UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number 333-145355

VANGENT, INC.

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

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

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

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

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 July 2, 2011.

 

 

VANGENT, INC.
Table of Contents

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 2, 2011 and December 31, 2010 (Unaudited)			3
Condensed Consolidated Statements of Operations for the three and six months ended July 2, 2011 and July 3, 2010 (Unaudited)			4
Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) for the six months ended July 2, 2011 and July 3, 2010 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2011 and July 3, 2010 (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			33
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3. Defaults Upon Senior Securities			34
Item 5. Other Information			34
Item 6. Exhibits			35
Signature			35
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Forward-Looking Statements

This quarterly report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as expectation or belief concerning future events. Forward-looking statements 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 the demand for services that the Company provides; completion of contracts with our customers; 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; general economic and business conditions and the other factors set forth under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2010. 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.

PART I. FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

Vangent, Inc.

(in thousands, except share and per-share amounts)

		July 2,				December 31,
		2011				2010
Assets
Current assets:
Cash and cash equivalents		$	66,786			$	27,194
Trade receivables, net			107,729				122,940
Prepaid expenses and other assets			13,280				10,855
Deferred tax asset			2,437				1,717
Assets of discontinued operations			—				329
Total current assets			190,232				163,035
Property and equipment, net			25,169				28,031
Intangible assets, net			137,563				150,847
Goodwill			298,351				298,004
Deferred tax asset			19,493				21,923
Deferred debt financing costs and other			7,479				8,823
Total assets		$	678,287			$	670,663
Liabilities Equity
Current liabilities:
Current portion of long-term debt		$	—			$	1,401
Accounts payable and accrued liabilities			86,734				81,600
Accrued interest payable			7,376				7,781
Deferred revenue			4,617				7,964
Liabilities of discontinued operations			—				1,880
Total current liabilities			98,727				100,626
Long-term debt, net of current portion			405,353				405,353
Other long-term liabilities			4,714				5,453
Deferred tax liability			1,912				1,860
Total liabilities			510,706				513,292
Commitments and contingencies (Note 10)
Equity:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares issued and outstanding			—				—
Additional paid-in capital			208,743				208,272
Accumulated other comprehensive loss			(4,570	)			(8,917	)
Accumulated deficit			(37,092	)			(42,535	)
Total Vangent stockholder’s equity			167,081				156,820
Noncontrolling interest			500				551
Total equity			167,581				157,371
Total liabilities and equity		$	678,287			$	670,663

See notes to the condensed consolidated financial statements.

Vangent, Inc.

(in thousands)

		Three Months Ended								Six Months Ended
		July 2,				July 3,				July 2,				July 3,
		2011				2010				2011				2010
Revenue		$	184,362			$	214,846			$	360,211			$	409,043
Cost of revenue			156,013				182,459				301,205				340,685
Gross profit			28,349				32,387				59,006				68,358
General and administrative expenses			11,814				11,494				23,963				23,684
Selling and marketing expenses			5,188				5,447				10,326				11,122
Operating income			11,347				15,446				24,717				33,552
Interest expense and other, net			6,599				7,362				14,090				15,598
Income from continuing operations before income taxes			4,748				8,084				10,627				17,954
Provision for income taxes			1,493				1,851				5,223				3,685
Income from continuing operations			3,255				6,233				5,404				14,269
Loss from discontinued operations, net of tax			—				(14,348	)			(12	)			(16,785	)
Net income (loss)			3,255				(8,115	)			5,392				(2,516	)
Net loss attributed to noncontrolling interest			(43	)			—				(51	)			—
Net income (loss) attributable to Vangent		$	3,298			$	(8,115	)		$	5,443			$	(2,516	)

See notes to the condensed consolidated financial statements.

Vangent, Inc.

(in thousands, except share amounts)

										Accum-
										ulated								Total
										Other								Vangent
		Common				Additional				Compre-				Accum-				Stock-				Non-
		Stock				Paid-in				hensive				ulated				holder’s				controlling				Total
		Shares				Capital				Loss				Deficit				Equity				Interest				Equity
Balance, December 31, 2009			100			$	207,376			$	(14,949	)		$	(82,564	)			109,863			$	—			$	109,863
Effect of hedging activities, net of tax			—				—				2,466				—				2,466				—				2,466
Foreign currency translation adjustment			—				—				(1,332	)			—				(1,332	)			—				(1,332	)
Net loss			—				—				—				(2,516	)			(2,516	)			—				(2,516	)
Total comprehensive loss																			(1,382	)			—				(1,382	)
Equity-based compensation			—				499				—				—				499				—				499
Balance, July 3, 2010			100			$	207,875			$	(13,815	)		$	(85,080	)		$	108,980			$	—			$	108,980
Balance, December 31, 2010			100			$	208,272			$	(8,917	)		$	(42,535	)			156,820			$	551			$	157,371
Effect of hedging activities, net of tax			—				—				2,005				—				2,005				—				2,005
Foreign currency translation adjustment			—				—				2,388				—				2,388				—				2,388
Defined benefit plan overfunding (net of tax)											(46	)							(46	)			—				(46	)
Net income (loss)			—				—				—				5,443				5,443				(51	)			5,392
Total comprehensive income (loss)																			9,790				(51	)			9,739
Equity-based compensation			—				471				—				—				471				—				471
Balance, July 2, 2011			100			$	208,743			$	(4,570	)		$	(37,092	)		$	167,081			$	500			$	167,581

