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

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, 2009.

 

 

VANGENT, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS			3
ITEM 1A. RISK FACTORS			9
ITEM 1B. UNRESOLVED STAFF COMMENTS			18
ITEM 2. PROPERTIES			18
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			42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			42
ITEM 9A (T). CONTROLS AND PROCEDURES			42
ITEM 9B. OTHER INFORMATION			43
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			44
ITEM 11. EXECUTIVE COMPENSATION			47
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			55
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES			55
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			56
SIGNATURES			57
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 Centers for Medicare and Medicaid Services (“CMS”), the U.S. Departments of Defense, Education, Health and Human Services, and Labor, and the U.S. Office of Personnel Management, 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. As of December 31, 2009, our total contract backlog was $2.1 billion.

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 increasingly utilize contractors to design, build and operate technologically advanced systems that deliver mission-critical information, services and programs to citizens.

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 — 87% of revenue in 2009. 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 29-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.

International Group — 7% of revenue in 2009. The International Group serves government and commercial customers, primarily in the United Kingdom and Canada, and provides consulting, systems integration, business process outsourcing, and the management of data, identity, revenue and human capital. As of December 31, 2009, the Company’s business operations in Latin America were held for sale and are classified as discontinued operations in the consolidated financial statements. These operations were formerly part of the International Group.

Human Capital Group — 6% of revenue in 2009. The Human Capital Group primarily serves the private sector and 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.

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:

•

Business process analysis and design

•

System architecture and requirements analysis

•

Enterprise modernization

•

Education and training

•

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, repeatable and reliable and support the critical needs of our customers. We provide the following build services:

•

Service oriented architecture implementation

•

Application development

•

System integration and testing

Business Process Outsourcing (Operate)

We also 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

•

Case management

•

Eligibility determination

•

Electronic filing

•

Data warehouse management

•

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 44 government customers with an average relationship length of approximately five years. For 2009, our largest customers were the Department of Health and Human Services including the CMS contract, and the Departments of Education and Defense. 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.

Through our acquisition of Aptiv Technology Partners in May 2008, we added new customers at the Veterans Health Administration, Indian Health Service and portions of the Military Health System. Internationally, our customers include local governments, central governments and commercial customers, primarily in the United Kingdom and Canada, and in Latin America where our operations are held for sale. 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 sector entities, including many Fortune 500 companies, with workforce solutions that automate and improve the recruitment, assessment, selection 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

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 Transportation

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 determined to be reasonable, allowable and are allocated to the contract and 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 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 determinable as of the reporting date, are recognized ratably over the contract performance period.
	•		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,
		2009				2008				2007
Cost-plus			55	%			51	%			47	%
Fixed-price			41	%			43	%			48	%
Time and materials			4	%			6	%			5	%
			100	%			100	%			100	%

Most of our revenue is derived from contracts which have duration of approximately five years, including option years. However, several 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 85% of total revenue for 2009.

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, 2009								December 31, 2008
		Total				Funded				Total				Funded
Government Group		$	1,782.6			$	313.4			$	1,250.9			$	173.2
International Group			291.2				196.8				284.7				189.9
Human Capital Group			7.1				7.1				16.7				16.7
Discontinued operations			44.9				44.9				75.6				72.9
		$	2,125.8			$	562.2			$	1,627.9			$	452.7

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. Approval of submitted annual incurred contract costs can take from one to three years from the date of submission of the incurred contract costs. Audits of incurred contract costs for the years 2005 to 2009 are open. An adverse finding under an audit could result in the disallowance of costs under a U.S. government 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 reports to the Senior Vice President of Corporate Development whose responsibilities include participating in strategy development, setting priorities and maturing opportunities for account penetration and expansion, establishing strategic partnerships, evolving the capabilities and processes of the organization, and managing the Government Group sales force. The sales organizations for the Human Capital Group and the International Group report to the respective Senior Vice President and General Manager for those groups.

Our marketing efforts are also centralized at the corporate level and the Senior Vice President of Corporate Development coordinates marketing 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;

•

industry reputation and results of performance on past engagements;

•

key management and personnel; and

•

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. Certain 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 8,728 employees at December 31, 2009, compared with 7,212 at December 31, 2008. The increase of 1,516, or 21%, reflects increased staffing in connection with the U.S. 2010 census contract and a contract with the Mexican social security agency. There were 7,394 employees associated with continuing operations, including 59 members of one labor union in the United Kingdom. There were 1,334 employees associated with discontinued operations, including 919 members of labor unions in Mexico and Argentina. 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 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; 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.

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 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.

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.

We are dependent on two contracts for a substantial portion of our revenue. One contract with CMS and one contract with the DoED represent a significant portion of our revenue. The loss of either of these contracts, or a significant reduction in the value of either of these contracts, would significantly and adversely affect our business, financial condition and results of operations.

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.

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.

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 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.

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. 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 will 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 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.

We operate in five countries outside the U.S. Our operations in the United Kingdom and Canada are reported in continuing operations and our operations in Latin America, including Mexico, Venezuela and Argentina, are reported in discontinued operations. We have classified our Latin American business as discontinued operations for accounting purposes and have made a determination to sell these operations in 2010. We may experience operating losses on discontinued operations until sale or disposal activities are complete.

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.

