UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL 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		(IRS Employer
incorporation or organization)		Identification No.)

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

Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES o NO þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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

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 December 31, 2010.

 

 

VANGENT, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS			3
ITEM 1A. RISK FACTORS			9
ITEM 1B. UNRESOLVED STAFF COMMENTS			18
ITEM 2. PROPERTIES			19
ITEM 3. LEGAL PROCEEDINGS			19
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			19
ITEM 6. SELECTED FINANCIAL DATA			19
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			41
ITEM 9A CONTROLS AND PROCEDURES			42
ITEM 9B. OTHER INFORMATION			42
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			43
ITEM 11. EXECUTIVE COMPENSATION			46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			54
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES			55
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			55
SIGNATURES			56
Exhibit 21.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

ITEM 1. BUSINESS

Unless the context otherwise indicates, references to “we,” “our,” the “Successor Entity,” “Vangent,” or the “Company” refer to Vangent, Inc. and its consolidated subsidiaries.

Company Overview

Vangent’s history dates back to 1953 with the founding of the Measurement Research Center at the University of Iowa. We have been serving clients in the U.S. government since 1973. In February 2007, a managed group of entities under Pearson plc known as Pearson Government Solutions became Vangent, Inc.

We are a global provider of information management and business process outsourcing services to several U.S. public health care and other civilian government agencies, as well as select U.S. defense and intelligence agencies, foreign government organizations and private sector entities, including the U.S. Departments of Health and Human Services, Commerce, Education, Labor, and State, as well as Fortune 500 companies. We design, build and operate mission-critical systems and processes to seamlessly deliver vital information, services and programs to our customers and their constituents. Most of our revenue is generated from long-term contracts that typically have duration of five years, including option years. At December 31, 2010, our total contract backlog was $1.9 billion, compared with $2.1 billion at the end of 2009.

We provide integrated services in three distinct areas:

•

Consulting (Design)

•

Systems Integration (Build)

•

Business Process Outsourcing (Operate)

We have a broad customer and contract base and believe we are well-positioned to capitalize upon the trend within U.S. government agencies to utilize government contractors to design, build and operate technologically advanced systems that deliver mission-critical information, services and programs to citizens.

Acquisitions

In September 2010, Vangent acquired Buccaneer Computer Systems and Service, Inc. (“Buccaneer Acquisition”) at a cost of $64.6 million. Buccaneer is a provider of information technology services, infrastructure, secure data hosting, and data analytics for the government healthcare market. Buccaneer’s government customers are the Centers for Medicare and Medicaid Services (“CMS”), the Food and Drug Administration, and the Department of Defense. Its data center in Warrenton, Virginia, is the largest repository of health quality data in the country. The Buccaneer Acquisition further strengthens our ability to serve government health care customers and greatly complements and enhances our information technology infrastructure and data analytics capabilities.

In May 2008, Vangent acquired the government health integration group of Aptiv Technology Partners, a provider of federal and commercial healthcare professional services including broad experience with InterSystems’ database, application, and middleware technologies. The acquisition strengthened Vangent’s ability to serve government and commercial health customers with the latest technology and consulting expertise.

On February 14, 2007, The Veritas Capital Fund III, L.P., Vangent Holding LLC and Vangent Holding Corp. consummated a stock purchase agreement with Pearson and certain other seller entities under which Vangent Holding Corp. acquired all of the equity interests of Pearson Government Solutions. Pearson Government Solutions became known as Vangent, Inc.

Our Segments

We manage our business through three business segments. Reference is made to information on business segments, major customers, geographic area information appearing in the notes to consolidated financial statements in this annual report on Form 10-K.

Government Group — 90% of revenue in 2010. The Government Group is our largest segment and has many years of experience in providing information management and business process outsourcing to several civilian and defense agencies of the federal government, including a 30-year history with the Department of Education (“DoED”), over 10 years with the Defense Information Systems Agency and eight years with the CMS. The Government Group is also responsible for the development, management, analysis and dissemination of healthcare information to the public sector and is one of the largest non-government providers of health information in the United States. The operations of Buccaneer acquired in September 2010 are part of the Government Group.

International Group — 7% of revenue in 2010. The International Group serves government and commercial customers in the United Kingdom and Canada and provides consulting, systems integration, and business process outsourcing solutions. Business operations in Argentina, Mexico and Venezuela, formerly part of the International Group, are classified as discontinued operations in the consolidated financial statements. Our operations in Argentina and Mexico were sold in 2010 and our operations in Venezuela were sold in February 2011.

Human Capital Group — 3% of revenue in 2010. The Human Capital Group primarily serves the private sector and provides workforce solutions that automate and improve the recruitment, assessment, selection, training and development of a customer’s workforce. We also provide learning infrastructure development solutions for public sector clients.

Services Offered

We provide high value, end-to-end solutions for our customers. We offer integrated consulting, systems integration and business process outsourcing services to support the design, build and operation of mission critical systems and processes for our customers and their programs. Our solutions are based on an in-depth understanding of each customer’s unique challenges, objectives and budgetary constraints.

Consulting (Design)

We design systems to modernize business processes, reduce costs, enhance organizational effectiveness, and increase operational efficiencies. We apply expertise and methodologies in business process re-engineering, performance consulting, information technology and organizational change management. Our ultimate goal is to help customers better manage change and enhance their delivery of superior, high-value products and services. Our consulting solutions portfolio includes the following offerings:

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Business process analysis and design

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System architecture and requirements analysis

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Enterprise modernization

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Education and training

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Organizational development and testing

Systems Integration (Build)

We build large-scale, complex and mission-critical systems for our customers utilizing industry-wide best practices. Our business processes are predictable, scalable, repeatable and reliable and support the critical needs of our customers. We provide the following build services:

•

Service oriented architecture implementation

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Application development

•

System integration and testing

•

Learning infrastructure development

Business Process Outsourcing (Operate)

We operate entire business processes for our customers. We combine our people, processes and technologies to manage transaction intensive activities. We offer the following services:

•

Multi-channel customer interaction management

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Case management

•

Eligibility determination

•

Electronic filing

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Data warehouse management

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Program management and forecasting

Our Customers

U.S. government departments and agencies represent our largest customer group. We provide services and solutions, typically as a prime contractor, to government customers with an average relationship length of approximately five years. For 2010, our largest customers were the Department of Health and Human Services, including CMS, the Department of Commerce, including the U.S. 2010 Census contract, and the Department of Education. We have more than 30 years of experience in providing information management and strategic business process outsourcing to several civilian and defense agencies of the federal government. We believe our long-standing relationships are due in large part to our technical expertise and proven performance on customer contracts, particularly providing support for our customers’ mission essential programs. Additionally, our services build and leverage agency program knowledge to increase efficiencies.

As a result of the Buccaneer Acquisition in September 2010, we added new business at the Centers for Medicare and Medicaid Services and the Food and Drug Administration. Internationally, our customers include local governments, central governments and commercial customers in the United Kingdom and Canada. We provide consulting, systems integration and business process outsourcing to address a variety of managerial disciplines, including customer interaction, as well as management of data, identity, revenue and human capital. In the Human Capital Group, we provide private and public sector entities, including many Fortune 500 companies, with workforce solutions that automate and improve the recruitment, assessment, selection, training and development of their employees.

A list of our most significant customers follows:

U.S. Department of Health and Human Services

	•		Centers for Medicare and Medicaid Services
	•		Centers for Disease Control and Prevention

Food and Drug Administration

U.S. Department of Education

•

Office of Federal Student Aid

U.S. Department of Defense

	•		U.S. Air Force
	•		U.S. Army
	•		U.S. Navy
	•		U.S. Department of Labor
	•		U.S. Department of State
	•		U.S. Office of Personnel Management
	•		U.S. Department of Commerce
	•		U.S. Census Bureau
	•		U.S. Intelligence Agencies
	•		Canada Post
	•		London Borough of Southwark

Our Contracts

We provide services under three types of contractual arrangements: cost-plus, fixed-price, and time and materials, as follows:

•

Cost-plus (cost reimbursable). We are reimbursed for costs that are reasonable, allowable and are allocated to the contract. We are paid a fee representing the profit margin negotiated at contract award, which may be a fixed amount and/or performance based. Revenue and profit under cost-plus service contracts is recognized as costs are incurred based on negotiated rates. Fixed fees on cost-plus service contracts are recognized ratably as services are performed. Incentive fees on cost-plus service contracts are recognized when awarded by the customer or, if determinable as of the reporting date, are recognized ratably as services are performed.

•

Fixed Price. We perform specific tasks or services identified in the contract statement of work for a fixed price over a defined period of performance. Compared with time and materials and cost reimbursable contracts, fixed price contracts generally offer a higher profit margin opportunity but involve higher risks associated with potential cost overruns. Revenue and profit on fixed-price service contracts are recognized ratably as services are performed or as units are delivered

•

Time and Materials. We are paid for labor at fixed contracted billing rates and paid for allowable costs related to materials, travel and other direct charges. Revenue for time-and-materials contracts is recognized on the basis of allowable labor hours multiplied by the contracted billing rates, plus costs for items used in the performance of the contract. Profit on time-and-materials contracts result from the difference between the cost of services performed and the contracted billing rates for these services.

A summary of revenue by contract type follows:

		Years Ended December 31,
		2010				2009				2008
Cost-plus			66	%			55	%			51	%
Fixed-price			30	%			41	%			43	%
Time and materials			4	%			4	%			6	%
			100	%			100	%			100	%

Most of our revenue is derived from contracts which have duration of approximately five years, including option years. However, some contracts have a longer duration.

As part of the contract bidding process, we may enter into agreements with subcontractors to enhance our ability to bid on large, complex assignments or to address more completely a particular customer’s requirements. Subcontracting relationships are useful because they permit us, as a prime contractor, to compete more effectively on a wider range of projects. In addition, we often enter into subcontract arrangements in order to meet government requirements to award certain categories of services to small businesses. We use subcontractors primarily for non-core functions, such as to provide supplemental customer service representatives and to provide specialists with domain expertise. When we are a prime contractor on an engagement, we are ultimately responsible for the overall engagement as well as the performance of our subcontractors. We are the prime contractor on most of our contracts, and revenue from contracts in which we were the prime contractor represented 68% of total revenue for 2010.

Our contracts are typically awarded for an estimated dollar value based on the cost proposal for the statement of work to be performed under the contract over its maximum life. We earn additional revenue from increases in program scope beyond that of the original contract. The government is not obligated to exercise options under a contract after the base period. Toward the end of a contract, the customer may announce a recompete of the existing contract if services are still required.

Many government contracts are indefinite delivery, indefinite quantity (“IDIQ”) contracts or government-wide acquisition contracts (“GWACs”), which are often awarded to multiple contractors. IDIQ contracts and GWACs do not represent a firm order for services. We have several GWACs issued by the General Services Administration and other government agencies. When a customer wishes to order services under an IDIQ contract or GWAC, it issues a request for proposals. Proposals are submitted by multiple contract awardees and task orders are typically awarded based on a best-value or lowest cost approach.

Contract Backlog

We track contract backlog to assess our current business development effectiveness and to assist us in forecasting financial performance and future business needs. We define total contract backlog as the amount of revenue we expect to realize over the remaining term of the contract including the base period and all option years. We do not include contract ceiling values under GWAC or IDIQ contracts in backlog. We define funded backlog as the portion of our contracts for which funding has been authorized.

A summary of contract backlog by business segment follows (in millions):

		December 31, 2010								December 31, 2009
		Total				Funded				Total				Funded
Government Group		$	1,629.2			$	241.3			$	1,782.6			$	313.4
International Group			251.9				161.8				291.2				196.8
Human Capital Group			13.2				13.2				7.1				7.1
Discontinued operations			—				—				44.9				44.9
		$	1,894.3			$	416.3			$	2,125.8			$	562.2

Regulatory Matters

Federal government contracts are subject to a number of federal statutes and regulations, including the Federal Acquisition Regulation (“FAR”) and agency supplements to the FAR. The FAR contains several regulations that affect us significantly.

The Anti-Deficiency Act prohibits federal government employees from committing government funds by contract or otherwise, in excess or in advance of appropriations, unless authorized by a specific statute. Thus, work on a contract may be limited by the availability of funds. Because Congress usually appropriates funds on a fiscal year basis, many of our contracts are incrementally funded by the agency as Congress makes appropriations for future fiscal years. In addition, the federal government uses FAR clauses, such as the Limitation of Cost and Limitation of Funds clauses, to limit its liability arising from its employees involving the federal government in expenditures or liabilities beyond those authorized by contract. In many cases, contracts are awarded for only one year, with a number of successive option years.