See notes to the condensed consolidated financial statements.

Vangent, Inc.

(in thousands)

		Six Months Ended
		July 2,				July 3,
		2011				2010
Cash flows from operating activities
Net income (loss)		$	5,392			$	(2,516	)
Loss from discontinued operations, net of tax			(12	)			(16,785	)
Income from continuing operations			5,404				14,269
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Amortization of intangible assets			13,528				10,540
Depreciation and amortization of property and equipment			6,204				5,901
Amortization of deferred debt financing costs			1,420				1,126
Equity-based compensation expense			471				499
Deferred income taxes			3,121				3,360
Changes in operating assets and liabilities:
Trade receivables			15,559				(30,544	)
Prepaid expenses and other assets			(1,506	)			(4,339	)
Accounts payable and other liabilities			3,893				12,733
Deferred revenue			(3,347	)			312
Continuing operations, net			44,747				13,857
Discontinued operations, net			(87	)			(2,870	)
Net cash provided by operating activities			44,660				10,987
Cash flows from investing activities
Buccaneer acquisition			(242	)			—
Capital expenditures			(3,680	)			(3,526	)
Continuing operations, net			(3,922	)			(3,526	)
Discontinued operations, net			127				(811	)
Net cash used in investing activities			(3,795	)			(4,337	)
Cash flows from financing activities
Borrowing under revolving credit facility			10,000				—
Repayment of borrowing under revolving credit facility			(10,000	)			—
Repayment of senior secured term loan			(1,401	)			(13,612	)
Other			—				(53	)
Net cash used in financing activities			(1,401	)			(13,665	)
Effect of exchange rate changes on cash and cash equivalents			128				(170	)
Net increase (decrease) in cash and cash equivalents			39,592				(7,185	)
Cash and cash equivalents, beginning of period			27,194				45,584
Cash and cash equivalents, end of period		$	66,786			$	38,399
Supplemental cash flow information
Interest paid		$	12,935			$	15,226
Income taxes paid			430				434

See notes to the condensed consolidated financial statements.

Vangent, Inc.

(dollars in thousands)

1. Organization and Basis of Presentation

Basis of Presentation

Vangent, Inc. (“Vangent” or “Company”) is a 100%-owned subsidiary of Vangent Holding Corp. Vangent Holding LLC holds 100% of the common stock, but none of the preferred stock, in Vangent Holding Corp. and is 90% owned by The Veritas Capital Fund III, L.P. and 10% owned by Pearson plc.

The unaudited condensed consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries and have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in complete financial statements have been condensed or omitted pursuant to the applicable rules and regulations. The Company believes that all disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in our annual report on Form 10-K for the year ended December 31, 2010.

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

Nature of Operations

Vangent is a global provider of consulting, systems integration, human capital management and business process services to the U.S. federal and international governments, higher education institutions and corporations. The Company’s primary customer focus is U.S. governmental agencies. Certain customers represented more than 10% of total revenue for the six months ended July 2, 2011, as follows: Department of Health and Human Services (“HHS”) 48%, Department of Education (“DoED”) 15%, Department of Defense (“DOD”)10%, and United Kingdom Government 11%.

Principles of Consolidation

The condensed consolidated financial statements include the balance sheet accounts and the results of operations and cash flows of Vangent, its domestic and foreign subsidiaries, and variable interest entities for which the Company has determined it is the primary beneficiary. Business operations in Latin America are segregated and reported as discontinued operations. All intercompany balances and transactions have been eliminated.

The Company has a 70% ownership interest in a joint venture in the United States, a 49% ownership interest in a joint venture in the United Kingdom, and a 48% ownership interest in a joint venture in the United Arab Emirates. The Company has guaranteed performance under contracts for which the joint ventures earn revenue from government customers. The three joint ventures are fully consolidated in the financial statements; the consolidated balance sheets include joint-venture assets of $16,116 and liabilities of $14,379 at July 2, 2011, compared with assets of $12,129 and liabilities of $8,419 at December 31, 2010. The Company holds less than a majority ownership interest in the two foreign joint ventures; however, the Company is entitled to 100% of the income and losses and has determined that it is the primary beneficiary of each of the foreign joint ventures and there is no allocation of equity or income/loss attributed to noncontrolling interests. The Company holds a 70% interest in the domestic joint venture; the remaining 30% ownership share is reported as noncontrolling interest in the consolidated financial statements.