Our international operations conduct most of their business in local currencies. Since our financial results are reported in U.S. dollars, our financial results are affected by changes in the foreign exchange rates of the local currencies in relation to the U.S. dollar. Currency-related risks of Venezuela surfaced in the fourth quarter of 2009 when we began to translate financial results using the market rate that was 63% below the government’s official rate. The government devalued the official exchange rate in January 2010. In addition, the Venezuelan economy was determined to be highly inflationary causing the functional currency used for accounting and consolidation purposes to change beginning in January 2010 under U.S. generally accepted accounting principles (“U.S. GAAP”). Changes in foreign currency exchange rates may also affect transactions which are denominated in currencies other than the local currency.

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.

Our net operating tax losses may not be used within the carryforward period to reduce future federal income tax payments, and a 3% tax withholding requirement applicable to government contractors will adversely affect our operating cash flow.

At December 31, 2009, we had accumulated U.S. net operating tax losses of $53.9 million that is available to offset future taxable income and reduce future federal income taxes during the carryforward period. The utilization of available losses depends on the generation of future taxable income to absorb the losses. We may not be able to use available losses within the carryforward period. In addition, based on U.S. GAAP, we have determined for financial accounting and reporting purposes that it is not more likely than not that we will be able to apply or use the available losses to reduce future federal income taxes during the carryforward period. This assessment is updated annually or more frequently based on changes in circumstances.

A 3% withholding requirement under which certain customers of government contractors would reduce their cash payments by 3% of the billing amount and remit the 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 date to January 2012. We expect to continue to generate net operating tax losses and we do not expect to make federal income tax payments for the foreseeable future. As a result, if the 3% withholding requirement becomes effective as scheduled, it will adversely affect our cash flow until such time that we could file for and obtain a refund of the 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 pre-requisites 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.

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.

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 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, H1N1 flu, 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.

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.

The costs requirements of complying with the Exchange Act and the Sarbanes Oxley Act may strain our resources and occupy the time and energies of management.

We are subject to the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes Oxley Act of 2002, including Section 404. The Sarbanes Oxley Act requires that we maintain and certify that we have effective disclosure controls and procedures and internal control over financial reporting. As a result of an extension of the transition period established for non-accelerated filers, an attestation report of the Company’s independent registered public accounting firm regarding the effectiveness of the Company’s internal control over financial reporting will initially be required beginning with the Company’s annual report on Form 10-K for the year ending December 31, 2010. These requirements will increase our costs and may place a strain on our systems and resources. The effort to comply with these requirements and maintain effective internal controls may divert management’s attention from other business concerns, which could adversely affect our business, financial condition or results of operations.

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, 2009, we had long-term debt of $420.4 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. 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 of $420.4 million at December 31, 2009, is scheduled as follows: (i) a term loan payment of $13.5 million is due March 31, 2010 under the senior secured credit facility; $1.7 million is due in 2012 and the remaining balance of the term loan amounting to $215.2 million is scheduled to mature in February 2013, and (ii) the senior subordinated fixed rate notes of $190.0 million 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 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 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.

Our ability to make debt service payments on and to refinance our debt, and to fund working capital needs and planned capital expenditures, will depend on our ability to generate cash flow in the future. This, to a certain extent, 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 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 facilities and space under lease, net of subleases, at December 31, 2009, follows:

		Square Feet
United States
Arlington, Virginia (corporate headquarters)			68,833
Atlanta, Georgia			5,026
Bloomington, Minnesota			1,266
Cedar Rapids, Iowa			21,050
Chicago, Illinois			30,591
Corbin, Kentucky			35,270
Coralville, Iowa			103,947
Emeryville, California			2,069
Falls Church, Virginia			12,015
Herndon, Virginia			27,761
Lawrence, Kansas			174,000
Orlando, Florida			2,670
Tampa, Florida			99,039
Pawcatuck, Connecticut			6,127
Phoenix, Arizona			162,343
Richmond, Virginia			123,199
Sandy, Utah			131,703
Washington, D.C.			3,310
			1,010,219
Foreign Locations
Edmonton, Canada			3,000
London, United Kingdom			21,828
Mississauga, Canada			7,066
Montreal, Canada			19,790
Ottawa, Canada			11,896
Rotherham, United Kingdom			3,000
			66,580
Discontinued Operations
Buenos Aires, Argentina			37,674
Caracas, Venezuela			7,319
Mexico City, Mexico			20,846
			65,839

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 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, 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 years ended December 31, 2005 and 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 the Company by Veritas Capital and its affiliates (“Acquisition”), there was no direct ownership relationship among the operations comprising the business. Accordingly, owner’s equity is presented for the Predecessor Entity in lieu of stockholder’s equity.

Selected financial data follows (dollars in thousands):