Disappointed bidders and firms excluded from competition for federal government contracts and task orders can avail themselves of FAR and General Accountability Office bid protest remedies by submitting an objection to the contracting officer or General Accountability Office within specified time limits. The U.S. Court of Federal Claims also has bid protest jurisdiction. Contract performance can be suspended while a protest is pending and the contract can be terminated if found to have been improperly awarded.

Larger contracts may also be subject to the Truth in Negotiations Act (“TINA”) and Cost Accounting Standards. TINA requires us to provide current, accurate and complete cost or pricing data in connection with the negotiation of a contract, modification or task order over a $650,000 threshold, and in certain other circumstances. Cost Accounting Standards require consistency of accounting practices over time and compliance with specific cost accounting criteria. FAR sets forth the rules regarding the allowability and allocability of costs incurred in connection with cost-reimbursable federal government contracts.

The FAR Changes Clause permits a contracting officer to make unilateral changes within the general scope of a contract at any time, by written order, in a number of contract areas. If a change under this clause causes an increase or decrease in the estimated cost of, or the time required for, performance of any part of the work under a changed contract, or otherwise affects any other terms and conditions of this contract, the contracting officer must make an equitable adjustment in the contract price or estimated cost, the delivery or completion schedule, the amount of any fixed fee and other affected terms of the contract. In the event that the contractor and the government fail to agree upon such an adjustment, the contractor is obligated to perform the contract as changed pending resolution of the dispute.

The federal government strives to avoid awarding contracts to companies that may have an organizational conflict of interest (“OCI”). The FAR describes the situations that may result in an OCI and provides guidance to contracting officers in order to avoid or mitigate an actual or potential OCI. An OCI involves a situation that arises or might arise because the nature of the work to be performed by a contractor may, absent some restriction on future activities, result in an unfair competitive advantage to the contractor, impair the contractor’s objectivity in performing the contract work or make the contractor potentially unable to render impartial assistance or advice to the federal government. The contracting officer is responsible for resolving any significant potential OCIs before a contract award is made. These types of restrictions may restrict our ability to obtain additional work beyond tasks that we currently perform or performed in the past.

To the extent that we fail to comply with procurement requirements, the federal government may demand an adjustment in contract prices or costs. In addition, changes in cost accounting practices are subject to a required procedure for determining the cost impact of the change. The federal government is generally protected from paying increased costs resulting from a contractor’s accounting changes.

Our books and records are subject to audit by audit agencies. The Defense Contract Audit Agency performs audits on behalf of the U.S. government. Negotiations of annual incurred cost submittals can take from three to five years or longer from the date of submission. Audits of our incurred cost submissions for 2005 and subsequent years are open. An adverse finding under an audit could result in the disallowance of costs under a cost-reimbursable contract, termination of federal government contracts, forfeiture of profits, suspension of payments, fines and suspension and prohibition from doing business with the federal government. See “Risk Factors- Our business could be adversely affected by a negative audit or other actions, including suspension or debarment, by the federal government.” In the event that an audit results in disallowance of costs under a contract, we have the right to appeal the findings of the audit under applicable dispute resolution provisions.

Sales and Marketing

Our sales organization is centralized at the corporate level for the Government Group. The Government Group sales organization participates in strategy development, setting priorities and maturing opportunities for account penetration and expansion, and establishing strategic partnerships. Our marketing efforts are also centralized at the corporate level on a company-wide basis. Our Corporate Development organization is responsible for coordinating collaboration among our segments, focusing resources on contract opportunities and identifying and developing the strategy for future markets and investment. In addition, our Corporate Development organization is responsible for proposal management and development, capture management, Government Wide Acquisition Contract (“GWAC”) Center of Excellence, small business development program, market research, and sales infrastructure management.

Competition

We compete against well capitalized divisions of large defense, information technology services and outsourcing prime contractors, as well as a number of smaller federal contractors with specialized capabilities. Our competitors include Accenture, ACS (a Xerox company), Booz Allen Hamilton, Computer Sciences Corporation, Electronic Data Systems (a unit of Hewlett Packard), IBM, Northrop Grumman, and SAIC. We believe that the major competitive factors that affect our ability to compete are:

•

technical expertise and range of service capabilities;

•

knowledge of the customer, their needs, objectives and budget constraints;

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industry reputation and results of performance on past engagements;

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key management and personnel; and

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value and ability to deliver predictable, cost effective solutions to the customer.

We believe we significantly differentiate ourselves from our competitors through our ability to provide end-to-end solutions to our customers through a broad range of capabilities. Most of our competitors do not have an integrated service offering. As a result, we compete with certain competitors that individually or in combination provide consulting, systems integration and business processing outsourcing at various stages of the design, build and operate continuum. Some of our competitors are attempting to expand their offerings to become full service providers. To the extent that our competitors are able to successfully broaden their service capabilities, we expect that competition will increase.

Employees

There were 7,008 employees at December 31, 2010, compared with 8,728 at December 31, 2009. The reduction of 1,720, or 20%, resulted from completion of the U.S. 2010 Census contract and from sales of discontinued operations in Latin America in 2010. Labor unions represented 67 employees in the United Kingdom. We consider our employee relations to be satisfactory.

Intellectual Property

We believe our intellectual property, especially our proprietary methodologies, is of economic importance to our business. In addition, we rely on trademarks and copyrights related to our business. We believe we have taken reasonable measures consistent with industry practice to protect the secrecy, confidentiality and value of our intellectual property.

Forward-Looking Statements

This annual report on Form 10-K 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 are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “projects,” “likely,” “will,” “would,” “could” and similar expressions or phrases identify forward-looking statements. All forward-looking statements involve risks and uncertainties. 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 federal government spending and 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 costs or operating expenses; our substantial debt; changes in the availability of and cost of capital; our ability to successfully integrate acquisitions; general economic and business conditions and the other factors set forth under “Risk Factors” in this annual report on Form 10-K. 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 undertakes no obligation, and specifically declines any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this annual report on Form 10-K, you should carefully consider the following risk factors. Any of the following risks could materially and adversely affect our business, financial condition or results of operations and cash flows.

Risks Relating to Our Business

We rely on sales to federal government entities. A loss or reduction of contracts with the federal government, a failure to obtain new contracts or a reduction of sales under such contracts could have a material adverse effect on our business.

We derive a significant portion of our revenue from contracts and subcontracts with U.S. government departments and agencies, including the Department of Health and Human Services (“HHS”) and the Department of Education (“DoED”). The continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for the various federal government agencies with which we do business. Among the factors that could impact federal government spending and reduce our federal government contracting business are:

•

a reapportioning of or decline in spending by the federal government in general, and HHS and DoED in particular, as a result of changes in federal policies or spending priorities, general economic conditions, or increased focus on federal budgets from concerns over federal deficits;

•

a failure by Congress to appropriate funds for programs in which we participate;

•

changes or delays in or cancellations of federal government programs;

•

the adoption of new laws or regulations that affect companies that provide services to the federal government;

•

federal government shutdowns or other disruptions or delays in the government appropriations process;

•

curtailment of the federal government’s use of third-party service firms or an increase in the trend toward insourcing by the federal government; and

•

changes in the political climate that may affect the funding of operations or the services we provide.

These or other factors could cause federal government agencies to reduce their purchases under contracts, to exercise their rights to terminate contracts in whole or in part, to issue temporary stop work orders, to decline to exercise renewal options or to fail to put new contracts out to bid or to enter into new contracts. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Since October 2010, the federal government has been operating under a continuing resolution to fund operations. A continuing resolution continues funding for most programs but does not allow for new contracts to be awarded. There have been delays in contract and task order awards. If the federal government is not able to arrive at a long-term solution, there is the possibility of a government work stoppage where only essential work would be authorized. The designation of essential would likely be determined by the federal government on a case by case basis.

Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations and cash flows.

If our contracts with Centers for Medicare and Medicaid Services (“CMS”) or Federal Student Aid were terminated or reduced in value, our business would be adversely affected.

The Department of Health and Human Services (“HHS”) represented 36% and the Department of Education (“DoED”) represented 13% of total revenue for 2010. We are dependent on these agencies for a substantial portion of our revenue. The loss of a major contract with these agencies or a significant reduction in the value of a major contract would significantly and adversely affect our business, financial condition and results of operations and cash flows.

Our federal government contracts may be terminated by the federal government at any time prior to their completion and contain other unfavorable provisions, which could lead to unexpected loss of revenue or reduction in contract backlog.

Under the term of our contracts, the federal government may unilaterally:

•

terminate or modify existing contracts;

•

reduce the value of existing contracts through partial termination;

•

delay the payment of our invoices by government payment offices;

•

decline to exercise an option to renew a multi-year contract or issue task orders in connection with indefinite delivery, indefinite quantity (“IDIQ”) contracts;

•

audit our contract related costs and fees; and

•

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

The federal government can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and task orders. If the federal government terminates and/or materially modifies any of our contracts or if any applicable option periods are not exercised, our failure to replace revenue generated from such contracts would result in lower revenue and adversely affect our business, financial condition and results of operations and cash flows.

Our federal government contracts are subject to competitive bidding, both upon initial issuance and recompetition. If we are unable to successfully compete in the bidding process or if we fail to receive renewal, it could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Substantially all of our federal government contracts are awarded through a competitive bidding process, including upon renewal (but not typically upon the exercise of optional periods), and we expect that this will continue to be the case. There often is significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks, including the following:

•

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

•

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

•

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

The federal government contracts for which we compete typically have multiple option periods, and if we fail to win a contract, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon re-competition, such failure could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Competition in our industry could limit our ability to attract and retain customers, which could have a material adverse effect on our business.

Given the broad range of services we provide to our customers, we compete with various entities across geographic and business lines. Some of our competitors have greater financial and other resources than we do or are better positioned than we are to compete for certain contract opportunities. For example, we are at a disadvantage when bidding for contracts put up for re-competition for which we are not the incumbent provider, because incumbent providers frequently are able to capitalize on customer relationships, technical knowledge and pricing experience gained from their prior service. In addition, some of our competitors, particularly those located in regions with lower costs of doing business, may be able to provide services and solutions at lower cost than we can. We expect that the number of such competitors will grow. In addition, we expect increasing participation in the federal government services market by traditional consulting and outsourcing providers that seek to increase their service offerings and/or customer base.

We may never receive any revenue under IDIQ contracts or GWACs.

Many of our federal government contracts are multiple award IDIQ contracts, such as our IDIQ contract with CMS. The award of an IDIQ contract does not represent a firm order for services. Generally, under an IDIQ contract, the federal government is not obligated to order a minimum of services or supplies from a contractor beyond a token amount, irrespective of the total estimated contract value. Furthermore, under an IDIQ contract, the federal government customer develops requirements for task orders that are competitively bid against all of the contract awardees, usually under a best value approach. Many IDIQ contracts also permit the government customer to direct work to a specific contractor. Additionally, GWACs, like IDIQ contracts, do not guarantee more than a minimal amount of work for us, but instead provide us access to work generally through further competitive procedures. Our federal government customers may not award us task orders under our IDIQ contracts or GWACs, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. We do not include contract ceiling values for IDIQ contracts or GWACs in our contract backlog.

Our business could be adversely affected by a negative audit or other actions, including suspension or debarment, by the federal government.

As a federal government contractor, we must comply with and are affected by laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we do business with our federal government customers and impose added costs. Federal government agencies routinely audit and investigate government contractors. These agencies review contract performance, cost structure and compliance with applicable laws, regulations and standards. Such agencies also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract would not be reimbursed. At any given time, many of our contracts are under review by one or more government agencies.

In addition, government contract payments received by us for allowable direct and indirect costs are subject to adjustment after audit by government auditors and repayment to the government if the payments exceed allowable costs as defined in the government contracts.

As a federal government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities, the results of which could have a material adverse effect on our business. If we violate the Civil False Claims Act or other federal laws in connection with the performance of contracts, we could face administrative, civil or criminal liabilities, including repayments, fines or penalties. If we were suspended or prohibited from contracting with the federal government generally, or any significant federal government agency, if our reputation or relationship with federal government agencies were impaired or if the federal government otherwise ceased doing business with us or significantly reduced the amount of business it does with us, our business, financial condition, and results of operations and cash flows would be adversely affected.

The Office of Management and Budget could reduce or delay federal information technology spending and cause us to lose business.