Fiscal Year and Quarterly Periods

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

2. Buccaneer Acquisition in September 2010

In September 2010, Vangent completed the acquisition (“Buccaneer Acquisition”) of Buccaneer Computer Systems & Service, Inc. (“Buccaneer”). 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 total purchase consideration of $65,563.

The Buccaneer Acquisition has been accounted for under the acquisition method of accounting under which the total purchase consideration is 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. A summary of the total purchase consideration and the allocation of the purchase consideration based on estimates of fair value for the assets acquired and the liabilities assumed follows:

Purchase Consideration
Cash paid		$	61,292
Other purchase consideration			4,271
		$	65,563

Other purchase consideration represents additional cash payments expected later in 2011 relating to the determination of the working capital adjustment and the Company’s election under Section 338 (h) (10) of the Internal Revenue Code.

Allocation of Purchase Consideration
Cash		$	897
Accounts receivable			18,224
Property and equipment			2,055
Definite-life intangible assets			25,792
Goodwill			31,385
Other assets			2,009
Less: Liabilities assumed			(14,072	)
Net assets acquired			66,290
Less: Noncontrolling interest			(727	)
		$	65,563
Allocation of Definite-Life Intangible Assets Acquired
Customer relationships (eight-year life)		$	23,809
Non-compete agreements (three-year life)			1,983
		$	25,792

The fair value of the intangible asset for customer relationships is based on customer contracts and relationships with existing customers and is expected to have an eight-year life. Amortization of the intangible asset for customer relationships is based on an accelerated method, and amortization of the intangible asset for non-compete agreements is based on straight line method. Amortization expense is included in cost of revenue.

Goodwill represents the excess of purchase consideration over the amounts assigned to tangible and intangible assets acquired and liabilities assumed. As a result of the election under Section 338(h) (10) of the Internal Revenue Code, the amount allocated to intangible assets and goodwill for tax purposes is expected to be tax deductible. In accordance with generally accepted accounting principles, goodwill associated with the Buccaneer Acquisition has been retrospectively increased by $928 as a result of the determination of the working capital adjustment and changes in estimates relating to the Company’s election under Section 338 (h) (10) of the Internal Revenue Code.

Buccaneer has a 70% ownership interest in Buccaneer Data Services, LLC, a joint venture that provides computer technical and other consulting services to an agency of the U.S. government. Buccaneer is entitled to a majority of the income and losses of the joint venture and has determined that it is the primary beneficiary. The joint venture is fully consolidated in the financial statements. Noncontrolling interest represents the remaining 30%.

Revenue from Buccaneer for the six months ended July 2, 2011, amounted to $73,756 and is reported as part of the Government Group business segment. Operating income was $2,333 and includes charges for the amortization of acquired intangible assets for customer relationships based on an accelerated method.

Unaudited Pro Forma Information

The following unaudited pro forma results of operations data for the three and six months ended July 3, 2010, are presented as if the Buccaneer Acquisition had occurred on January 1, 2010:

		Three Months				Six Months
		Ended				Ended
		July 3, 2010				July 3, 2010
Revenue		$	247,682			$	464,470
Income from continuing operations		$	6,256			$	15,281

The unaudited pro forma results of operations data are derived from the consolidated financial statements of Vangent and Buccaneer and reflect pro forma adjustments as if the Buccaneer Acquisition had occurred on January 1, 2010. The unaudited pro forma data are being furnished solely for informational purposes and are not intended to represent or be indicative of the consolidated results of operations that the Company would have reported had the Buccaneer Acquisition been completed as of the date and for the period presented, nor are they necessarily indicative of future results.

3. Discontinued Operations

In 2009, Vangent completed an evaluation of its international business and committed to a plan to sell its business operations in Latin America that are segregated and reported as discontinued operations. Vangent completed the sales of its operations in Argentina in the third quarter of 2010 and Mexico in the fourth quarter of 2010. The sale of operations in Venezuela was completed in February 2011 to complete the disposal of discontinued operations. There are no business operations classified as discontinued operations subsequent to the first quarter of 2011. Summarized statement of operations data for discontinued operations follows:

		Three Months				Six Months Ended
		Ended				July 2,				July 3,
		July 3, 2010				2011				2010
Statements of Operations Data
Revenue		$	7,075			$	137			$	14,210
Costs and expenses			7,346				144				14,846
Expected loss on sale or disposal			15,277				—				17,895
Other (income) expense, net			7				5				(746	)
Loss from discontinued operations before income taxes			(15,555	)			(12	)			(17,785	)
Provision (benefit) from income taxes			(1,207	)			—				(1,000	)
Loss from discontinued operations, net of tax		$	(14,348	)		$	(12	)		$	(16,785	)

4. Recent Accounting Pronouncements

Pronouncements Not Yet Effective

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRS, to change the description of the requirements for measuring fair value and for disclosing information about fair value. The update becomes effective prospectively beginning January 2012, and the Company does not expect adoption will have a material effect on the consolidated financial statements.