		Successor Entity (1)													Predecessor Entity
										Period					Period
		Years Ended								February 15 to					January 1 to				Years Ended
		December 31,								December 31,					February 14,				December 31,
		2009				2008				2007					2007				2006				2005
Statements of Operations Data
Revenue		$	583,986			$	532,049			$	427,129				$	55,514			$	499,387			$	506,256
Cost of revenue			490,500				440,495				356,241					45,411				394,287				419,525
Gross profit			93,486				91,554				70,888					10,103				105,100				86,731
General and administrative expenses			40,387				46,440				40,267					9,219				43,117				30,285
Selling and marketing expenses			18,003				14,930				13,284					1,766				17,898				17,108
Impairment charges for goodwill and intangibles			11,227				13,766				—					—				—				—
Operating income (loss)			23,869				16,418				17,337					(882	)			44,085				39,338
Interest expense, net			34,289				35,244				33,418					6				854				543
Income (loss) from continuing operations before income taxes			(10,420	)			(18,826	)			(16,081	)				(888	)			43,231				38,795
Provision (benefit) for income taxes			6,794				4,939				6,151					(275	)			16,108				14,570
Income (loss) from continuing operations			(17,214	)			(23,765	)			(22,232	)				(613	)			27,123				24,225
Income (loss) from discontinued operations (net of tax)			(16,794	)			(2,742	)			183					238				1,492				1,121
Net income (loss)		$	(34,008	)		$	(26,507	)		$	(22,049	)			$	(375	)		$	28,615			$	25,346
Balance Sheet Data
Cash and cash equivalents		$	44,638			$	19,446			$	23,831				$	1,478			$	9,562			$	3,044
Working capital			76,179				75,272				69,439					72,061				60,024				21,663
Total assets			640,229				666,274				694,068					605,087				596,776				608,779
Long-term debt			420,366				420,366				420,875					—				—				—
Owner’s/stockholder’s equity			109,863				144,637				180,289					541,853				529,084				491,283
Statements of Cash Flow Data
Cash flows provided by (used in):
Operating activities			40,387				18,410				30,847					(18,896	)			14,378				43,606
Investing activities			(15,783	)			(13,530	)			(622,612	)				(3,727	)			(15,885	)			(22,920	)
Financing activities			(188	)			(8,088	)			617,803					13,271				9,110				(41,650	)
Other Financial Data
Depreciation and amortization			31,883				33,558				28,401					2,138				12,204				10,522
Capital expenditures			10,682				9,053				6,792					3,707				5,250				21,003

•

Amortization of intangible assets included in cost of revenue.

•

Interest expense paid and accrued on long-term debt.

•

A tax valuation allowance included in the provision for income tax resulting from the assessment that deferred tax assets are not more likely than not to be realized.

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 government organizations 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, 2009, our total contract backlog was $2.1 billion, an increase of 31% over December 31, 2008.

We manage our business through three segments: the Government Group; the International Group; and the Human Capital Group. The Department of Health and Human Services (“HHS”) represented 44% and the Department of Education (“DoED”) represented 15% of total revenue for 2009.

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 29-year history with the Department of Education, over 10 years with the Defense Information Systems Agency and eight 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 fourth quarter of the calendar year typically represents the highest revenue quarter as a result of the fourth-quarter open enrollment period under the CMS contract and student financial aid activity under the DoED contract. The Government Group represented 87% of total revenue for 2009.

The International Group serves government and commercial customers, primarily in the United Kingdom and Canada, and provides consulting, systems integration, business process outsourcing, and the management of data, identity, revenue and human capital. As of December 31, 2009, the Company’s business operations in Latin America were held for sale and are classified as discontinued operations in the consolidated financial statements. These operations were formerly part of the International Group. The International Group represented 7% of total revenue for 2009.

The Human Capital Group primarily serves the private sector and 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 6% of total revenue for 2009.

Vangent Acquisition Transaction (the “Acquisition”)

On February 14, 2007, Vangent Holding Corp. consummated the acquisition of all of the equity interests of (i) Pearson Government Solutions, Inc., a 100%-owned subsidiary of Pearson, and (ii) the domestic and international affiliates of Pearson Government Solutions, Inc. engaged in the consulting, systems integration and business process outsourcing business operated by the Pearson Government Solutions operating unit of Pearson and the other seller entities. We refer to this transaction as the “Acquisition.” Pearson and the other seller entities are referred to as the “sellers” or “Predecessor Entity.”

Purchase Consideration. The total purchase consideration paid to Pearson for the 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, the majority shareholder in Vangent Holding Corp.

Accounting for the 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 Acquisition.

Acquisition of Aptiv Technology Partners

In May 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. The assets and liabilities acquired were recorded at their estimated fair values at the date of the acquisition, and the results of operations of the acquired business have been included in Vangent’s consolidated financial statements from the date of the acquisition. The allocation of the purchase consideration resulted in intangible assets of $1.2 million that are being amortized over a three-year period and goodwill of $2.7 million.

Basis of Presentation

The financial statements for the Predecessor Entity have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) from the historical accounting records of Pearson plc and are presented on a carve-out basis until February 14, 2007, the date of the Acquisition. The carve-out financial statements include allocations from Pearson for corporate expenses based on a percentage of revenue or headcount measures to cover support and administrative services.

For management discussion and analysis purposes, the statements of operations data for 2007 represent the mathematical addition of the results for the Predecessor Entity for the period January 1 to February 14, 2007 and for the Successor Entity for the period February 15 to December 31, 2007. Although this approach is not consistent with U.S. GAAP, we believe it is the most meaningful way to review the statements of operations data for such periods.

The new basis of accounting resulting from the Acquisition in February 2007 and related financing had a significant effect on statements of operations data for periods subsequent to the Acquisition and reflects amortization of intangible assets, interest expense on debt, and an income tax valuation allowance.

In the fourth quarter of 2009, Vangent completed an evaluation of its international business and made the determination to sell its business operations in Latin America. The consolidated financial statements have been revised for all periods presented to report Latin America as discontinued operations. The discontinued operations include: Vangent Mexico, S.A. de C.V.; Vangent Servicios de Mexico, S.A. de C.V.; Vangent Argentina, S.A.; Vangent Venezuela, C.A.; Vangent Puerto Rico, Inc.; and Proyectos Prohumane México, S. A. de C. V. For management discussion and analysis purposes, the results of operations discussion reflects the results from continuing operations, and discontinued operations are discussed separately.