The Office of Management and Budget (“OMB”) supervises spending by federal agencies and enforces the Government Performance Results Act. This Act requires, among other things, that federal agencies make an adequate business justification to support capital planning initiatives, including information technology investments. The factors considered by the OMB include whether the proposed information technology investment is expected to achieve an appropriate return on investment, whether related processes are contemporaneously reviewed, whether interoperability with existing systems and the capacity for these systems to share data across government agencies have been considered and whether existing commercial off-the-shelf products are being utilized to the extent possible. If our government customers do not adequately justify proposed information technology investments, the OMB may refuse funding for their new or continuing information technology investments, and we may lose business as a result.

Costs of performing under time and materials and fixed price contracts may exceed revenue.

With cost-plus contracts, so long as actual costs incurred are within the contract ceiling and allowable under the terms of the contract, we are entitled to reimbursement of the costs plus a stipulated profit amount. We assume financial risk on time-and-materials and fixed price contracts, because we assume the risk of performing those contracts at the stipulated prices or negotiated hourly rates. If we do not accurately estimate ultimate costs and control costs during performance of the work, we could incur losses on a particular contract or have lower than anticipated margins. We also assume the risk of damage or loss to federal government property and we are responsible for third party claims under fixed price contracts.

We are exposed to risks associated with operating internationally.

Our operations in the United Kingdom and Canada are reported in continuing operations. Discontinued operations include our businesses in Argentina and in Mexico that were sold in 2010 and in Venezuela that was sold in February 2011. Our foreign operations are subject to risks customarily associated with doing business in foreign countries, including fluctuations in foreign currency exchange rates, labor and economic conditions, political instability, controls on repatriation of earnings, nationalization, expropriation and other forms of restrictive actions by local governments. Changes in the political or economic environments in the countries in which we operate could have a material adverse effect on our business, financial condition and results of operations and cash flows. Our operations conduct most of their business in their local currency. Our financial results are reported in U.S. dollars and are affected by changes in the foreign exchange rates of the local currencies in relation to the U.S. dollar.

We are subject to certain U.S. laws and regulations which are the subject of rigorous enforcement by the U.S. government; and noncompliance with such laws and regulations could adversely affect our future operating performance.

We may be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for treble damages. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit, and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our government contractor status could significantly reduce our future revenues and profits.

Our corporate policy requires strict compliance with the U.S. Foreign Corrupt Practices Act and with local laws prohibiting payments to government officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment. Improper actions by our employees or agents could subject us to civil or criminal penalties, including substantial monetary fines, as well as disgorgement, and could damage our reputation and, therefore, our ability to do business.

We have net operating tax loss carryforwards that must be used within the carryforward period to reduce future federal income tax payments, and a 3% tax withholding requirement applicable to government contractors could adversely affect our operating cash flow.

At December 31, 2010, we had a U.S. net operating tax loss carryforward of $55.5 million available to offset future taxable income and reduce future federal income taxes during the carryforward period. The utilization depends on the generation of future taxable income to absorb the losses. Under U.S. GAAP, we have determined for financial accounting and reporting purposes that it is more likely than not that we will utilize the available losses to reduce future federal income taxes during the carryforward period. Adverse changes in circumstances or business conditions could affect our ability to use available losses within the carryforward period.

A withholding requirement under which government agencies would reduce their cash payments to government contractors by 3% of the amount billed and remit the withheld funds directly to the Internal Revenue Service as an advance payment of the government contractor’s income tax liability was passed in Section 511 of the “Tax Increase Prevention and Reconciliation Act of 2005” (P.L. 109-222). The “American Recovery and Reinvestment Act of 2009” delayed the effective implementation date to January 2012. In view of our net operating tax loss carryforward, we do not expect to make federal income tax payments for the foreseeable future. If the 3% withholding requirement becomes effective as scheduled, it could adversely affect our operating cash flow until such time that we could file for and obtain a refund of the advance tax payments made on our behalf.

We depend on the services of key executives and skilled personnel, the loss of which could adversely affect our business.

Our senior executives are important to our success because they have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, and identifying expansion opportunities. Losing the services of any of these individuals could adversely affect our business until a suitable replacement could be found. We do not maintain key-man life insurance on any of our senior executives.

We must also compete to attract the skilled and experienced personnel integral to our continued operation. We hire from a limited pool of potential employees with specialized technical skill sets as prerequisites for many positions. Our failure to compete effectively for employees or excessive attrition among our skilled personnel could reduce our ability to satisfy our customers’ needs, and increase the costs and time required to perform our contractual obligations. This could adversely affect our business, financial condition and results of operations and cash flows.

We may make acquisitions, which present additional risks.

Part of our growth strategy may include pursuing acquisitions. We may not be able to consummate acquisitions in the future on terms acceptable to us, if at all. The integration of any future acquisitions may not be successful and the anticipated strategic benefits of any future acquisitions may not be realized. Future acquisitions may involve a number of special risks, including, but not limited to:

•

an increase in debt levels and reduction in our liquidity;

•

adverse short-term effects on operating results;

•

diversion of management’s attention;

•

difficulties assimilating and integrating the operations of the acquired company; and

•

liabilities or contingencies relating to the acquired company.

If our subcontractors or joint venture partners fail to perform their contractual obligations, we may be required to incur costs and perform on their behalf and our reputation as a prime contractor and our ability to obtain future business could be adversely affected.

As a prime contractor, we often rely significantly upon other companies as subcontractors to perform work we are obligated to perform for our customers. If one or more of our subcontractors fails to perform satisfactorily the agreed upon services on a timely basis, or violates federal government contracting policies, laws or regulations, our ability to perform our obligations or meet our customers’ expectations as a prime contractor may be compromised. In some cases, we have limited involvement in the work performed by the subcontractors but are nevertheless responsible for the work performed. In extreme cases, performance or other deficiencies on the part of our subcontractors could result in a customer terminating our contract for default. A default termination could expose us to liability for a federal government agency’s costs of re-procurement, damage our reputation and could hurt our ability to compete for future federal government contracts.

We may enter into joint ventures so that we can jointly bid and perform on a particular project. The success of a joint venture depends, in large part, on the satisfactory performance of the contracted services by the joint venture partners. If joint venture partners do not meet their obligations, the joint venture may be unable to adequately perform and deliver its contracted services. We may be required to make additional investments or to provide additional services to ensure the adequate performance and delivery of the contracted services. In some arrangements, the extent of the Company’s obligations for the performance of others is not expressly specified. These additional obligations could adversely affect our business, financial condition and results of operations and cash flows.

Failure to maintain strong relationships with prime contractors could adversely affect our business.

As a subcontractor, we often lack control over fulfillment of a contract, and poor performance on the contract could affect our reputation, even when we perform as required. Our business, financial condition and results of operations and cash flows could be adversely affected if other contractors eliminate or reduce their subcontract relationships with us or if the federal government terminates or reduces other prime contractors’ programs or does not award them new contracts.

If we experience systems or services failures, our reputation could be adversely affected and our customers could assert claims against us for damages or refunds.

We create, implement and maintain information technology and outsourcing services that are often critical to our customers’ operations, some of which involve classified or other sensitive information. We have experienced and may in the future experience some systems or services failures, schedule or delivery delays, and other problems in connection with our work. If our solutions, services, or products have significant defects or errors, are subject to delivery delays or fail to meet our customers’ expectations, we may:

•

lose revenue due to adverse customer reactions;

•

be required to provide additional services to customers at no charge;

•

receive negative publicity, which could damage our reputation and affect our ability to attract or retain customers; or

•

suffer claims for substantial damages.

Our operations may suffer significant disruption as a result of a serious pandemic or other national emergency.

Substantially all of our revenue is derived from services performed by employees in our facilities, or those of our customers. In the event of a serious outbreak of a virus other communicable disease, a serious weather related disruption or other national emergency, our operations could be disrupted by high levels of absenteeism, and in extreme cases, it may be necessary to temporarily close facilities. Such disruptions could reduce our service levels and adversely affect our business, financial condition and results of operations and cash flows.

A preference for minority owned, small and small disadvantaged businesses could impact our ability to be a prime contractor on certain federal governmental procurements.

As a result of the Small Business Administration set-aside program, the federal government may decide to restrict certain procurements only to bidders that qualify as minority-owned small or small disadvantaged businesses. As a result, we would not be eligible to perform as a prime contractor on those programs and would be restricted to a maximum of 49% of the work as a subcontractor. An increase in the amount of procurements under the Small Business Administration set-aside program may impact our ability to bid on new procurements as a prime contractor or restrict our ability to recompete on incumbent work that is placed in the set-aside program.

Our employees may violate company policies and procedures by engaging in misconduct or other improper activities, which could adversely affect our business.

A significant number of our employees are involved in federal government contracting and billing processes, which require compliance with a number of procurement laws and regulations. In addition, in the course of our business, our employees routinely obtain access to sensitive or classified government information and personal information that is subject to privacy laws. We are exposed to the risk of employee misconduct that could include intentional or unintentional failures to comply with federal government procurement regulations, engaging in unauthorized activities, or falsifying time or expense records. Employee misconduct could also involve the improper use of our customers’ or their constituents’ sensitive or classified information, which could result in regulatory sanctions against us and adversely affect our reputation. While we have policies and processes in place, it is not always possible to prevent employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling risks or losses.

The failure to enforce and maintain our intellectual property rights could adversely affect our business.

Our success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property. We rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements, and patent, copyright and trademark laws to protect our intellectual property rights. However, our methods of protecting this information may not be adequate, and we might not be able to take appropriate and timely steps to enforce our intellectual property rights.

Additional Risks Relating to Debt

Our substantial debt could adversely affect our financial health and prevent us from meeting our debt service obligations.

As of December 31, 2010, we had long-term debt of $406.8 million outstanding, and, subject to certain limitations including compliance with the maximum allowable limits under the leverage ratio covenant, we would have been able to borrow an additional $49.8 million under our revolving credit facility that is scheduled to expire in February 2012. Our substantial debt could have important consequences. For example, it could:

•

make it more difficult for us to satisfy our obligations with respect to the senior subordinated notes;

•

increase our vulnerability to general adverse economic or industry conditions;

•

require us to dedicate a substantial portion of our cash flow from operations to debt service payments, thereby reducing the availability of cash flow to fund working capital, capital expenditures and other general corporate purposes;

•

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•

place us at a competitive disadvantage compared to our competitors that may have less debt; and

•

limit our ability to borrow additional funds.

Long-term debt amounted to $406.8 million at December 31, 2010 and consists of a term loan of $216.8 million and senior subordinated notes of $190.0 million. Long-term debt is scheduled to mature as follows: (i) term loan under the senior secured credit facility is scheduled to mature in February 2013, and (ii) the senior subordinated fixed rate notes are scheduled to mature in February 2015. Debt repayments will require significant amounts of cash. Our ability to generate sufficient cash flow from operations to repay long-term debt when it matures, or to refinance our debt when it matures, depends on numerous factors beyond our control. In view of the credit ratings assigned to our outstanding debt and corporate credit by credit rating agencies, in the event we were to refinance the senior secured credit facility or the senior subordinated notes, we would likely encounter higher interest rates and limited availability of debt financing capacity. In addition, we are subject to interest rate risk on the unhedged portion of the variable-rate term loan and the available portion of the revolving credit facility under the senior secured credit facility.

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

The terms of the indenture governing the senior subordinated notes and the senior secured credit facility allow us to incur additional debt of up to $49.8 million under the senior secured credit facility, subject to certain limitations. The borrowings would be senior to the senior subordinated notes. If new debt is added to our current debt levels, the related risks that we now face would likely increase.

The right to receive debt service payments on the senior subordinated notes is junior to our existing and future senior debt, including borrowings under the senior secured credit facility. Further, the guarantees of the senior subordinated notes are junior to all of the guarantors’ existing and future senior debt.

The senior subordinated notes rank behind all of our existing and any future senior debt. As a result of the subordination, upon any distribution to our creditors in a bankruptcy, liquidation, reorganization or similar proceeding, holders of senior secured debt will be entitled to be paid in full before any payment will be made on the senior subordinated notes. In the event of bankruptcy, liquidation or reorganization, holders of the senior subordinated notes will participate with all other holders of subordinated debt in the assets remaining after all of our senior secured debt has been paid.

To service our debt, we must generate a significant amount of cash flow. Our ability to generate cash flow depends on many factors beyond our control.