In June 2011, the FASB issued an ASU, Presentation of Comprehensive Income, to eliminate the current option to report other comprehensive income/loss and its components in the statement of changes in equity. An entity can elect to present income/loss and other comprehensive income/loss in one continuous statement of comprehensive income/loss, or in two separate, but consecutive, statements. The update becomes effective beginning January 2012, and the Company does not expect adoption will have a material effect on the consolidated financial statements.

Recently Adopted Pronouncements

In October 2009, the FASB issued an ASU, Multiple-Deliverable Revenue Arrangements, to (i) provide guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated; (ii) require an allocation of revenue using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of the selling price; and (iii) eliminate the residual method. The update became effective prospectively for new contracts beginning January 2011, and adoption did not have a material effect on the Company’s results of operations and cash flows or financial position.

In October 2009, the FASB issued an ASU, Certain Revenue Arrangements that Include Software Elements, that amends existing requirements to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. The update became effective in January 2011, and adoption did not have a material effect on the Company’s results of operations and cash flows or financial position.

In January 2010, the FASB issued an ASU, Improving Disclosures about Fair Value Measurements, requiring additional disclosures on fair value measurements. Disclosure requirements for transfers in and out of levels 1 and 2 of the hierarchy for fair value measurements became effective in January 2010 and disclosures about purchases, sales, issuance, and settlements in a rollforward of activity for level 3 fair value measurements were deferred and became effective in January 2011. Adoption did not have a material effect on the Company’s results of operations and cash flows or financial position.

In April 2010, the FASB issued an ASU, Revenue Recognition — Milestone Method, to provide guidance on (i) defining a milestone, and (ii) determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The update became effective in January 2011, and adoption did not have a material effect on the Company’s results of operations and cash flows or financial position.

In December 2010, the FASB issued an ASU, Disclosure of Supplementary Pro Forma Information for Business Combinations effective for business combinations occurring after December 15, 2010, and an ASU, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts effective for fiscal years beginning after December 15, 2010. Adoption did not have a material effect on the Company’s results of operations and cash flows or financial position.

5. Trade Receivables

A summary of trade receivables follows:

		July 2,				December 31,
		2011				2010
Billed trade receivables		$	65,744			$	91,126
Billable trade receivables			34,333				22,391
Unbilled trade receivables pending completion of milestones, contract authorizations, or retainage			7,215				8,794
Other			599				806
			107,891				123,117
Allowance for doubtful accounts			(162	)			(177	)
Trade receivables, net		$	107,729			$	122,940
Trade accounts receivable from major customers
Department of Health and Human Services			48	%			46	%
Department of Education			18	%			17	%
Department of Defense			*				11	%

6. Long-Term Debt

A summary of long-term debt follows:

		July 2,				December 31,
		2011				2010
Term loan under senior secured credit facility with interest at variable rates (2.26% at July 2, 2011), maturing February 15, 2013		$	215,353			$	216,754
9 5/8% Senior subordinated fixed rate notes, due February 15, 2015			190,000				190,000
			405,353				406,754
Less: current portion of long-term debt			—				1,401
Long-term debt, net of current portion		$	405,353			$	405,353
Scheduled maturities of long-term debt
2011		$	—
2012			310
2013			215,043
2014			—
2015			190,000
		$	405,353

Senior Secured Credit Facility

At July 2, 2011, the senior secured credit facility consisted of a term loan of $215,353, and, subject to certain limitations, an available revolving credit facility of up to $49,758 that is scheduled to expire February 14, 2012. At July 2, 2011, there was a letter of credit of $242 outstanding under the revolving credit facility. There were no borrowings outstanding under the revolving credit facility at July 2, 2011 or at December 31, 2010. A commitment fee of 0.5% per year is paid on the available unused portion of the revolving credit facility.

Borrowings under the senior secured credit facility bear interest at a rate equal to, at the Company’s option, either: (i) the base rate, as defined, plus an applicable margin of 1.00-1.50%, or (ii) the adjusted LIBOR, as defined, plus an applicable margin of 2.00-2.50%. Borrowings are subject to mandatory prepayment with (i) 100% of the net cash proceeds of certain asset sales; (ii) 25% of the net cash proceeds of equity offerings as long as the consolidated leverage ratio, as defined, is below 4.00 to 1; (iii) 25% of capital contributions subject to certain conditions; (iv) 100% of the net cash proceeds of additional debt; and (v) a percentage of annual excess cash flow, as defined. Payments resulting from the annual excess cash flow requirement are due 90 days following the year end. Based on excess cash flow, a mandatory repayment of $1,401 was made March 31, 2011. Since the excess cash flow requirement is based on annual cash flow, it is not possible to determine the amount, if any, that would become payable in March 2012.