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 84% of total revenue for 2009, compared with 79% for 2008. The continuation and renewal of 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.

Revenue from contracts in which we acted as the prime contractor represented 85% of total revenue for 2009, compared with 90% for 2008. 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,
		2009				2008				2007
Cost-plus			55	%			51	%			47	%
Fixed-price			41	%			43	%			48	%
Time and materials			4	%			6	%			5	%
			100	%			100	%			100	%

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

The Buyer made an election under Section 338(h) (10) of the Internal Revenue Code that significantly increased the tax basis of our U.S. assets, primarily intangible assets and goodwill, and increased tax deductions for the related amortization of intangibles and goodwill. The tax deductions for amortization contribute to the net operating losses for the periods subsequent to the Acquisition, and the net operating loss carryforward plus future tax amortization are available to reduce future cash taxes. A purchase accounting tax valuation allowance was established in connection with the Acquisition, and a full valuation allowance has been provided against U.S. federal, state and local deferred tax assets. The valuation allowance will be reversed at such time that realization is believed to be more likely than not.

Contract Backlog

Total contract backlog is the amount of revenue we expect to realize over the remaining term of our 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. The backlog amount reported for the Government Group at December 31, 2009, reflects a four-year extension of the CMS contract that was signed in May 2009. A summary of contract backlog by business segment follows (in millions):

		December 31, 2009								December 31, 2008
		Total				Funded				Total				Funded
Government Group		$	1,782.6			$	313.4			$	1,250.9			$	173.2
International Group			291.2				196.8				284.7				189.9
Human Capital Group			7.1				7.1				16.7				16.7
Discontinued operations			44.9				44.9				75.6				72.9
		$	2,125.8			$	562.2			$	1,627.9			$	452.7

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 (formerly Statement of Position No. 81-1, Accounting for Performance of Construction Type and Certain Production-Type Contracts), are recognized using the cost-to-cost method 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 of services or deliverables. Judgment is required to determine if a contract with more than one element should be segmented into 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 performance 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 resulted from the Acquisition are amortized over their estimated useful life. 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 in connection with the Acquisition was recorded in February 2007 representing the excess of the cost of the Acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Goodwill was allocated to each of the business segments at the time of the Acquisition 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 established for the Human Capital 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. The impairment test is a two-step process. The first step compares the fair value of each reporting unit with the carrying amount, including goodwill. The fair values are determined using the 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. 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 value of goodwill with carrying amount of goodwill.

As a result of goodwill impairment charges aggregating $13.8 million for 2008, the balance of goodwill for the International Group was reduced to $16.9 million and for the Human Capital Group was reduced to $10.9 million at December 31, 2008. In the fourth quarter of 2009, the Company performed the annual impairment test of goodwill and the indefinite-life intangible asset and recorded an impairment charge of $11.2 million, as follows: (i) 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; and (ii) goodwill and the 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 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 the fair value of the reporting units for the annual evaluation, estimates and judgments are developed about the future cash flows of 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.

As of December 31, 2009, the remaining balance of goodwill was $268.2 million, of which $250.4 million was associated with the Government Group, $9.3 million with the International Group, and $8.5 million with the Human Capital Group. The remaining balance of the indefinite-life intangible asset of the Human Capital Group was $10.3 million at December 31, 2009. Since the Acquisition in February 2007, there has not been an impairment of goodwill associated with the Government Group. Based upon our last impairment analysis, the Company believes the estimated fair value is substantially in excess of the carrying value for the Government Group. The Company has recorded goodwill impairment charges in both the International and Human Capital Groups in 2008 and 2009, and therefore the carrying values of those reporting units have been written down to their fair value. Further declines in those markets would likely require additional impairment charges.

The Company will continue to test goodwill and the indefinite-life intangible asset on an annual basis in the fourth quarter of each year or more frequently if indicators of impairment exist. We cannot be certain that a future downturn in our business 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 membership interests in Vangent Holding LLC granted to the Company’s employees and to certain directors. The Class B membership interests are net profits interests in Vangent Holding LLC and are considered equity-based awards. Equity-based compensation expense is amortized on a straight line basis over the total requisite service period for the award. The fair value of Class B membership interests of 5.3% in Vangent Holding LLC granted in 2007 amounted to $6.0 million and was based on the amount paid in February 2007 by Veritas Capital for 90% of the Class A membership interests in Vangent Holding LLC and the value of Pearson’s 10% Class A membership interest, less a 35% discount for lack of liquidity.

The fair value of grants of Class B membership 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 membership interests. The fair value of grants of 1.5% in 2008 amounted to $1.1 million, net of a 35% discount for lack of liquidity. The fair value of grants of 0.4% in 2009 amounted to $0.4 million, net of a 25% discount for lack of liquidity.

Income Taxes

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 valuation allowance is recorded against deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment for a valuation allowance requires judgment on the part of management with respect to the benefits that may be realized. The Company has concluded, based upon all available evidence, it is more likely than not that the U.S. federal, state, and local deferred tax assets at December 31, 2009, will not be realizable. A purchase accounting tax valuation allowance was established in connection with the Acquisition, and a full valuation allowance has been provided against U.S. federal, state and local deferred tax assets. The valuation allowance will be reversed at such time that realization is believed to be more likely than not. A reduction to the tax valuation allowance would be recorded as an adjustment to the provision for income taxes.