We depend on the timely collection of our receivables to generate cash flow, provide working capital and continue business operations. If the U.S. government fails to pay or delays the payment of our invoices for any reason, our business and financial condition may be materially and adversely affected. The U.S. government may delay or fail to pay invoices for a number of reasons, including lack of appropriated funds, lack of an approved budget, or as a result of audit findings by government regulatory agencies. Our ability to make debt service payments, refinance our debt, fund working capital needs, and fund planned capital expenditures depends on our ability to generate cash flow that is subject to general economic, financial, competitive and other factors that are beyond our control.

Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under the senior secured credit facility or otherwise in an amount sufficient to enable us to make payments on our debt, or to fund other liquidity needs. We may need to refinance all or a portion of our debt, on or before the maturity thereof. We may not be able to refinance any of our debt, including the senior secured credit facility and the senior subordinated notes, on commercially reasonable terms, or at all.

In addition, if for any reason we are unable to meet our debt service obligations, we would be in default under the terms of the debt agreements. If such a default were to occur, the lenders under the senior secured credit facility could elect to declare all amounts outstanding under the facility immediately due and payable, and the lenders would not be obligated to continue to extend loans under the revolving credit facility. In addition, if such a default were to occur, the senior subordinated notes would become immediately due and payable. The lenders may also elect to have the rights to all current and future payments received under certain customer contracts assigned to them. If the amounts outstanding under these debt agreements are accelerated, our assets may not be sufficient to repay in full the debt obligations to the debt holders, including holders of the senior subordinated notes.

The right to receive payments on the senior subordinated notes is effectively subordinated to the rights of the existing and future secured creditors.

Holders of the senior secured debt will have claims that are prior to claims of the holders of the senior subordinated notes to the extent of the value of the assets securing the debt. The senior secured credit facility is secured by liens on substantially all of our assets and a pledge of all of our capital stock and all of the capital stock of our domestic subsidiaries. The senior subordinated notes are effectively subordinated to all of our secured debt. In the event of any distribution or payment of our assets or any pledged capital stock in any foreclosure, dissolution, winding-up, liquidation, reorganization or other bankruptcy proceeding, holders of secured debt will have prior claims to those of our assets and any pledged capital stock that constitute their collateral. Holders of the senior subordinated notes will participate ratably with all holders of our unsecured debt that is deemed to be of the same class as the senior subordinated notes, and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor, in our remaining assets. In any of the foregoing events, there may not be sufficient assets to pay amounts due on the senior subordinated notes. As a result, holders of the senior subordinated notes may receive less, ratably, than holders of secured debt.

If we default on our obligations to pay our other debt, we may not be able to make payments on the senior subordinated notes.

Any default under the debt agreements, including a default under the senior secured credit facility that is not waived by the holders, and the remedies sought by the holders of such debt, could make us unable to pay principal, premium, if any, and interest on the senior subordinated notes and substantially decrease the market value of the senior subordinated notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our debt, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our debt (including our senior secured credit facility), we could be in default under the terms of the agreements governing such debt. In the event of such default, the holders of such debt could elect to declare all the funds borrowed there under to be due and payable, together with accrued and unpaid interest, the lenders under our senior secured credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under the senior secured credit facility or other debt we may incur in the future to avoid being in default. If we breach our covenants under the senior secured credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the senior secured credit facility, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, such as the lenders under the senior secured credit facility, could proceed against the collateral securing the debt. If the debt under the senior subordinated notes or under the senior secured credit facility or any of our other debt is accelerated, we may be unable to repay or finance the amounts due because the governing indenture has customary cross default provisions.

Our substantial debt and the restrictive covenants governing the debt impose significant operating and financial restrictions which may prevent us from capitalizing on business opportunities and taking some actions.

The indenture governing the senior subordinated notes and the senior secured credit facility contain customary restrictions on our activities, including covenants that restrict us from:

•

incurring additional debt and issuing preferred stock;

•

creating liens on our assets;

•

making certain investments or other restricted payments;

•

consolidating or merging with, or acquiring, another business;

•

selling or otherwise disposing of our assets;

•

paying dividends and making other distributions with respect to capital stock, or repurchasing, redeeming or retiring capital stock or subordinated debt; and

•

entering into transactions with our affiliates.

Our senior secured credit facility requires us to meet certain financial ratios. We may not be able to maintain these ratios and if we fail to be in compliance with these requirements, we will not be able to borrow the full amount available under the senior secured revolving credit facility.

These restrictions may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We also may incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operating flexibility. We may not be granted waivers or amendments to these agreements if for any reason we are unable to comply with the debt agreements, and we may not be able to refinance our debt on terms acceptable to us, or at all. The breach of any of these covenants and restrictions could result in a default. An event of default under the debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable.

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture governing the senior subordinated notes.

Upon the occurrence of certain kinds of change of control events, we will be required to offer to repurchase the outstanding senior subordinated notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of a change of control to make the required repurchase of the senior subordinated notes or that restrictions in our senior secured credit facility will not allow such repurchases. Our failure to purchase the tendered senior subordinated notes would constitute an event of default under the indenture governing the senior subordinated notes which, in turn, would constitute a default under our senior secured credit facility. In addition, the occurrence of a change of control would constitute an event of default under the senior secured credit facility. A default under the senior secured credit facility would result in a default under the senior subordinated notes indenture if the lenders accelerate the debt under the senior secured credit facility.

Moreover, the senior secured credit facility restricts, and any future debt we incur may restrict, our ability to repurchase the senior subordinated notes, including following a change of control event. As a result, following a change of control event, we would not be able to repurchase the senior subordinated notes unless we first repay all debt outstanding under the senior secured credit facility and any of our other debt that contains similar provisions, or obtain a waiver from the holders of such debt to permit us to repurchase the senior subordinated notes. We may be unable to repay all of that debt or obtain a waiver of that type. Any requirement to offer to repurchase the outstanding senior subordinated notes may therefore require us to refinance our other outstanding debt, which we may not be able to do on commercially reasonable terms, if at all. These repurchase requirements may also delay or make it more difficult for others to obtain control of us.

The senior subordinated notes are structurally subordinated to all obligations of our non-guarantor subsidiaries.

The senior subordinated notes are not guaranteed by any of our current or future foreign subsidiaries. As a result of this structure, the senior subordinated notes are structurally subordinated to all debt and other obligations, including trade payables, of our non-guarantor subsidiaries. The effect of this subordination is that, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding involving a non-guarantor subsidiary, the assets of that subsidiary cannot be used until all other claims against that subsidiary, including trade payables, have been fully paid.

Our controlling equity holder may take actions that conflict with interests of debt holders.

90% of the voting power of our equity is held by The Veritas Capital Fund III, L.P. (“Veritas Capital”). As controlling equity holder, Veritas Capital controls the power to elect directors and officers, to appoint new management and to approve actions requiring the approval of holders of our equity, including adopting amendments to constituent documents and approving mergers, acquisitions or sales of all or substantially all of our assets. The controlling equity holder has the authority, subject to the terms of our debt agreements, to issue additional debt or equity, declare dividends and make other decisions about our equity.

In addition, the interests of the controlling equity holder could conflict with interests of debt holders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of the controlling equity holder might conflict with interests of debt holders. Our controlling equity holders also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that could enhance the equity investment, even though such transactions might involve risks to the debt holders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

We lease commercial office facilities in the United States and foreign countries in connection with the services we provide for customers. Upon expiration of the leases, we do not anticipate difficulty in obtaining renewals or alternative space. We believe that substantially all of our property and equipment is in good condition, subject to normal wear and tear, and that our facilities have sufficient capacity to meet the current and anticipated needs of our business. We do not own any real estate.

A summary of the locations of leased office facilities, net of subleases, at December 31, 2010, follows:

		Square
		Feet
United States
Arlington, Virginia (corporate headquarters)			68,833
Chicago, Illinois			22,801
Coralville, Iowa			103,947
Corbin, Kentucky			35,270
Falls Church, Virginia			32,680
Herndon, Virginia			18,921
Lawrence, Kansas			174,000
Owings Mills, Maryland			19,278
Phoenix, Arizona			162,343
Richmond, Virginia			123,199
Tampa, Florida			99,039
Warrenton, Virginia			45,585
West Des Moines, Iowa			36,194
York, Pennsylvania			32,200
All other			33,876
			1,008,166
Foreign Locations
Canada			41,752
United Kingdom			203,971
			245,723

ITEM 3. LEGAL PROCEEDINGS

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 and cash flows or financial position.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established public trading market for our common stock. All of our outstanding shares of common stock are held by our parent. We have not declared a dividend on our common stock. We are generally restricted from paying dividends under the senior secured credit facility covenants and the indenture for the senior subordinated notes.

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data for the Successor Entity for the years ended December 31, 2010, 2009 and 2008, and for the period February 15 to December 31, 2007, have been derived from Vangent’s consolidated financial statements. Financial data for the Predecessor Entity for the period January 1 to February 14, 2007 and for the year ended December 31, 2006 have been derived from carve-out financial statements based on the historical accounting records of Pearson Government Solutions Business. Prior to the acquisition of Pearson Government Solutions by Veritas Capital and its affiliates (“Vangent Acquisition”), there was no direct ownership relationship among the operations comprising the business.

Selected financial data follows (dollars in thousands):

		Successor Entity (1)																	Predecessor Entity
														Period					Period
						Years Ended								February 15 to					January 1 to				Year Ended
		December 31,												December 31,					February 14				December 31,
		2010				2009				2008				2007					2007				2006
Statements of Operations Data
Revenue		$	761,841			$	583,986			$	532,049			$	427,129				$	55,514			$	499,387
Cost of revenue			639,377				490,500				440,495				356,241					45,411				394,287
Gross profit			122,464				93,486				91,554				70,888					10,103				105,100
General and administrative expenses			45,354				40,387				46,440				40,267					9,219				43,117
Selling and marketing expenses			19,905				18,003				14,930				13,284					1,766				17,898
Impairment of goodwill and indefinite-life intangible asset			5,320				11,227				13,766				—					—				—
Operating income (loss)			51,885				23,869				16,418				17,337					(882	)			44,085
Interest expense, net			31,140				34,289				35,244				33,418					6				854
Income (loss) from continuing operations before income taxes			20,745				(10,420	)			(18,826	)			(16,081	)				(888	)			43,231
Provision (benefit) for income taxes			(31,486	)			6,794				4,939				6,151					(275	)			16,108
Income (loss) from continuing operations			52,231				(17,214	)			(23,765	)			(22,232	)				(613	)			27,123
Income (loss) from discontinued operations, net of tax			(12,228	)			(16,794	)			(2,742	)			183					238				1,492
Net income (loss)			40,003				(34,008	)			(26,507	)			(22,049	)				(375	)			28,615
Net loss attributed to noncontrolling interest			(26	)			—				—				—					—				—
Net income (loss) attributable to Vangent		$	40,029			$	(34,008	)		$	(26,507	)		$	(22,049	)			$	(375	)		$	28,615
Balance Sheet Data
Cash and cash equivalents		$	27,194			$	44,638			$	19,446			$	23,831				$	1,478			$	9,562
Working capital			63,337				76,179				75,272				69,439					72,061				60,024
Total assets			669,735				640,229				666,274				694,068					605,087				596,776
Long-term debt			406,754				420,366				420,366				420,875					—				—
Equity			157,371				109,863				144,637				180,289					541,853				529,084
Statements of Cash Flow Data
Cash flows provided by (used in):
Operating activities			70,891				40,387				18,410				30,847					(18,896	)			14,378
Investing activities			(73,118	)			(15,783	)			(13,530	)			(622,612	)				(3,727	)			(15,885	)
Financing activities			(15,804	)			(188	)			(8,088	)			617,803					13,271				9,110

•

Amortization of intangible assets included in cost of revenue.

•

Interest expense on long-term debt.

•

The effect of a tax valuation allowance on the provision for income taxes.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this annual report on Form 10-K. Refer also to “Item 1A Risk Factors” and” Forward Looking Statements” for a discussion of risks and uncertainties that could affect our business, financial condition or results of operations.

Overview

We are a leading provider of information management and business process outsourcing services to several U.S. public health care and other civilian government agencies, as well as selected U.S. defense and intelligence agencies, foreign governments and private sector entities. We design, build and operate mission-critical systems and processes to seamlessly deliver vital information, services and programs to our customers and their constituents. Most of our revenue is generated from long-term contracts that typically have duration of approximately five years, including option years. As of December 31, 2010, our total contract backlog was $1.9 billion, compared with $2.1 billion at the end of 2009.