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. Joint ventures and 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: consolidating or merging with, or acquiring, another business, restrictions on selling or disposing 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 July 2, 2011, the Company was in compliance with all of the affirmative and negative covenants.

The more restrictive covenants relate to compliance with a maximum allowable consolidated leverage ratio, as defined in the senior secured credit facility, based on consolidated indebtedness, as defined, reduced by unrestricted cash and cash equivalents in excess of $5,000, divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, adjusted for certain unusual and non-recurring items, as defined) for a twelve-month period. At July 2, 2011, the consolidated leverage ratio was 3.74 to 1, compared with the maximum allowable ratio of 5.25 to 1 applicable to the period. The maximum allowable consolidated leverage ratio steps down to 5.00 at March 31, 2012.

9 5/8% Senior Subordinated Notes

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

The notes are redeemable at the option of the Company at the redemption price of 104.8125% of the principal amount on or after February 15, 2011, 102.4063% on or after February 15, 2012, and 100% on or after February 15, 2013.

7. Accumulated Other Comprehensive Loss

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

		July 2,				December 31,
		2011				2010
Accumulated other comprehensive loss
Effect of hedging activities, net of tax:
Interest rate swap agreements, net of tax		$	—			$	(391	)
Additional deferred tax effect relating to interest rate swap agreement			—				(1,614	)
Continuing operations, net of tax			—				(2,005	)
Foreign currency cumulative translation adjustments:
Continuing operations			(4,700	)			(5,359	)
Discontinued operations			—				(1,729	)
			(4,700	)			(7,088	)
Defined benefit plan overfunding, net of tax			130				176
Total accumulated other comprehensive loss		$	(4,570	)		$	(8,917	)

		Hedging Activities				Cumulative
		Interest Rate				Translation
Summary of changes in accumulated other comprehensive loss		Swap				Adjustment				Other				Total
Balance, December 31, 2010		$	(2,005	)		$	(7,088	)		$	176			$	(8,917	)
Reclassification of swap loss to interest expense			646												646
Reclassification of swap tax effect to provision for income taxes			(255	)											(255	)
Reclassification of additional deferred tax swap effect to provision for income taxes			1,614												1,614
Foreign currency translation adjustment							2,388								2,388
Other											(46	)			(46	)
Balance, July 2, 2011		$	—			$	(4,700	)		$	130			$	(4,570	)

Total comprehensive income, including net income, amounted to $3,152 for the three months ended July 2, 2011, and $8,253 for the corresponding period in 2010.

8. Derivative Instruments, Hedging Activities and Financial Instruments

Vangent has used derivative financial instruments to manage interest rate risk. Interest rate swap agreements were used as cash-flow hedges against fluctuations in LIBOR interest rates on a portion of the term loan borrowings under the senior secured credit facility. The interest rate swap agreement in the notional amount of $150,000 to pay fixed interest at the rate of 3.28% and to receive variable interest based on three-month LIBOR matured in February 2011. For derivative financial instruments that qualify as a cash-flow hedge, the effective portion of the gain/loss is reported as a component of other comprehensive income/loss (“OCI”) and is subsequently reclassified to the statements of operations in the period or periods in which the hedged transaction affects the statement of operations.

Derivative Instruments and Hedging Activities

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

Balance Sheet Data
				Fair Value of
				Liability Derivatives
				July 2,				December 31,
Derivative Contracts		Balance Sheet Location		2011				2010
Derivatives that qualify as cash flow hedges
Interest rate swap agreements		Accrued liabilities		$	—			$	646

Statements of Operations Data

Amount of Gain

Location of Gain

(Loss) Recognized

Amount of Gain

Location of Gain

Amount of Gain

(Loss) Recognized in

in Income on

(Loss)

(Loss)

(Loss)

Income on Derivative

Derivative

Recognized in

Reclassified from

Reclassified from

(Ineffective

(Ineffective

OCI on

Accumulated OCI

Accumulated OCI

Portion and

Portion and

Derivative

into Income

into Income

Amount Excluded

Amount Excluded

(Effective

(Effective

(Effective

from Effectiveness

from Effectiveness

Derivative Contracts

Portion)

Portion)

Portion)

Testing)

Testing)

Three Months Ended July 3, 2010

Derivatives that qualify as cash flow hedges

Interest rate swap agreements

$

10

Interest expense

$

(1,108

)