An income tax benefit resulting from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the tax authorities. An uncertain tax position represents a tax benefit claimed or expected to be claimed on an income tax return. The Company has determined that it has no uncertain tax positions. Interest and penalties, if any, are recognized as part of the provision for income taxes.

Results of Operations

Statements of operations data follow (dollars in thousands):

		Years Ended												Years Ended
		December 31,								Increase				December 31,								Increase
		2009				2008				(Decrease)				2008				2007 (1)				(Decrease)
Statements of Operations Data
Revenue		$	583,986			$	532,049			$	51,937			$	532,049			$	482,643			$	49,406
Cost of revenue			490,500				440,495				50,005				440,495				401,652				38,843
Gross profit			93,486				91,554				1,932				91,554				80,991				10,563
General and administrative expenses			40,387				46,440				(6,053	)			46,440				49,486				(3,046	)
Selling and marketing expenses			18,003				14,930				3,073				14,930				15,050				(120	)
Impairment charges for goodwill and intangibles			11,227				13,766				(2,539	)			13,766				—				13,766
Operating income			23,869				16,418				7,451				16,418				16,455				(37	)
Interest expense, net			34,289				35,244				(955	)			35,244				33,424				1,820
Loss from continuing operations before income taxes			(10,420	)			(18,826	)			8,406				(18,826	)			(16,969	)			(1,857	)
Provision for income taxes			6,794				4,939				1,855				4,939				5,876				(937	)
Loss from continuing operations			(17,214	)			(23,765	)			6,551				(23,765	)			(22,845	)			(920	)
Income (loss) from discontinued operations (net of tax)			(16,794	)			(2,742	)			(14,052	)			(2,742	)			421				(3,163	)
Net loss		$	(34,008	)		$	(26,507	)		$	(7,501	)		$	(26,507	)		$	(22,424	)		$	(4,083	)
Statements of Operations Data as a Percent of Revenue
Revenue			100.0	%			100.0	%							100.0	%			100.0	%
Cost of revenue			84.0				82.8								82.8				83.2
Gross profit margin			16.0				17.2								17.2				16.8
General and administrative expenses			6.9				8.7								8.7				10.3
Selling and marketing expenses			3.1				2.8								2.8				3.1
Impairment charges for goodwill and intangibles			1.9				2.6								2.6				—
Operating income margin			4.1				3.1								3.1				3.4
Interest expense, net			5.9				6.6								6.6				6.9
Loss from continuing operations before income taxes			(1.8	)			(3.5	)							(3.5	)			(3.5	)
Provision for income taxes			1.1				1.0								1.0				1.2
Loss from continuing operations			(2.9	)			(4.5	)							(4.5	)			(4.7	)
Income (loss ) from discontinued operations (net of tax)			(2.9	)			(0.5	)							(0.5	)			0.1
Net loss			(5.8	)%			(5.0	)%							(5.0	)%			(4.6	)%

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	%

Total revenue increased $51.9 million, or 10%, compared with 2008, as follows: increases of $57.4 million, or 13%, for the Government group and $4.2 million, or 14%, for the Human Capital Group; a reduction of $4.5 million, or 9%, for the International Group; and the elimination of intersegment revenue of $5.2 million.

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 resulted primarily from the following:

	•		Revenue from Department of Commerce (“DoC”) contracts increased $26.0 million from initial work on the 2010 U.S. Census contract.
	•		Revenue from Department of Defense (“DoD”) contracts increased $18.0 million, primarily from the DoD’s Military Health System including a new contract for traumatic brain injury.
	•		A short-term contract with the Department of Transportation (“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.

•

A reduction of $4.4 million in revenue from HHS contracts resulting from lower call volumes in 2009.

The reduction 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 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 Intangibles

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 new 2010 U.S. Census contract with DoC, the new national passport contract with DoS, and increased work on the Employee Retirement Income Security Act 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 reflects 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 excluding tax valuation allowance		$	220			$	(5,204	)		$	5,424
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.

Loss from Continuing Operations

The reduction of $6.6 million, or 28%, in the loss from continuing operations for 2009 primarily reflects the increase in operating income of $7.5 million and the reduction of $1.0 million in net interest expense, partially offset by the higher provision for income taxes.

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 significantly affected by foreign currency exchange rate changes. Revenue from discontinued operations was $22.8 million for 2009 compared with $26.2 million for 2008, a reduction of $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 test during the fourth quarter of 2009. As a result, a charge of $4.3 million was recorded for Latin American operations prior to our decision to sell. An additional charge of $5.0 million for an expected loss on disposal was recorded in 2009 as a result of our 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 this business in 2008.

Years Ended December 31, 2008 and 2007

Revenue

		Years Ended
		December 31,								Increase (Decrease)
		2008				2007				Amount				Percent
Revenue by business segment
Government Group		$	454,094			$	403,460			$	50,634				13	%
International Group			48,703				45,276				3,427				8	%
Human Capital Group			29,252				33,907				(4,655	)			(14	)%
		$	532,049			$	482,643			$	49,406				10	%
Business segment revenue as a percent of total revenue
Government Group			85.3	%			83.6	%
International Group			9.2				9.4
Human Capital Group			5.5				7.0
			100.0	%			100.0	%

The increase in Government Group revenue resulted from increases of $29.7 million from contracts with HHS primarily from higher prescription drug enrollment volume under continuing Medicare-related outsourcing contracts, $9.8 million from new contract awards with DoD primarily from military health contracts, $6.6 million from new contract awards with DoL, $3.3 million from DoED, and $3.5 million from business with commercial health customers. The increases were partly offset by reductions for contracts completed in 2007, including $3.1 million with the Equal Employment Opportunity Commission and $2.4 million with the Department of Homeland Security.