The Department of Health and Human Services (“HHS”) represented 36%, the Department of Commerce (“DoC”) represented 24%, and the Department of Education (“DoED”) represented 13% of total revenue for 2010. We manage our business through three segments: the Government Group; the International Group; and the Human Capital Group.

The Government Group is our largest segment and has many years of experience in providing information management and business process outsourcing to several civilian and defense agencies of the federal government, including a 30-year history with the Department of Education, over 10 years with the Defense Information Systems Agency and nine years with the Centers for Medicare and Medicaid Services (“CMS”). The Government Group is also responsible for the development, management, analysis and dissemination of healthcare information to the public sector and is one of the largest non-government providers of health information in the United States. The operations of Buccaneer acquired in mid September 2010 are part of the Government Group. The Government Group represented 90% of total revenue for 2010.

The International Group serves government customers in the United Kingdom and Canada and provides consulting, systems integration, business process outsourcing, and the management of data, identity, revenue and human capital. The International Group continuing operations represented 7% of total revenue for 2010. Business operations in Latin America, formerly part of the International Group, are classified as discontinued operations in the consolidated financial statements. Our operations in Argentina and Mexico were sold in 2010 and our operations in Venezuela were sold in February 2011.

The Human Capital Group designs, builds, and operates workforce solutions that automate and improve the recruitment, assessment, selection, training and development of a customer’s workforce. We provide solutions that automate pre-employment screening which improves the quality and retention of new employees and reduces the cost and time associated with workforce planning and hiring. The Human Capital Group represented 3% of total revenue for 2010.

Buccaneer Acquisition in September 2010

In September 2010, Vangent acquired Buccaneer Computer Systems & Service, Inc. (“Buccaneer Acquisition”). Buccaneer is a leading provider of IT services, infrastructure, secure data hosting and data analytics for the government healthcare market. Vangent acquired all outstanding shares of Buccaneer stock in exchange for purchase consideration of $64.6 million. Vangent funded the $60.0 million paid at closing with available cash of $44.0 million and a variable-rate borrowing of $16.0 million drawn on its senior secured revolving credit facility. The revolving credit borrowing was repaid in full in December 2010.

The Buccaneer Acquisition has been accounted for under the acquisition method of accounting which requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value. The excess of the purchase consideration over the amounts assigned to tangible or intangible assets acquired and liabilities assumed is recognized as goodwill.

Acquisition of Aptiv Technology Partners in 2008

In 2008 Vangent purchased the government health integration group assets of Aptiv Technology Partners for cash consideration of $3.9 million, including acquisition fees. The acquisition further strengthens our ability to serve government and commercial health customers with the latest technology and consulting expertise.

Vangent Acquisition in February 2007

In February 2007, Vangent Holding Corp. consummated the acquisition of all of the equity interests of Pearson Government Solutions, Inc., a 100%-owned subsidiary of Pearson, and the domestic and international affiliates of Pearson Government Solutions, Inc. engaged in the consulting, systems integration and business processing outsourcing business operated by the Pearson Government Solutions operating unit of Pearson and the other seller entities (“Vangent Acquisition”).

The total purchase consideration paid to Pearson for the Vangent Acquisition was $638.5 million and included: (i) $560.0 million in cash; (ii) $35.0 million in Series A preferred stock of Vangent Holding Corp.; (iii) $5.0 million in Series B preferred stock of Vangent Holding Corp.; and (iv) 10% of the Class A membership interests in Vangent Holding LLC. Vangent Holding LLC holds 100% of the common stock, but none of the preferred stock, in Vangent Holding Corp.

Accounting for the Vangent Acquisition was based in part on the portion of Pearson’s (“continuing stockholder”) basis in Vangent represented by its 10% residual interest assigned to the assets and liabilities acquired. The remainder of the investment in the assets and liabilities acquired by Vangent Holding Corp. (the remaining 90%) was recorded at fair value. As a result, the assets and liabilities were assigned new values which include part carryover basis and part fair value basis. Goodwill of $301.9 million resulted from the Vangent Acquisition.

Discontinued Operations

At the end of 2009, Vangent completed an evaluation of its international business and made the determination to sell its business operations in Latin America that are reported as discontinued operations in the consolidated financial statements. Sales of business operations in Argentina and Mexico were completed in 2010, and the sale of operations in Venezuela was completed in February 2011 to complete the disposal of discontinued operations.

Factors Affecting Our Results of Operations

Our results of operations are affected by a number of factors, including but not limited to, the following:

Nature of Our Contracts

Contracts funded by U.S. government agencies represented 88% of total revenue for 2010, compared with 84% for 2009. Revenue from contracts in which we acted as the prime contractor represented 68% of total revenue, a reduction from 85% for 2009 due to subcontract work performed on the U.S. 2010 Census contract. The continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for the various federal government agencies with which we do business. Revenue generated by the Government Group reflects our continuing strategic emphasis on the development of enhanced information management and business process outsourcing solutions across the U.S. government with a particular focus in the health, education, national security, and intelligence related fields.

We have cost-plus, fixed-price and time and materials contracts. Fixed-priced contracts generally offer a higher profit margin opportunity but involve higher risks associated with potential cost overruns. Revenue from each type of contract as a percent of total revenue follows:

		Years Ended December 31,
		2010				2009				2008
Cost-plus			66	%			55	%			51	%
Fixed-price			30	%			41	%			43	%
Time and materials			4	%			4	%			6	%
			100	%			100	%			100	%

The increases in the percentage of revenue from cost-plus contracts for 2010 resulted from the U.S. 2010 Census contract.

Cost of Revenue

Cost of revenue includes labor, facilities, other direct contract costs, overhead, management and support, amortization of intangible assets, depreciation of property and equipment, and other costs attributable to serving our customers. Labor includes salaries, wages and related employee benefits associated with the professional and customer service staff. Facilities costs include rent for commercial office space and a portion of headquarters costs. Other direct contract costs include travel, hardware and software, and costs of subcontractors.

General and Administrative Expenses and Selling and Marketing Expenses

General and administrative expenses are not directly associated with performing work for our customers and include salaries and wages, associated fringe benefits, facilities, depreciation, travel, and insurance. Among the functions covered by general and administrative expenses are human resources, information systems, accounting, general management, legal, finance, contracts, and purchasing. Selling and marketing expenses for the sales and business development group include salaries, wages and commissions, associated fringe benefits, facilities, travel, and bid and proposal expenses. Most of these expenses qualify as allowable costs under the cost accounting standards for contracting with the federal government.

Income Taxes

In connection with the Buccaneer Acquisition in 2010 and the Vangent Acquisition in 2007, elections under Section 338(h) (10) of the Internal Revenue Code significantly increased the tax basis of U.S. assets resulting in tax deductions for the amortization of intangibles and goodwill. The deductions significantly contribute to the net operating loss carryforward that is available to reduce future cash taxes.

Contract Backlog

Total contract backlog is the amount of revenue we expect to realize over the remaining term of the contracts. We include in backlog task orders awarded, but not contract ceiling values, under government-wide acquisition contracts or indefinite delivery, indefinite quantity contracts. Funded backlog is the portion for which funding has been authorized. Most of our federal government contracts allow the customer the option of extending the period of performance for a period of one or more years. A summary of contract backlog by business segment follows (in millions):

		December 31, 2010								December 31, 2009
		Total				Funded				Total				Funded
Government Group		$	1,629.2			$	241.3			$	1,782.6			$	313.4
International Group			251.9				161.8				291.2				196.8
Human Capital Group			13.2				13.2				7.1				7.1
Discontinued operations			—				—				44.9				44.9
		$	1,894.3			$	416.3			$	2,125.8			$	562.2

The net change in total contract backlog from December 31, 2009, reflects revenue earned on major contracts awarded in prior years, including contracts with the Centers for Medicare and Medicaid Services and the U.S. 2010 Census contract, and a slowdown in the level of U.S. government contract awards, partially offset by the addition of backlog from the Buccaneer Acquisition.

Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in the notes to the consolidated financial statements. A number of our accounting policies require the application of significant judgment by management, and such judgments are reflected in the amounts reported in the consolidated financial statements. In applying these policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Estimates and assumptions are based upon what we believe is the best information available, historical experience, the terms of existing contracts, observations of trends in the industry, information provided by our customers, and information available from other outside sources. Estimates and assumptions could change materially as conditions within and beyond our control change. We evaluate the estimates and judgments relating to critical accounting policies on an ongoing basis, including those related to revenue recognition, amortization of intangible assets, goodwill, equity-based compensation, and income taxes. Actual results may differ significantly from the estimates reflected in the consolidated financial statements. We believe the following are our critical accounting policies.

Revenue Recognition and Cost Estimation on Long-Term Contracts

Revenue is derived primarily from contracts with the U.S. Government. Revenue from service contracts is recognized when earned, generally as work is performed in accordance with the FASB Accounting Standards Codification Topic 605-10, Revenue — Overall (Securities and Exchange Commission, Staff Accounting Bulletin No. 104, Revenue Recognition). Revenue is recognized when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable, and collectibility is reasonably assured.

Contracts with customers are fixed-price, cost-plus, or time-and-materials contracts. Revenue and profit on fixed-price service contracts under which the Company is paid a specific amount to provide services are recognized ratably as services are performed or as units are delivered. Revenue and profit under cost-plus service contracts is recognized as costs are incurred plus negotiated fees. Fixed fees on cost-plus service contracts are recognized ratably over the contract performance period as services are performed. Incentive fees on cost-plus service contracts are recognized when awarded by the customer or, if based on successful completion of measurable objectives determinable as of the reporting date, are recognized ratably over the contract performance period. Revenue for time-and-materials contracts is recognized on the basis of allowable labor hours multiplied by the contracted billing rates, plus costs for items used in the performance of the contract. Profit on time-and-materials contracts result from the difference between the cost of services performed and the contracted billing rates for these services.

Revenue and profit on fixed-price systems development contracts within the scope of the FASB Accounting Standards Codification Topic 605-35, Revenue Recognition — Construction-Type and Production-Type Contracts (formerly Statement of Position No. 81-1, Accounting for Performance of Construction Type and Certain Production-Type Contracts), are recognized under the percentage-of-completion method based on the ratio of actual costs incurred to the total estimated costs at completion of the contract, multiplied by estimated total contract revenue. Provision for the full amount of an anticipated loss on a contract is recognized in the period in which the loss becomes probable and can be reasonably estimated.

Revenue recognition 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 contracts, estimates of revenue and costs are subject to a number of variables. Contract costs include labor and related employee benefits, subcontracting costs and other direct costs, as well as allocations of allowable indirect costs. For contract change orders, claims or similar items, judgment is required for estimating the amounts, assessing the potential for realization, and determining whether realization is probable. From time to time, facts develop that require revisions of revenue recognized or cost estimates. To the extent that a revised estimate affects the current or an earlier period, the cumulative effect of the revision is recognized in the period in which the facts requiring the revision become known. Contracts may include a combination of one or more services or deliverables. Judgment is required to determine if a contract with more than one element should be considered separate units of accounting with revenue allocated to each element.

Invoices to customers are prepared in accordance with the terms of the contract which may not be directly related to the performance of services or the recognition of revenue. Unbilled receivables are invoiced to customers based upon the achievement of specific criteria defined by the contract including deliverables, milestones, timetables, or the incurrence of certain costs. Payments received from customers in advance of delivery or the performances of services are classified as deferred revenue. Reimbursements of certain costs, including certain hardware costs or out-of-pocket expenses are included in revenue with corresponding costs included in cost of revenue as costs are incurred.

Definite-Life Intangible Assets

Definite-life intangible assets are amortized over their estimated useful lives. The intangible asset for customer relationships resulting from the Buccaneer Acquisition in 2010 is amortized based on an accelerated method. Amortization of intangible assets is included in cost of revenue in the consolidated statements of operations. The carrying amount of definite-life intangible assets is evaluated when events and circumstances indicate a potential impairment. The carrying amount is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying amount. A loss is recognized based on the amount by which the carrying amount exceeds fair value. Fair value is determined primarily using estimated cash flows associated with the asset, discounted at a rate commensurate with the risk involved. Changes in estimates of future cash flows could result in impairment in a future period.