Foreign currency forward contracts

Discontinued operations

(13

)

Six Months Ended July 2, 2011

Derivatives that qualify as cash flow hedges

Interest rate swap agreements

Interest expense

(646

)

Tax effect of interest rate swap agreements

Provision for income taxes

255

Additional deferred tax effect relating to interest rate swap agreements

Provision for income taxes

(1,614

)

Six Months Ended July 3, 2010

Derivatives that qualify as cash flow hedges

Interest rate swap agreements

(622

)

Interest expense

2,775

Interest expense

$

23

Foreign currency forward contracts

(8

)

Discontinued operations

(321

)

Derivatives that do not qualify as cash flow hedges

Foreign currency forward contracts

Discontinued operations

(89

)

Fair Value of Financial Instruments

The fair values of financial instruments at July 2, 2011, follow:

		Carrying
		Amounts				Fair Value
Long-term debt
Variable-rate term loan under the senior secured credit facility		$	215,353			$	215,353
9 5/8% senior subordinated notes, due February 15, 2015			190,000				192,375
		$	405,353			$	407,728

The carrying amount of the variable-rate term loan under the senior secured credit facility approximates fair value. The fair value of the 9 5/8% senior subordinated notes is based on the quoted market price of $101.250 per $100 reflecting a yield of 9.2%. The carrying amounts of other financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate fair value due to their short term nature.

9. Income Taxes

The provision for income taxes is composed of U.S. federal, state and local and foreign income taxes. The provision for income taxes for the six months ended July 2, 2011, includes an additional charge of $1,614 resulting from the deferred tax effect relating to the interest rate swap agreement that matured in the first quarter of 2011. The effective tax rate of 49% for the six months ended July 2, 2011, is higher than the U.S. federal statutory tax rate of 35% and includes 15% for the deferred tax charge of $1,614 relating to the interest rate swap agreement. The deferred tax effect was associated with the amount that remained in Other Comprehensive Income/Loss (“OCI”) at December 31, 2010, as a result of the release of the tax valuation allowance in 2010 on the beginning deferred tax asset balance as a credit to the provision for income taxes for 2010 and subsequent activity during 2010 classified in OCI. The maturity of the swap agreement in the first quarter of 2011 allows for the clearing of the disproportionate tax effect in OCI as an additional charge to the provision for income taxes for the six months ended July 2, 2011.

The provision for income taxes for the six months ended July 2, 2011, includes a charge of $660 on a specific portion of the current year’s undistributed earnings of one of its foreign operations that is not considered to be reinvested indefinitely. When the earnings are distributed, federal income and foreign withholding taxes would apply. The amount of the unrecognized income tax associated with the undistributed earnings of all other foreign subsidiaries where the earnings are considered to be reinvested indefinitely was not material at July 2, 2011.

At July 2, 2011, the Company has concluded based upon all available evidence, that it is more likely than not that U.S. deferred tax assets will be realizable, except for a portion relating to a net capital loss carryforward.

The effective tax rate of 21% for the six months ended July 3, 2010, is lower than the U.S. federal statutory tax rate of 35% and reflects a reduction of 12% from the utilization of a portion of the net operating loss carryforward amounting to $2,180.

ASC Topic 740, Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken, or expected to be taken, in a tax return. There was no liability for unrecognized tax benefits at July 2, 2011 or December 31, 2010. Vangent does not expect changes in unrecognized tax benefits, if any, within the next twelve months to have a material impact on the provision for income taxes or the effective tax rate.

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

10. Commitments and Contingencies

Federal government agencies routinely audit the Company’s books and records. These agencies review contract performance, cost structure and compliance with applicable laws, regulations and standards. Such agencies also review the adequacy of, and compliance with, internal control systems and policies, including purchasing, property, estimating, compensation and management information systems. Audits of the Company’s incurred cost submissions for 2005 and subsequent years are open. The Company is also subject to audits, 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.

11. Equity-Based Compensation

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

Certain members of management of Vangent and independent directors of Vangent Holding Corp. have been granted Class B or B-1 membership interests in Vangent Holding LLC. In the first quarter of 2011, the membership interests previously granted to independent directors were redeemed. Vangent Holding LLC holds 100% of the common stock, but none of the preferred stock, in Vangent Holding Corp., which in turn owns all of Vangent’s common stock. At July 2, 2011, the outstanding balance of grants of Class B and B-1 membership interests represented 6.2% of the net profit interests in Vangent Holding LLC. Pursuant to the terms of the operating agreement governing Vangent Holding LLC, the Class B and B-1 membership interests are subject to a five-year vesting schedule, except in the event of a change of control. The unvested portion of Class B and B-1 membership interests resulting from forfeitures reverts to the holders of Class A membership interests in Vangent Holding LLC. Holders of Class B and B-1 membership interests are entitled to receive their respective proportional interest in all distributions made by Vangent Holding LLC, provided the holders of the Class A membership interests have received an 8% per annum internal rate of return on their invested capital. Class B and B-1 membership interests are granted with no exercise price and no expiration date. Class B membership interests have been granted with no threshold or floor value, and Class B-1 membership interests have been granted with a threshold or floor value and earn a proportional interest in distributions above the floor valuation. Grants of Class B and B-1 membership interests are limited in the aggregate to 7.5% of the net profits interests in Vangent Holding LLC.