The increase in International Group revenue reflects $7.3 million from two new contracts in Canada, partly offset by a reduction of $4.9 million in revenue from the United Kingdom resulting from changes in foreign currency exchange rates and price reductions on a government contract.

The reduction in Human Capital Group revenue reflects lower assessment product sales for various commercial customers and a reduction in training services and assessment related services for several Fortune 500 customers due in part to deterioration in overall economic conditions and therefore reductions in customer hiring patterns.

Cost of Revenue

Cost of revenue increased $38.8 million, or 10%, for 2008 principally reflecting increased labor and services provided under Government Group contracts and an increase of $3.2 million, or 18%, in amortization of intangible assets resulting from the Acquisition on February 14, 2007. Amortization of intangibles resulting from the Acquisition was recorded for the full year in 2008, compared with 10.5 months for 2007. Costs for 2007 included a charge of $4.1 million resulting from the termination of a contract with the University of California.

Gross Profit

Gross profit increased $10.6 million, or 13%, for 2008 compared to 2007. The gross profit margin, or the ratio of gross profit to revenue, was 17.2%, compared with 16.8% for 2007. The increase in gross profit reflects the revenue increase of 10%, an increase of $4.8 million in award fees earned under cost-plus contracts, and a $4.1 million charge recorded in 2007 from the termination of a contract with the University of California.

General and Administrative Expenses

General and administrative expenses declined $3.1 million, or 6%, for 2008 compared with 2007. General and administrative expenses represented 8.7% of revenue compared with 10.3% for 2007. Expenses increased by $5.1 million for employee incentive compensation, higher salary costs, and a net charge of $2.0 million resulting from the settlement of a contract dispute with the University of California. The net settlement charge reflected an insurance recovery of $2.0 million under a mutual reservation of rights and reimbursement agreement with the Company’s insurance carrier.

Other factors contributing to the reduction in general and administrative expenses included transition-related expenses of $9.0 million for 2007 for retention bonuses, transition costs, and Predecessor Entity equity-based compensation. In addition, expenses for 2007 included a charge of $1.0 million for an increase in expected settlement costs relating to a terminated contract with the Transportation Security Administration.

Selling and Marketing Expenses

Selling and marketing expenses were $14.9 million or 3% of revenue for 2008, about the same as in 2007.

Goodwill Impairment Charges

Goodwill impairment charges were $13.8 million for 2008, consisting of $5.6 million for the International Group and $8.2 million for the Human Capital Group. The goodwill impairment charge for the International Group resulted from changes in foreign currency exchange rates versus the U.S. dollar, lower operating margins, and the effects of the global recession. The goodwill impairment charge for the Human Capital Group resulted from the recession and overall economic weakness coupled with a slowdown in customer orders relating to screening, testing and hiring. There were no goodwill impairment charges for 2007.

Operating Income

		Years Ended
		December 31,								Increase (Decrease)
		2008				2007				Amount				Percent
Operating income (loss) by business segment
Government Group		$	28,987			$	14,946			$	14,041				94	%
International Group			(4,163	)			5				(4,168	)			—	%
Human Capital Group			(8,348	)			2,061				(10,409	)			—	%
Corporate			(58	)			(557	)			499				(90)	%
		$	16,418			$	16,455			$	(37	)			—	%
Operating margin by business segment
Government Group			6.4	%			3.7	%
International Group			(8.6	)%			—	%
Human Capital Group			(28.5	)%			6.1	%

The increase in Government Group operating income reflects increases of $9.2 million from Medicare-related outsourcing contracts including award fees earned, $3.7 million from DoD contracts, and $2.1 million from contracts with commercial health customers. The increases were partially offset by an increase of $2.5 million from the amortization of intangibles resulting from the Acquisition on February 14, 2007. Amortization of intangibles was recorded for the full year 2008, compared with 10.5 months for 2007. Income for 2008 also reflects a charge of $2.0 million, which is net of insurance recoveries, from the settlement of claims with the University of California, compared with a loss of $4.1 million on the disputed contract for 2007. Operating income for 2007 had been reduced by $9.0 million for transition-related expenses for retention bonuses, transition costs, and Predecessor Entity equity-based compensation.

The International Group operating loss for 2008 resulted primarily from a noncash goodwill impairment charge of $5.6 million, partly offset by increases from two new contracts in Canada. The goodwill impairment charge resulted from changes in foreign currency exchange rates vs. the U.S. dollar, lower operating margins, and the effects of the global recession.

The Human Capital Group operating loss for 2008 resulted primarily from a noncash goodwill impairment charge of $8.2 million and the revenue reduction of $4.7 million.

Interest Expense, Net

The net increase of $1.8 million, or 5%, in net interest expense for 2008 reflects interest accrued on an average outstanding debt level of $422 million for the full year 2008, compared with an average debt level of $431 million for 10.5 months in 2007. The increase was partly offset by the decline in variable interest rates in 2008 on the unhedged portion of the term loan. Rates declined an average of 2.19% (219 basis points) for 2008 compared with 2007, and the unhedged portion of the term loan averaged $52.5 million during 2008.