Goodwill and Indefinite-Life Intangible Asset

Goodwill is that amount by which the cost of an acquired business exceeds the fair value of assets acquired and liabilities assumed. In connection with the Vangent Acquisition in February 2007, goodwill was initially allocated to the business segments as follows: Government Group $247.7 million, International Group $22.7 million and Human Capital Group $19.2 million; in addition, an indefinite-life intangible asset amounting to $11.2 million was initially recorded for the Human Capital Group. In 2010 the Buccaneer Acquisition added goodwill of $30.5 million for the Government Group.

The Company tests goodwill and the indefinite-life intangible asset for each reporting unit, or segment, on an annual basis in the fourth quarter of each year or more frequently if indicators of impairment exist. If the fair value of the indefinite-life intangible asset exceeds its carrying amount, the asset is not considered impaired. The impairment test for goodwill is a two-step process. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount for a reporting unit exceeds its fair value, the second step of the impairment test is performed to determine the amount of the impairment loss by comparing the fair values of goodwill with the carrying amount. Fair values are determined using an income approach based on a discounted cash flow methodology. The Company considers and relies, in part, on reports of a third-party expert to determine the fair values.

In the fourth quarter of 2010, the Company performed the annual impairment tests and recorded impairment charges totaling $5.3 million for the Human Capital group. The indefinite-life intangible asset and goodwill were impaired by $3.8 million and $1.5 million, respectively, as a result of the recession in the United States and continuing high unemployment levels that have reduced hiring and processing needs of human resource departments of commercial customers in the Human Capital Group. As a result of impairment charges, the balance of goodwill for the International Group has been reduced to $9.2 million, and for the Human Capital Group goodwill has been reduced to $7.0 million and the indefinite-life intangible asset reduced to $6.5 million at December 31, 2010.

The process of evaluating the impairment of goodwill and the indefinite-life intangible asset is subjective and requires significant judgment at many points during the analysis. In estimating fair values of the reporting units for the annual evaluation, estimates and judgments are developed about the future cash flows for each of the reporting units, including estimated long-term growth rates, the level and timing of future cash flows, discount rates and assumptions about the future economic and operating environment. Although cash-flow forecasts are based on assumptions that are consistent with plans and estimates that are used to manage the business segments, there is significant judgment in determining the cash flows attributable to reporting units over the forecast period. We cannot be certain that a future downturn in any of our businesses or adverse changes in market conditions compared with our estimates and assumptions will not result in future impairment charges. Failure to achieve forecast operating results due to further weakness in the economic environment or other factors could result in future impairment charges.

Equity-Based Compensation

Vangent charges equity-based compensation expense for awards of Class B or B-1 membership interests in Vangent Holding LLC granted to certain employees and independent directors. Vangent Holding LLC holds 100% of the common stock, but none of the preferred stock, of Vangent Holding Corp. which in turn owns 100% of Vangent’s common stock. The Class B or B-1 membership interests represent net profits interests in Vangent Holding LLC and are considered equity-based awards. Holders of Class B or B-1 membership interests are entitled to receive their respective proportional interest in 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. Equity-based compensation expense is amortized on a straight line basis over the total requisite service period for the award. The fair value of grants of Class B or B-1membership interests is determined by management using an income approach based on a cash flow methodology, less a discount for lack of liquidity. The Company considers and relies, in part, on reports of third-party experts in the determination of fair value of grants of Class B or B-1 membership interests.

Income Taxes and Tax Valuation Allowance

The Company accounts for income taxes based on an asset and liability approach that 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 and 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 purchase accounting tax valuation allowance was established in 2007 in connection with the Vangent Acquisition, and a full valuation allowance was provided against U.S. deferred tax assets at December 31, 2008 and 2009. A valuation allowance is recorded against deferred tax assets when it is more likely than not that a tax benefit will not be realized in the future. The assessment for a valuation allowance requires judgment on the part of management with respect to tax benefits that may be realized. The Company considers all available positive and negative evidence, including future reversals of temporary differences, projected future taxable income, tax planning strategies, and recent financial results. The Company has recently experienced positive trends in its continuing operating performance, and the positive trends are likely to continue in future periods. The Company has concluded at December 31, 2010, based upon all available evidence, that it is more likely than not that U.S. deferred tax assets will be realizable, except for the portion relating to a net capital loss carryforward resulting from the sales of discontinued operations in Latin America. Accordingly, the tax valuation allowance against deferred tax assets was reversed in 2010 since realization is believed to be more likely than not. The reduction to the tax valuation allowance is recorded as an adjustment to the provision for income taxes for 2010.

Discontinued Operations

Vangent completed an evaluation of its international business and made the determination to sell its business operations in Latin America that are reported as discontinued operations in the consolidated financial statements. Charges for expected losses on sale or disposal were recorded based on a comparison of estimates of fair values for each of the discontinued operations with the related carrying amounts. Fair values were initially determined using an income approach based on a discounted cash flow methodology. The Company considered and relied, in part, on reports of a third-party expert to determine the initial estimates of fair values. Fair value estimates were revised and additional charges for expected losses on sale or disposal were recorded based on bids and letters of intent received from market participants in the Latin American countries. Expected losses were adjusted to actual as a result of sales of business operations in Argentina and Mexico that were completed in 2010, and the sale of operations in Venezuela that was completed in February 2011.

Results of Operations

Statements of operations data follow (dollars in thousands):

		Years Ended												Years Ended
		December 31,								Increase				December 31.								Increase
		2010				2009				(Decrease)				2009				2008				(Decrease)
Statements of Operations Data
Revenue		$	761,841			$	583,986			$	177,855			$	583,986			$	532,049			$	51,937
Cost of revenue			639,377				490,500				148,877				490,500				440,495				50,005
Gross profit			122,464				93,486				28,978				93,486				91,554				1,932
General and administrative expenses			45,354				40,387				4,967				40,387				46,440				(6,053	)
Selling and marketing expenses			19,905				18,003				1,902				18,003				14,930				3,073
Impairment of goodwill and indefinite-life intangible asset			5,320				11,227				(5,907	)			11,227				13,766				(2,539	)
Operating income			51,885				23,869				28,016				23,869				16,418				7,451
Interest expense, net			31,140				34,289				(3,149	)			34,289				35,244				(955	)
Income (loss) from continuing operations before income taxes			20,745				(10,420	)			31,165				(10,420	)			(18,826	)			8,406
Provision (benefit) for income taxes			(31,486	)			6,794				(38,280	)			6,794				4,939				1,855
Income (loss) from continuing operations			52,231				(17,214	)			69,445				(17,214	)			(23,765	)			6,551
Loss from discontinued operations, net of tax			(12,228	)			(16,794	)			4,566				(16,794	)			(2,742	)			(14,052	)
Net income (loss)			40,003				(34,008	)			74,011				(34,008	)			(26,507	)			(7,501	)
Net loss attributed to noncontrolling interest			(26	)			—				26				—				—				—
Net income (loss) attributable to Vangent		$	40,029			$	(34,008	)		$	74,037			$	(34,008	)		$	(26,507	)		$	(7,501	)
Statements of Operations Data as a Percent of Revenue
Revenue			100.0	%			100.0	%							100.0	%			100.0	%
Cost of revenue			83.9				84.0								84.0				82.8
Gross profit margin			16.1				16.0								16.0				17.2
General and administrative expenses			6.0				6.9								6.9				8.7
Selling and marketing expenses			2.6				3.1								3.1				2.8
Impairment of goodwill and indefinite-life intangible asset			0.7				1.9								1.9				2.6
Operating income margin			6.8				4.1								4.1				3.1
Interest expense, net			4.1				5.9								5.9				6.6
Income (loss) from continuing operations before income taxes			2.7				(1.8	)							(1.8	)			(3.5	)
Provision (benefit) for income taxes			(4.2	)			1.1								1.1				1.0
Income (loss) from continuing operations			6.9				(2.9	)							(2.9	)			(4.5	)
Loss from discontinued operations, net of tax			(1.6	)			(2.9	)							(2.9	)			(0.5	)
Net income (loss)			5.3				(5.8	)							(5.8	)			(5.0	)
Net loss attributed to noncontrolling interest			—				—								—				—
Net income (loss) attributable to Vangent			5.3	%			(5.8	)%							(5.8	)%			(5.0	)%

Years Ended December 31, 2010 and 2009

Buccaneer Acquisition

On September 15, 2010, Vangent completed the Buccaneer Acquisition. The results of operations of Buccaneer for the period September 15 to December 31, 2010, are included in the consolidated statements of operations and cash flows for the periods ended December 31, 2010. The results of operations for Buccaneer reflect amortization of acquired intangible assets on an accelerated method.

Revenue

A summary of revenue by business segment follows (dollars in thousands):

		Years Ended
		December 31,								Increase (Decrease)
		2010				2009				Amount				Percent
Revenue by business segment
Government Group		$	688,270			$	511,482			$	176,788				35	%
International Group			50,435				44,194				6,241				14	%
Human Capital Group			25,420				33,487				(8,067	)			(24	)%
Elimination			(2,284	)			(5,177	)			2,893				56	%
		$	761,841			$	583,986			$	177,855				30	%
Business segment revenue as a percent of total revenue
Government Group			90.3	%			87.6	%
International Group			6.6				7.6
Human Capital Group			3.3				5.7
Elimination			(0.2	)			(0.9	)
			100.0	%			100.0	%

The Department of Health and Human Services (“HHS”) represented 36%, the Department of Commerce (“DoC”) represented 24%, and the Department of Education (“DoED”) represented 13% of total revenue for 2010.

Government Group Revenue

The Buccaneer Acquisition completed in mid September 2010 contributed revenue of $34.9 million for 2010 from the date of acquisition. Revenue from HHS contracts, primarily Centers for Medicare and Medicaid Services (“CMS”), represented 83% of Buccaneer revenue for the period.

Other increases in Government Group revenue for 2010 compared with 2009 include: (i) revenue from DoC contracts increased $152.4 million from the processing of census forms and data capture under the U.S. 2010 Census contract that was completed in 2010, and (ii) revenue from DoED increased $13.1 million from additional contract work with the Office of Federal Student Aid. Revenue from DoD contracts increased $2.0 million for 2010 including an increase of $10.4 million in revenue from the Single Sign On contract with the Defense Health Information Management System that was offset by a reduction of $10.5 million in revenue from the Traumatic Brain Injury contract with the Military Health System.

The increase of 35% in Government Group revenue for 2010 was partially offset by, (i) a reduction of $9.1 million resulting from the one-time cash-for-clunkers program for the Department of Transportation in 2009, (ii) a reduction of $7.2 million resulting from the transition to automated processing of ERISA filings under contracts with the Department of Labor (“DoL”), and (iii) a reduction of $7.0 million from HHS contracts, primarily Centers for Medicare and Medicaid Services (“CMS”).

International Group Revenue

The increase of 14% in International Group revenue for 2010 reflects an increase of $4.4 million from the start up of a major one-year contract in the United Kingdom, partly offset by reductions from a completed contract and lower volume in Canada. Changes in foreign currency exchange rates increased revenue by $2.0 million, compared with the average exchange rates prevailing during 2009.

Human Capital Group Revenue

The reduction of 24% in Human Capital Group revenue reflects a reduction of $12.9 million from the completion in 2009 of a foreign military sales contract with the U.S. Air Force to modernize the Royal Saudi Air Force learning infrastructure.

Cost of Revenue

The increase in cost of revenue of $148.9 million, or 30%, primarily reflects costs incurred for contract work performed under the U.S. 2010 Census contract with DoC that was completed in 2010. Costs for salaries and wages, including incentive compensation costs, increased $67.8 million, or 40%. Costs for employee benefits increased $20.5 million, or 26%. The average number of employees increased 43% primarily for work performed on the U.S. 2010 Census contract. Incentive compensation costs increased; incentive compensation costs were minimal for 2009. The Buccaneer Acquisition completed in mid September 2010 increased costs by $32.4 million for 2010 for operations from the date of acquisition, including amortization of $1.7 million for acquired intangible assets, primarily customer relationships, on an accelerated method. Changes in foreign exchange rates increased costs of the International Group by $1.7 million, compared with the average exchange rates prevailing during 2009.

General and Administrative Expenses

The increase in general and administrative expenses reflects increased incentive compensation expense of $5.8 million. Incentive compensation expense is accrued based upon the level of operating results compared to established targets; there was no incentive compensation expense accrued for 2009. The Buccaneer Acquisition completed in mid September 2010 increased expenses by $1.4 million for 2010 for operations from the date of acquisition. Acquisition-related cost and expenses of $0.6 million from the Buccaneer Acquisition increased expenses for 2010. Legal and consulting fees increased for 2010.