A summary of activity for grants and the outstanding balance of Class B and B-1 membership interests in Vangent Holding LLC follow:

		Class B and B-1 Membership Interests
		Available for								Fair Value at Date
		Grant				Outstanding				of Grant
Balance, December 31, 2010			1.6	%			5.9	%		$	5,987
Granted			(0.9	)			0.9				850
Forfeited and redeemed			0.6				(0.6	)			(289	)
Balance, July 2, 2011			1.3	%			6.2	%		$	6,548
At July 2, 2011:
Vested							3.3	%
Not yet vested							2.9
							6.2	%

Charges for equity-based compensation expense amounted to $535 for six months ended July 2, 2011 and $499 for the corresponding period in 2010. The unamortized amount of equity-based compensation was $2,128 at July 2, 2011, and is scheduled to be charged to expense as follows:

Years Ending December 31
2011 (remaining six months)		$	539
2012			545
2013			437
2014			321
2015			257
2016			29
		$	2,128

12. Related Party Transactions

Vangent is a 100%-owned subsidiary of Vangent Holding Corp. Vangent Holding LLC holds 100% of the common stock, but none of the preferred stock, in Vangent Holding Corp. and is 90% owned by The Veritas Capital Fund III, L.P.

Robert B. McKeon is the sole member of the board of directors of Vangent, is chairman of the board of Vangent Holding Corp., and is the president of Veritas Capital Partners III, LLC. Mr. Ramzi Musallam is a director of Vangent Holding Corp. and is a partner at Veritas Capital.

Certain members of management of Vangent have been granted Class B or B-1 membership interests in Vangent Holding LLC.

Vangent pays an annual management fee of $1,000 to Veritas Capital of which $500 was paid for the six months ended July 2, 2011, along with out-of-pocket costs of $47.

Vangent purchased administrative services under contracts and leases with Pearson amounting to $2,602 for the six months ended July 2, 2011. Pearson holds $35,000 of Series A preferred stock and $5,000 of Series B preferred stock in Vangent Holding Corp., and holds 10% of the Class A membership interests in Vangent Holding LLC.

13. Business Segments and Major Customers

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Vangent reports operating results and financial data for three business segments: the Government Group, the International Group, and the Human Capital Group.

Government Group customers are primarily U.S. federal agencies. The Government Group assists civilian, defense and intelligence agencies as well as government related entities with the design and execution of information and technology strategy, helps develop and maintain their complex, mission critical systems and delivers a wide range of business process outsourcing solutions. The operations of Buccaneer acquired in September 2010 are part of the Government Group.

The International Group serves government and commercial customers in the United Kingdom and Canada and provides consulting, systems integration and business process outsourcing solutions.

The Human Capital Group serves the public sector with advanced distributed learning and classroom modernization services and the private sector with workforce and risk management solutions that automate and improve the recruitment, assessment, selection, training and development of a skilled, ethical and high-quality workforce.

A summary of revenue and operating income by business segment follows:

		Three Months Ended								Six Months Ended
		July 2,				July 3,				July 2,				July 3,
		2011				2010				2011				2010
Revenue by business segment
Government Group		$	142,607			$	198,677			$	294,655			$	375,914
International Group			28,164				11,148				47,173				22,973
Human Capital Group			13,696				5,834				18,618				11,969
Elimination			(105	)			(813	)			(235	)			(1,813	)
Total revenue		$	184,362			$	214,846			$	360,211			$	409,043
Operating income (loss) by business segment
Government Group		$	6,563			$	15,966			$	19,776			$	34,835
International Group			5,052				8				5,987				70
Human Capital Group			(266	)			(522	)			(1,016	)			(1,342	)
Other			(2	)			(6	)			(30	)			(11	)
Total operating income			11,347				15,446				24,717				33,552
Interest expense and other, net			6,599				7,362				14,090				15,598
Income from continuing operations before income taxes		$	4,748			$	8,084			$	10,627			$	17,954
Depreciation and amortization
Government Group		$	8,648			$	7,183			$	17,322			$	14,488
International Group			1,052				568				2,028				1,295
Human Capital Group			190				333				382				658
Total depreciation and amortization		$	9,890			$	8,084			$	19,732			$	16,441
Revenue from major customers as a percent of total revenue
Department of Health and Human Services			46	%			25	%			48	%			30	%
Department of Education			13	%			11	%			15	%			13	%
Department of Commerce			*				42	%			*				34	%
Department of Defense			11	%			*				10	%			*
United Kingdom Government			13	%			*				11	%			*