Provision for Income Taxes

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

		Years Ended
		December 31,								Increase
		2008				2007				(Decrease)
Provision (benefit) for income taxes excluding tax valuation allowance		$	(5,204	)		$	(6,559	)		$	1,355
Tax valuation allowance			10,143				12,435				(2,292	)
Total provision for income taxes		$	4,939			$	5,876			$	(937	)

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.

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
		2008				2007				(Decrease)
Revenue		$	26,222			$	27,410			$	(1,188	)
Costs and expenses			25,364				26,660				(1,296	)
Impairment charge for goodwill			2,985				—				2,985
Income (loss) from discontinued operations before income taxes			(2,127	)			750				(2,877	)
Provision for income taxes			615				329				286
Income (loss) from discontinued operations (net of tax)		$	(2,742	)		$	421			$	(3,163	)

The reduction in revenue from discontinued operations for 2008 reflects a decline of $2.6 million in revenue from Mexico from lower contract volumes and the effects of foreign currency exchange rates, partially offset by an increase in revenue from Venezuela as a result of inflation-based price increases.

The net loss from discontinued operations for 2008 resulted primarily from a goodwill impairment charge of $3.0 million, partly offset by higher margins from contracts in Venezuela.

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 $44.6 million at December 31, 2009. Subject to certain limitations, including compliance with the maximum allowable limits under the leverage ratio covenant under the senior secured credit facility, the available line of credit under the revolving credit facility was $49.8 million at December 31, 2009. 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 a debt service payment of $13.5 million, scheduled interest payments of $29.2 million, scheduled lease payments and noncancelable purchase commitments of $40.3 million, and planned capital expenditures of $15.0 million.

Cash and cash equivalents of $44.6 million 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 money market securities 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.

Long-Term Debt

At December 31, 2009, the senior secured credit facility consisted of a term loan of $230.4 million and, subject to certain limitations, an available revolving credit facility of up to $49.8 million that expires February 14, 2012. There were no borrowings outstanding under the revolving credit facility at December 31, 2008. 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) 50% of the net cash proceeds of equity offerings or capital contributions subject to certain exceptions; (iii) 100% of the net cash proceeds of additional debt; and (iv) a percentage of annual excess cash flow, as defined. Payments resulting from the annual excess cash flow requirement are due 90 days following the year end. Based on the excess cash flow calculation for the year ended December 31, 2009, a mandatory payment of $13.5 million is scheduled to be made March 31, 2010. Since the excess cash flow requirement is based on annual cash flow, it is not possible to estimate the amount, if any, that would become payable in March 2011 or 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. 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, 2009, the Company was in compliance with all of the affirmative and negative covenants.

Long-term debt of $420.4 million at December 31, 2009, is scheduled to mature as follows: (i) a term loan payment of $13.5 million is due March 31, 2010, under the senior secured credit facility; $1.7 million is due in 2012 and the remaining balance of the term loan amounting to $215.2 million is scheduled to mature in February 2013, and (ii) $190.0 million of senior subordinated fixed rate notes is 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, 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 as set forth under the caption Credit Ratings, 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.

Debt Covenants

The more restrictive debt covenants relate to (i) loans and advances to non-guarantor subsidiaries, and (ii) compliance with a maximum allowable consolidated leverage ratio. At December 31, 2009, the cumulative amount of net loans to and investments in Vangent Mexico, S.A. de C.V., a non-guarantor subsidiary, by Vangent, Inc. amounted to $8.3 million compared with the maximum allowable amount of $10.0 million for loans to or investments in non-guarantor subsidiaries under the senior secured credit facility.

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 unusual and non-recurring items) as defined in the debt agreement for a twelve-month period. At December 31, 2009, the consolidated leverage ratio was 5.44 to 1, compared with the maximum allowable ratio of 6.00 to 1 applicable to the period. The maximum allowable consolidated leverage ratio steps down to 5.50 to 1 at December 31, 2010.

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. GAAP 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 excludes (i) discontinued operations, (ii) impairment charges for goodwill and intangibles, (iii) equity-based compensation expense, (iv) net transition and contract settlement costs, (v) management fee and expenses paid to Veritas Capital, and (vi) and other items included in the debt agreement.

A reconciliation of net loss as reported under U.S. GAAP to EBITDA and Adjusted EBITDA follows (dollars in thousands):

		Years Ended December 31,
		2009				2008				2007
Net loss		$	(34,008	)		$	(26,507	)		$	(22,424	)
Provision for income taxes			6,794				4,939				5,876
Interest expense, net of interest income			34,281				35,243				33,423
Depreciation and amortization			31,883				33,558				30,539
EBITDA			38,950				47,233				47,414
Loss from discontinued operations (net of tax)			16,794				2,742				421
Impairment charges for goodwill and intangibles			11,227				13,766				—
Equity-based compensation expense			1,048				1,053				909
Net transition and contract settlement costs			—				4,514				20,318
Management fee			1,289				1,164				914
Other			810				588				5,903
Adjusted EBITDA		$	70,118			$	71,060			$	75,879

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, 2009, the total notional amount of the pay-fixed/receive-variable interest rate swap agreements was $185.0 million, scheduled to reduce to $150.0 million in February 2010 and scheduled to mature in February 2011.