General and administrative expenses were 6.0% of revenue, compared with 6.9% for 2009. The reduction reflects revenue earned on the U.S. 2010 Census contract for which there was minimal incremental general and administrative expenses.

Selling and Marketing Expenses

The increase in selling and marketing expenses reflects higher commission and incentive compensation expenses and an increase in the number of new business development employees in the Government Group.

Impairment Charges for Goodwill and Indefinite-Life Intangible Asset

Impairment charges for goodwill and an indefinite-life intangible asset totaled $5.3 million for 2010 and $11.2 million for 2009. The Company performs the annual impairment test in the fourth quarter of each year. Goodwill and an indefinite-life intangible asset for the Human Capital Group were impaired by $5.3 million for 2010 and $3.3 million for 2009 as a result of continuing high unemployment levels that have reduced hiring and processing needs of human resource departments of commercial customers. Goodwill for the International Group was impaired by $7.9 million for 2009 as a result of adverse business conditions and reduced expectations of future operating performance.

Operating Income

A summary of operating income by business segment follows (dollars in thousands):

		Years Ended
		December 31,								Increase (Decrease)
		2010				2009				Amount				Percent
Operating income (loss) by business segment
Government Group		$	58,399			$	36,380			$	22,019				61	%
International Group			1,206				(7,379	)			8,585				—	%
Human Capital Group			(7,694	)			(5,111	)			(2,583	)			(51	)%
Corporate			(26	)			(21	)			(5	)			(24	)%
		$	51,885			$	23,869			$	28,016				117	%
Operating margin by business segment
Government Group			8.5	%			7.1	%
International Group			2.4	%			(16.7	)%
Human Capital Group			(30.3	)%			(15.3	)%

The increase in Government Group operating income primarily reflects work on the U.S. 2010 Census contract with DoC that was completed in 2010. Award fees earned under cost-plus contracts, including the U.S. 2010 Census contract, increased $14.4 million compared with 2009. Higher revenue earned on DoED contracts contributed to the increase in operating income for 2010. The Buccaneer Acquisition completed mid-September 2010 contributed $1.1 million to operating income and reflects charges for amortization of intangible assets on an accelerated method. The increase in operating income for 2010 was partly offset by (i) a reduction of $4.9 million from contracts with DoL resulting from the transition to automated processing of ERISA filings, and (ii) higher accrued expenses of $6.3 million for incentive compensation compared with 2009 when no incentive compensation was earned or accrued.

International Group operating income for 2010 reflects the start up of a major one-year contract in the United Kingdom, partly offset with lower income from Canada. The operating loss for 2009 reflects a goodwill impairment charge of $7.9 million.

The Human Capital Group operating losses reflect impairment charges for goodwill and the indefinite-life intangible asset of $5.3 million for 2010 and $3.3 million for 2009. Operating results for 2010 also reflect the adverse impact of lower revenue from completion in 2009 of sales contract with the U.S. Air Force to modernize the Royal Saudi Air Force learning infrastructure and lower revenue from reductions in training needs and customer hiring patterns from continued high unemployment levels.

Interest Expense, Net

The reduction in interest expense, net, of $3.1 million resulted from lower average variable interest rates on the unhedged portion of the term loan. The average variable rate was 2.4% for 2010, compared with 3.4% for 2009. A portion of the interest rate swap on the hedged portion of the term loan, under which we pay a fixed rate and receive a variable rate, matured in February 2010; the increase in the unhedged portion of the term loan benefitted from lower variable rates for 2010, compared with the fixed rate for 2009. The remaining balance of the interest rate swap with a notional amount of $150.0 million is scheduled to mature in February 2011.

Provision for Income Taxes

A summary of the provision for income taxes follows (in thousands):

		Years Ended
		December 31,								Increase
		2010				2009				(Decrease)
Provision for income taxes before change in tax valuation allowance		$	4,076			$	220			$	3,856
Change in tax valuation allowance			(35,562	)			6,574				(42,136	)
Total provision (benefit) for income taxes		$	(31,486	)		$	6,794			$	(38,280	)

The provision for income taxes is composed of U.S. federal, state and local and foreign income taxes. The provision for income taxes for 2010 is net of the reversal of the tax valuation allowance for deferred tax assets. The Company considers all available positive and negative evidence, including future reversals of temporary differences, projected future taxable income, tax planning strategies, and recent financial results. The Company has recently experienced positive trends in its continuing operating performance, and the positive trends are likely to continue in future periods. The Company has concluded at December 31, 2010, based upon all available evidence, that it is more likely than not that U.S. deferred tax assets will be realizable, except for the portion relating to a net capital loss carryforward resulting from the sales of discontinued operations in Latin America. Accordingly, the tax valuation allowance against deferred tax assets was reversed in 2010 since realization is believed to be more likely than not. The reduction to the tax valuation allowance is recorded as an adjustment to the provision for income taxes for 2010.

Discontinued Operations

A summary of revenue and cost and expenses for discontinued operations in Latin America that are segregated and reported separately in the consolidated financial statements follows (in thousands):

		Years Ended
		December 31,								Increase
		2010				2009				(Decrease)
Revenue		$	24,697			$	22,803			$	1,894
Costs and expenses			23,600				29,894				(6,294	)
Losses on sales or disposal and impairment charges			22,151				9,218				12,933
Other (income) expense, net			(1,020	)			525				(1,545	)
Loss from discontinued operations before income taxes			(20,034	)			(16,834	)			(3,200	)
Provision (benefit) for income taxes			(7,806	)			(40	)			(7,766	)
Loss from discontinued operations, net of tax		$	(12,228	)		$	(16,794	)		$	4,566

Revenue and costs and expenses for discontinued operations for 2010 were affected by the sale of operations in Argentina completed in the third quarter of 2010 and the sale of operations in Mexico completed in the fourth quarter of 2010. Revenue from a contract with Mexico’s social security agency increased for 2010. However, low member enrollments under the social security contract resulted in revenue that was below expectations. The social security contract was in the start up phase and had experienced operational delays in 2009. An increase in revenue from Mexico was partially offset by the completion of a contract with the Mexican tax authority in March 2010.

Revenue and costs and expenses are denominated in multiple foreign currencies and are affected by foreign currency exchange rate changes. Changes in rates, primarily the Mexican Peso, reduced revenue by $1.1 million, compared with the average rates for 2009.

The reduction in costs and expenses for discontinued operations resulted from sales of operations in Argentina and Mexico in 2010, the completion of a contract in Mexico in March 2010, and high costs incurred in 2009 under the contract with Mexico’s social security agency that was in the start up phase and experienced operational delays. Under the accounting for discontinued operations, there is no depreciation and amortization expense for 2010, compared with $2.1 million for 2009.

Losses on sales or disposal amounted to $22.2 million for 2010 and resulted from reduced expectations and the completion of sales of operations in Argentina in the third quarter and Mexico in the fourth quarter of 2010. The valuation of the businesses by market participants was substantially below expectations as a result of lack of potential buyers and limited competition in the bidding process. Charges for expected loss on disposal and goodwill impairment totaled $9.2 million for 2009.

Other income from discontinued operations for 2010 includes equity in net income of $1.1 million from a joint venture in Argentina that began operating in the second quarter of 2009.

Years Ended December 31, 2009 and 2008

Revenue

		Years Ended
		December 31,								Increase (Decrease)
		2009				2008				Amount				Percent
Revenue by business segment
Government Group		$	511,482			$	454,094			$	57,388				13	%
International Group			44,194				48,703				(4,509	)			(9	)%
Human Capital Group			33,487				29,252				4,235				14	%
Elimination			(5,177	)			—				(5,177	)			—	%
		$	583,986			$	532,049			$	51,937				10	%
Business segment revenue as a percent of total revenue
Government Group			87.6	%			85.3	%
International Group			7.6				9.2
Human Capital Group			5.7				5.5
Elimination			(0.9	)			—
			100.0	%			100.0	%

The Department of Health and Human Services (“HHS”) represented 44%, the Department of Education (“DoED”) represented 15%, and the Department of Defense (“DoD’) represented 9% of total revenue for 2009.

The increase in Government Group revenue for 2009 resulted primarily from the following:

•

Revenue from DoC contracts increased $26.0 million from initial work on the U.S. 2010 Census contract.

•

Revenue from DoD contracts increased $18.0 million, primarily from the Military Health System including a new contract for traumatic brain injury.

•

A short-term contract with DoT under the cash-for-clunkers program generated revenue of $9.1 million for 2009.

•

Revenue from a new contract with the Department of State (“DoS”) generated $9.0 million for initial work on the National Passport Information Center.

The increases for the Government Group were partially offset by a reduction of $8.0 million in revenue in the commercial health business as a result of the completion of a major contract and a reduction of $4.4 million in revenue from HHS contracts from lower call volumes.

The reduction of 9% in International Group revenue reflects the impact of foreign currency exchange rate changes that reduced revenue by $6.4 million compared with the average exchange rates prevailing during 2008 and lower volume on Canadian contracts, partially offset by the startup of two contracts in the United Kingdom.

The increase of 14% in Human Capital Group revenue reflects a new foreign military contract with the U.S. Air Force to modernize the Royal Saudi Air Force learning infrastructure, offset in part by lower assessment product revenue and training services for various commercial customers due to reductions in customer hiring patterns and overall economic conditions.

Cost of Revenue

Cost of revenue increased $50.0 million, or 11%, for 2009. The increase reflects additional contract work performed under U.S. government contracts, partly offset by the effect of changes in foreign exchange rates that reduced costs of the International Group segment by $5.5 million and the use of our own employees in lieu of subcontractors on certain contracts. The average number of employees increased 16% and fringe benefit costs, primarily medical costs, increased for 2009.

The gross profit margin, or the ratio of gross profit to revenue, was 16% for 2009, compared with 17% for 2008. The reduction resulted primarily from higher costs on fixed price contracts in the Government Group, and lower assessment product revenue that typically generates a higher gross profit margin in the Human Capital Group.

General and Administrative Expenses

General and administrative expenses were $6.1 million, or 13%, lower for 2009 compared with 2008. Expenses represented 7% of revenue, compared with 9% for 2008. Expenses for 2008 included a net charge of $2.0 million resulting from the settlement of a customer contract dispute. There were no expenses accrued for annual incentive compensation awards for 2009, compared with $6.3 million accrued for 2008. Incentive compensation expense is accrued based upon the level of operating results compared to established targets.

Selling and Marketing Expenses

Selling and marketing expenses increased $3.1 million, or 21%, for 2009 and reflect an increase of 50% in the number of new business development employees primarily within the Government Group.

Impairment Charges for Goodwill and Indefinite-Life Intangible Asset

Impairment charges for goodwill and an indefinite-life intangible asset totaled $11.2 million for 2009. In the fourth quarter of 2009, the Company performed its annual impairment test and determined that goodwill was impaired. Goodwill for the International Group was impaired by $7.9 million as a result of continuing adverse business conditions and reduced expectations of future operating performance. Goodwill and an indefinite-life intangible asset for the Human Capital Group were impaired by $2.5 million and $0.8 million, respectively, as a result of high and continuing unemployment levels that have reduced hiring and processing needs of human resource departments of commercial customers.

The goodwill impairment charge was $13.8 million for 2008, consisting of $5.6 million for the International Group and $8.2 million for the Human Capital Group. The International Group was adversely affected by changes in foreign currency exchange rates vs. the U.S. dollar, lower operating margins, and the effects of the global recession. The recession and overall economic weakness coupled with a slowdown in customer orders relating to screening, testing and hiring adversely affected the Human Capital Group.

Operating Income

		Years Ended
		December 31,								Increase (Decrease)
		2009				2008				Amount				Percent
Operating income (loss) by business segment
Government Group		$	36,380			$	28,987			$	7,393				26	%
International Group			(7,379	)			(4,163	)			(3,216	)			(77	)%
Human Capital Group			(5,111	)			(8,348	)			3,237				39	%
Corporate			(21	)			(58	)			37				64	%
		$	23,869			$	16,418			$	7,451				45	%
Operating margin by business segment
Government Group			7.1	%			6.4	%
International Group			(16.7)	%			(8.6	)%
Human Capital Group			(15.3)	%			(28.5	)%

Government Group operating income increased $7.4 million, or 26%, and operating margin increased to 7.1% for 2009, compared with 6.4% for 2008. Operating income for 2008 was reduced by a net charge of $2.0 million resulting from the settlement of a customer contract dispute. The net increase in operating income also reflects initial work on the U.S. 2010 Census contract with DoC, the new national passport contract with DoS, and increased work on the ERISA contract with DoL. In addition, incentive compensation expense for 2009 was lower by $6.3 million in 2009 compared to 2008, and award fees earned under cost-plus contracts increased $4.1 million for 2009. The increase in operating income from these factors was partly offset by higher call volume on student loan programs that resulted in increased costs and lower operating income under DoED fixed-priced contracts. Income from the commercial health business declined as a result of completion of a major contract.