14. Condensed Issuer, Guarantor and Non-Guarantor Financial Information

Debt issued by Vangent Inc. (“Issuer”) includes the term loan under the senior secured credit facility, borrowings drawn from time to time under the revolving credit facility, and the senior subordinated notes. The debt of the Issuer is guaranteed, jointly and severally, by its domestic subsidiaries (“Guarantor Subsidiaries”). Joint ventures and foreign subsidiaries do not guarantee the debt (“Non-Guarantor Subsidiaries”). Condensed combining balance sheets, statements of operations, and statements of cash flows for the Issuer, Guarantor Subsidiaries, and Non-Guarantor Subsidiaries follow:

Condensed Combining Balance Sheets (Unaudited)

						Guarantor				Non-Guarantor
		Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		July 2, 2011
Current assets:
Cash and cash equivalents		$	44,471			$	180			$	22,135			$	—			$	66,786
Trade receivables, net			67,645				31,215				8,869				—				107,729
Prepaid expenses and other			11,587				1,472				2,658				—				15,717
Total current assets			123,703				32,867				33,662				—				190,232
Property and equipment, net			18,425				2,898				3,846				—				25,169
Goodwill and intangible assets			367,407				50,316				18,191				—				435,914
Deferred tax asset (liability)			20,836				(1,343	)			—				—				19,493
Deferred debt financing costs and other			6,340				864				275				—				7,479
Investment in and advances to subsidiaries			107,433				—				—				(107,433	)			—
Total assets		$	644,144			$	85,602			$	55,974			$	(107,433	)		$	678,287
Current liabilities		$	67,353			$	10,198			$	21,176			$	—			$	98,727
Long-term debt			405,353				—				—				—				405,353
Other long-term liabilities			3,857				817				1,952				—				6,626
Total liabilities			476,563				11,015				23,128				—				510,706
Total equity			167,581				74,587				32,846				(107,433	)			167,581
Total liabilities and equity		$	644,144			$	85,602			$	55,974			$	(107,433	)		$	678,287
		December 31, 2010
Current assets:
Cash and cash equivalents		$	20,477			$	—			$	6,717			$	—			$	27,194
Trade receivables, net			90,879				20,504				11,557				—				122,940
Prepaid expenses and other			9,140				1,227				2,534				—				12,901
Total current assets			120,496				21,731				20,808				—				163,035
Property and equipment, net			20,640				2,393				4,998				—				28,031
Goodwill and intangible assets, net			377,721				53,003				18,127				—				448,851
Deferred tax asset			21,923				—				—				—				21,923
Deferred debt financing costs and other			8,089				471				263				—				8,823
Investment in and advances to subsidiaries			95,666				—				—				(95,666	)			—
Total assets		$	644,535			$	77,598			$	44,196			$	(95,666	)		$	670,663
Current liabilities		$	77,116			$	12,572			$	16,039			$	(5,101	)		$	100,626
Long-term debt, net of current portion			405,353				—				—				—				405,353
Other long-term liabilities			4,695				711				1,907				—				7,313
Total liabilities			487,164				13,283				17,946				(5,101	)			513,292
Total equity			157,371				64,315				26,250				(90,565	)			157,371
Total liabilities and equity		$	644,535			$	77,598			$	44,196			$	(95,666	)		$	670,663

Condensed Combining Statements of Operations (Unaudited)

						Guarantor				Non-Guarantor
		Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		Three Months Ended July 2, 2011
Revenue		$	114,756			$	39,396			$	30,330			$	(120	)		$	184,362
Cost of revenue			97,328				36,290				22,515				(120	)			156,013
Gross profit			17,428				3,106				7,815				—				28,349
General and administrative expenses			8,996				1,417				1,401				—				11,814
Selling and marketing expenses			4,166				343				679				—				5,188
Operating income			4,266				1,346				5,735				—				11,347
Interest  expense and other, net			6,632				—				(33	)			—				6,599
Equity in net income of subsidiaries			5,098				—				—				(5,098	)			—
Income from continuing operations before income taxes			2,732				1,346				5,768				(5,098	)			4,748
Provision (benefit) for income taxes			(523	)			473				1,543				—				1,493
Income from continuing operations			3,255				873				4,225				(5,098	)			3,255
Net loss attributable to noncontrolling interest			—				—				(43	)			—				(43	)
Net income attributable to Vangent		$	3,255			$	873			$	4,268			$	(5,098	)		$	3,298