The fair value of the net interest rate swap liability was $4.7 million at December 31, 2009, of which $4.6 million represents an unrealized loss that is reported in accumulated other comprehensive loss in the consolidated statement of stockholder’s 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
		2009				2008				(Decrease)
Cash and cash equivalents		$	44,638			$	19,446			$	25,192
Trade receivables, net			109,846				123,382				(13,536	)
Prepaid expenses and other			10,353				10,733				(380	)
Current portion of long-term debt			(13,534	)			—				(13,534	)
Accounts payable and accrued liabilities			(62,402	)			(64,674	)			2,272
Other liabilities			(20,237	)			(20,911	)			674
Discontinued operations, net			7,515				7,296				219
Net working capital		$	76,179			$	75,272			$	907

Cash Flows

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

		Years Ended
		December 31,								Increase
		2009				2008				(Decrease)
Net cash provided by (used in)
Operating activities		$	40,387			$	18,410			$	21,977
Investing activities			(15,783	)			(13,530	)			(2,253	)
Financing activities			(188	)			(8,088	)			7,900

Operating Activities

In assessing cash flows from operating activities for continuing operations, we consider several principal factors: (i) income (loss) from continuing operations adjusted for non-cash charges, primarily impairment charges for goodwill and intangibles, amortization of intangible assets, depreciation and amortization of property and equipment, and deferred income taxes, and (ii) the extent to which receivables, payables, or other working capital components increase or decrease.

Continuing operations provided net cash from operating activities of $49.4 million for 2009, compared with $18.4 million for 2008, an increase of $31.0 million, or 168%. The loss from continuing operations of $17.2 million for 2009 adjusted by non-cash charges of $52.2 million generated cash flow of $35.0 million for 2009. The loss from continuing operations of $23.8 million for 2008 adjusted by non-cash charges of $54.4 million generated cash flow of $30.6 million for 2008.

A net reduction of $14.4 million in trade receivables contributed to cash flow from operating activities for 2009, compared with a net increase of $18.9 million in trade receivables that reduced cash flow for 2008. The net reduction for 2009 resulted from improvements to the billing and collection process and the timing of collections from customers. Trade receivables at December 31, 2009, reflect DSO (days sales outstanding) of 57 days, compared with 73 days at December 31, 2008.

A reduction of $4.1 million in accounts payable and accrued liabilities reduced cash flow from operating activities for 2009, compared with an increase of $6.7 million that increased cash flow for 2008. The reduction for 2009 primarily reflects the timing of payments to vendors and payments of $6.3 million for incentive compensation in 2009 that had been earned and accrued in 2008. There was no accrued liability for incentive compensation expense for 2009.

Investing Activities

Net cash used in investing activities reflects capital expenditures of $10.7 million for 2009 and $9.1 million for 2008 for contractual and general infrastructure requirements for continuing operations. Total capital expenditures of $15.0 million are expected for 2010. Net cash used in investing activities for 2008 included cash paid of $3.9 million to purchase the government health integration services of Aptiv Technology Partners.

Noncash investing activities consist of costs for leasehold improvements of $0.9 million for 2009 and $2.5 million for 2008 that were recorded under operating leases for office space; other liabilities were increased for the corresponding deferred rent obligation under the operating leases.

Financing Activities

Net cash used in financing activities of $8.1 million for 2008 reflects a mandatory debt prepayment of $7.8 million under the senior secured credit facility based on a percentage of annual excess cash flow, as defined, for the preceding year. Based on the excess cash flow calculation for 2008, there was no mandatory debt prepayment required in 2009.

Discontinued Operations

Discontinued operations generated negative cash flow from operating activities of $9.0 million for 2009, compared with breakeven operating cash flow for 2008. The loss from discontinued operations of $16.8 million, adjusted for non-cash impairment charges of $9.2 million, produced negative cash flow of $7.6 million for 2009. Cash flow 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.

Capital expenditures for discontinued operations were $5.1 million for 2009, primarily equipment for the new contract in Mexico.

Credit Ratings

The debt-to-equity ratio was 3.8 at December 31, 2009, compared with 2.9 at December 31, 2008. There was no change in long-term debt during 2009. The increase reflects the reduction to stockholder’s equity caused primarily by noncash goodwill impairment charges and the loss from discontinued operations. The most recent ratings were assigned by Standard and Poor’s in November 2009 and by Moody’s Investor Services in December 2009, as follows:

		Standard
		& Poor’s		Moody’s
Senior secured credit facility		BB-		B1
Senior subordinated notes due 2015		CCC+		Caa2
Corporate credit		B		B3
Outlook		Negative		Negative

Contractual Obligations

Contractual commitments to make future cash payments under long-term debt agreements, contracts, and contingent commitments at December 31, 2009, follow (in millions):

						Payments Due by Year
										2011 and				2013 and
		Total				2010				2012				2014				2015				Thereafter
Long-term debt:
Term loan under senior secured credit facility (1)			230.4			$	13.5			$	1.7			$	215.2			$	—			$	—
Senior subordinated notes due 2015			190.0				—				—				—				190.0				—
Interest relating to long-term debt (2)			124.6				29.2				48.4				37.8				9.2				—
Operating leases			78.4				20.1				27.5				13.7				3.4				13.7
Purchase and other contractual commitments (3)			20.2				20.2				—				—				—				—
		$	643.6			$	83.0			$	77.6			$	266.7			$	202.6			$	13.7