The International Group operating losses reflect goodwill impairment charges of $7.9 million for 2009 and $5.6 million for 2008. In addition, operating results for 2009 were adversely affected by lower volume on Canadian contracts.

The Human Capital Group operating losses reflect impairment charges for goodwill and an indefinite-life intangible asset of $3.3 million for 2009 and $8.2 million for 2008. Operating results for 2009 also reflect the adverse impact of lower assessment product revenue that typically generates a higher gross profit margin and lower revenue from training services for various commercial customers due to reductions in customer hiring patterns from continuing high unemployment levels.

Interest Expense, Net

Interest expense, net, was $34.3 million for 2009, a reduction of $1.0 million from 2008. A decline of 1.84% (184 basis points) in the average variable interest rates on the unhedged portion of the term loan reduced interest expense by $0.8 million for 2009.

Provision for Income Taxes

A summary of the provision for income taxes follows (in thousands):

		Years Ended
		December 31,								Increase
		2009				2008				(Decrease)
Provision (benefit) for income taxes before change in tax valuation allowance		$	220			$	(5,204	)		$	5,424
Change in tax valuation allowance			6,574				10,143				(3,569	)
Total provision for income taxes		$	6,794			$	4,939			$	1,855

The provision for income taxes is composed of U.S. federal, state and local and foreign income taxes and reflects a tax valuation allowance against U.S. deferred tax assets. The Company has concluded, based upon available evidence, that it is more likely than not that the U.S. deferred tax assets at December 31, 2009, will not be realizable. Therefore, a valuation allowance has been provided. The valuation allowance results primarily from the effect on U.S. net operating losses from the tax amortization of goodwill. Goodwill is an indefinite life 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. GAAP.

Discontinued Operations

A summary of revenue, cost and expenses for discontinued operations that are segregated and reported separately in the consolidated financial statements follows (in thousands):

		Years Ended
		December 31,								Increase
		2009				2008				(Decrease)
Revenue		$	22,803			$	26,222			$	(3,419	)
Costs and expenses			30,419				25,364				5,055
Impairment charges for goodwill			4,253				2,985				1,268
Expected loss on disposal			4,965				—				4,965
Loss from discontinued operations before income taxes			(16,834	)			(2,127	)			(14,707	)
Provision (benefit) for income taxes			(40	)			615				(655	)
Loss from discontinued operations, net of tax		$	(16,794	)		$	(2,742	)		$	(14,052	)

Revenue and costs and expenses for discontinued operations are denominated in multiple foreign currencies, primarily the Mexican Peso, and are affected by foreign currency exchange rate changes. Revenue from discontinued operations declined $3.4 million, or 13%. Changes in foreign currency exchange rates reduced revenue by $4.5 million, or 17%, compared with the average exchange rates prevailing during 2008. Revenue for 2009 reflects a new contract with Mexico’s social security agency, offset by lower revenue from a contract in Venezuela that terminated in December 2008.

The net loss from discontinued operations for 2009 was adversely affected by start-up costs, operational delays and low member enrollments on a new contract with Mexico’s social security agency that resulted in an operating loss of $6.5 million. Other factors included the effect of the contract termination in Venezuela in December 2008 and a foreign currency loss of $0.5 million from adoption of the market rate as opposed to the official exchange rate in Venezuela for translation of operating results beginning in the fourth quarter of 2009. The Company performed its annual goodwill impairment assessment during the fourth quarter of 2009. As a result, a charge of $4.3 million was recorded for Latin American operations prior to the decision to sell. An additional charge of $5.0 million for an expected loss on disposal was recorded in 2009 as a result of the decision to sell the business, which was primarily recorded as a reduction of the remaining goodwill and intangible assets. An impairment charge of $3.0 million was recorded for Latin America in 2008.

Liquidity and Capital Resources

Our primary sources of liquidity are available cash and cash equivalents, a line of credit under the revolving credit facility, and cash flows from operating activities. Cash and cash equivalents amounted to $27.2 million at December 31, 2010, of which $20.5 million, or 75%, was held by Vangent in the United States and the remaining $6.7 million, or 25%, was held by foreign subsidiaries or consolidated joint ventures. Cash held by foreign subsidiaries would be subject to U. S. federal income taxes in the event the funds were repatriated to the United States. Subject to certain limitations, including compliance with the maximum allowable limits under the leverage ratio under the senior secured credit facility, the amount available under the revolving credit facility was $49.8 million at December 31, 2010. The revolving credit facility is scheduled to expire in February 2012. Based on our current planned level of operations, we believe our cash and cash equivalents, cash flow from operations, and available line of credit will be adequate to meet our liquidity needs for at least the next twelve months, including scheduled debt and interest payments, scheduled lease payments, noncancelable purchase and other contractual commitments, and planned capital expenditures.

In September 2010, Vangent completed the Buccaneer Acquisition and funded the $60.0 million paid at closing with available cash of $44.0 million and a variable-rate borrowing of $16.0 million drawn on its senior secured revolving credit facility. The revolving credit borrowing was repaid in full in December 2010.

Cash and cash equivalents are composed of cash in banks and highly liquid instruments with original maturities of 90 days or less. Cash equivalents or marketable securities are comprised of repurchase agreements and institutional money market funds with major commercial banks under which cash is primarily invested in U.S. Treasury and U.S. government agency securities. The Company does not invest in high yield or high risk securities. Cash in bank accounts at times may exceed federally insured limits.

Short-Term Borrowings

The Company has access to short-term borrowings under the revolving credit facility. At December 31, 2010, there were no short-term borrowings outstanding. In September 2010, a short-term revolving credit borrowing of $16.0 million was drawn to fund a portion of the Buccaneer Acquisition; the borrowing was repaid in full in the fourth quarter of 2010. Short-term revolving credit borrowings 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%. A summary of short-term borrowings including the amount, average, and maximum outstanding follows (dollars in thousands):

		Years Ended December 31,
		2010				2009				2008
Amount outstanding at end of year		$	—				—				—
Average amount outstanding during the year			3,605				—				—
Weighted average interest rate			2.59	%			—				—
Maximum amount outstanding during the year		$	16,000				—				—

Long-Term Debt

Refer to the notes to the consolidated financial statements for information on long-term debt, revolving credit facility, scheduled maturities of long-term debt, affirmative and negative covenants including the maximum allowable consolidated leverage ratio, interest rate swap agreements on variable-rate term loan, and the fair value of the interest rate swap liability.

Long-term debt amounted to $406.8 million at December 31, 2010, and consists of a term loan of $216.8 million and senior subordinated notes of $190.0 million. Long-term debt is scheduled to mature as follows: (i) term loan under the senior secured credit facility is scheduled to mature in February 2013, and (ii) the senior subordinated fixed rate notes are scheduled to mature in February 2015. Our ability to generate sufficient cash flow from operations to repay long-term debt when it matures, or to refinance debt when it matures, depends on numerous factors beyond our control, including those discussed under Risk Factors reported elsewhere in this annual report on Form 10-K. In view of current credit market conditions and the credit ratings assigned to our outstanding debt and corporate credit by credit rating agencies, in the event we were to refinance the senior secured credit facility or the senior subordinated notes, we would likely encounter higher interest rates.

Debt Covenants

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 December 31, 2010, the Company was in compliance with all of the affirmative and negative covenants.

The more restrictive debt covenants relate to compliance with a maximum allowable consolidated leverage ratio. 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 $5.0 million, divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, and adjusted for certain unusual and non-recurring items, as defined) for a twelve-month period. At December 31, 2010, the consolidated leverage ratio was 3.78 to 1, compared with the maximum allowable ratio of 5.50 to 1 applicable to the period. The maximum allowable consolidated leverage ratio steps down to 5.25 at June 30, 2011, and to 5.00 at March 31, 2012.

EBITDA is defined as net income (loss) before interest, income taxes, and depreciation and amortization. Management uses this measure as an indicator of operating performance. EBITDA is not an indicator of financial performance under U.S. generally accepted accounting principles or a measure of liquidity and may not be comparable to similarly captioned information reported by other companies. In addition, it should not be considered as an alternative to, or more meaningful than, income (loss) before income taxes, cash flows from operating activities, or other traditional indicators of operating performance.

Adjusted EBITDA is a financial measure used to calculate the consolidated leverage ratio, one of the more restrictive financial covenants under the senior secured credit facility. Adjusted EBITDA, as defined in the senior secured credit facility, excludes (i) discontinued operations, (ii) impairment charges, (iii) equity-based compensation expense, (iv) management fee and expenses paid to Veritas Capital, (v) net transition and contract settlement costs for 2008, and (vi) other items as defined in the senior secured credit facility, including an adjustment to include the pre-acquisition EBITDA results of the acquired company for the calculation of the consolidated leverage ratio. The adjustment to EBITDA for the pre-acquisition results of Buccaneer was $6,574 for the year ended December 31, 2010, resulting in Adjusted EBITDA, including the pro forma results of Buccaneer, of $101,646 for the year ended December 31, 2010. A reconciliation of net income (loss) as reported under U.S. generally accepted accounting principles to EBITDA and Adjusted EBITDA follows (in thousands):

		Years Ended December 31,
		2010				2009				2008
Net income (loss)		$	40,003			$	(34,008	)		$	(26,507	)
Provision (benefit) for income taxes			(31,486	)			6,794				4,939
Interest expense, net of interest income			31,246				34,281				35,243
Depreciation and amortization			34,798				31,883				33,558
EBITDA			74,561				38,950				47,233
Loss from discontinued operations, net of tax			12,228				16,794				2,742
Impairment of goodwill and indefinite-life intangible asset			5,320				11,227				13,766
Equity-based compensation expense			896				1,048				1,053
Net transition and contract settlement costs			—				—				4,514
Management fee			1,278				1,289				1,164
Other			789				810				588
Adjusted EBITDA, excluding pro forma results of acquisition		$	95,072			$	70,118			$	71,060

Interest Rate Swaps on Variable-Rate Term Loan under Senior Secured Credit Facility

The Company has entered into interest rate swap agreements 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 December 31, 2010, the total notional amount of the pay-fixed/receive-variable interest rate swap agreements was $150.0 million scheduled to mature in February 2011.

The fair value of the net interest rate swap liability was $0.6 million at December 31, 2010, all of which represents an unrealized loss that is reported, net of tax, in accumulated other comprehensive loss in the consolidated statement of equity. The fair value is based on quoted prices for swaps in active markets adjusted for non-performance risks. The Company does not hold or issue derivative financial instruments for speculative purposes.

Working Capital

A summary of working capital follows (in thousands):

		December 31,								Increase
		2010				2009				(Decrease)
Cash and cash equivalents		$	27,194			$	44,638			$	(17,444	)
Trade receivables, net			122,940				109,846				13,094
Prepaid expenses and other			12,572				10,353				2,219
Current portion of long-term debt			(1,401	)			(13,534	)			12,133
Accounts payable and accrued liabilities			(80,672	)			(64,849	)			(15,823	)
Accrued interest payable			(7,781	)			(8,186	)			405
Deferred revenue			(7,964	)			(3,976	)			(3,988	)
Deferred tax liability			—				(5,628	)			5,628
Discontinued operations, net			(1,551	)			7,515				(9,066	)
Net working capital		$	63,337			$	76,179			$	(12,842	)

The increases in trade receivables and accounts payable and accrued liabilities resulted primarily from the Buccaneer Acquisition completed in September 2010. Trade receivables at December 31, 2010, reflect DSO (days sales outstanding) of 62 days, compared with 57 days at December 31, 2009.

Cash Flows

A summary of net cash flows follows (in thousands):

		Years Ended
		December 31,								Increase
		2010				2009				(Decrease)
Net cash provided by (used in)
Operating activities:
Continuing operations		$	72,783			$	49,428			$	23,355
Discontinued operations			(1,892	)			(9,041	)			7,149
Investing activities:
Continuing operations			(72,602	)			(10,682	)			(61,920	)
Discontinued operations			(516	)			(5,101	)			4,585
Financing activities:
Continuing operations			(15,804	)			(188	)			(15,594	)