UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number 333-145355

VANGENT, INC.

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

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

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

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

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

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

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 April 2, 2011.

 

 

VANGENT, INC.
Table of Contents

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 2, 2011 and December 31, 2010 (Unaudited)			3
Condensed Consolidated Statements of Operations for the three months ended April 2, 2011 and April 3, 2010 (Unaudited)			4
Condensed Consolidated Statements of Equity and Comprehensive Income for the three months ended April 2, 2011 and April 3, 2010 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows for the three months ended April 2, 2011 and April 3, 2010 (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			31
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 5. Other Information			32
Item 6. Exhibits			32
Signature			32
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Forward-Looking Statements

This quarterly report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as expectation or belief concerning future events. Forward-looking statements 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 our annual report on Form 10-K for the year ended December 31, 2010. Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances, and there can be no assurance that any forward-looking statement contained herein will prove to be accurate. The Company undertakes no obligation, and specifically declines any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I. FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

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

		April 2,				December 31,
		2011				2010
Assets
Current assets:
Cash and cash equivalents		$	46,438			$	27,194
Trade receivables, net			110,010				122,940
Prepaid expenses and other assets			13,467				12,572
Assets of discontinued operations			—				329
Total current assets			169,915				163,035
Property and equipment, net			26,581				28,031
Intangible assets, net			144,325				150,847
Goodwill			297,416				297,076
Deferred tax asset			19,977				21,923
Deferred debt financing costs			8,113				8,823
Total assets		$	666,327			$	669,735
Liabilities Equity
Current liabilities:
Current portion of long-term debt		$	—			$	1,401
Accounts payable and accrued liabilities			76,761				80,672
Accrued interest payable			2,803				7,781
Deferred revenue			10,389				7,964
Liabilities of discontinued operations			—				1,880
Total current liabilities			89,953				99,698
Long-term debt, net of current portion			405,353				405,353
Other long-term liabilities			4,961				5,453
Deferred tax liability			1,901				1,860
Total liabilities			502,168				512,364
Commitments and contingencies (Note 10)
Equity:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares issued and outstanding			—				—
Additional paid-in capital			208,473				208,272
Accumulated other comprehensive loss			(4,467	)			(8,917	)
Accumulated deficit			(40,390	)			(42,535	)
Total Vangent stockholder’s equity			163,616				156,820
Noncontrolling interest			543				551
Total equity			164,159				157,371
Total liabilities and equity		$	666,327			$	669,735

See notes to the condensed consolidated financial statements.

Vangent, Inc.

Condensed Consolidated Statements of Operations (Unaudited)
(in thousands)

		Three Months Ended
		April 2,				April 3,
		2011				2010
Revenue		$	175,849			$	194,197
Cost of revenue			145,192				158,226
Gross profit			30,657				35,971
General and administrative expenses			12,149				12,190
Selling and marketing expenses			5,138				5,675
Operating income			13,370				18,106
Interest expense, net			7,491				8,236
Income from continuing operations before income taxes			5,879				9,870
Provision for income taxes			3,730				1,834
Income from continuing operations			2,149				8,036
Loss from discontinued operations, net of tax			(12	)			(2,437	)
Net income			2,137				5,599
Net loss attributed to noncontrolling interest			(8	)			—
Net income attributable to Vangent		$	2,145			$	5,599

See notes to the condensed consolidated financial statements.

Vangent, Inc.

(in thousands, except share amounts)

										Accum-
										ulated								Total
										Other								Vangent
						Additional				Compre-				Accum-				Stock-				Non-
		Common				Paid-in				hensive				ulated				holder’s				controlling				Total
		Stock				Capital				Loss				Deficit				Equity				Interest				Equity
Balance, December 31, 2009		$	—			$	207,376			$	(14,949	)		$	(82,564	)			109,863			$	—			$	109,863
Effect of hedging activities, net of tax			—				—				1,331				—				1,331				—				1,331
Foreign currency translation adjustments			—				—				(59	)			—				(59	)			—				(59	)
Net income			—				—				—				5,599				5,599				—				5,599
Total comprehensive income																			6,871				—				6,871
Equity-based compensation			—				262				—				—				262				—				262
Balance, April 3, 2010		$	—			$	207,638			$	(13,677	)		$	(76,965	)		$	116,996			$	—			$	116,996
Balance, December 31, 2010		$	—			$	208,272			$	(8,917	)		$	(42,535	)			156,820			$	551			$	157,371
Effect of hedging activities, net of tax			—				—				2,005				—				2,005				—				2,005
Foreign currency translation adjustment			—				—				2,262				—				2,262				—				2,262
Defined benefit plan overfunding											183								183				—				183
Net income (loss)			—				—				—				2,145				2,145				(8	)			2,137
Total comprehensive income (loss)																			6,595				(8	)			6,587
Equity-based compensation			—				201				—				—				201				—				201
Balance, April 2, 2011		$	—			$	208,473			$	(4,467	)		$	(40,390	)		$	163,616			$	543			$	164,159

See notes to the condensed consolidated financial statements.

Vangent, Inc.

(in thousands)

		Three Months Ended
		April 2,				April 3,
		2011				2010
Cash flows from operating activities
Net income		$	2,137			$	5,599
Loss from discontinued operations, net of tax			(12	)			(2,437	)
Income from continuing operations			2,149				8,036
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
Amortization of intangible assets			6,763				5,272
Depreciation and amortization of property and equipment			3,079				3,085
Amortization of deferred debt financing costs			714				563
Equity-based compensation expense			201				262
Deferred income taxes			3,344				1,656
Changes in operating assets and liabilities:
Trade receivables			13,317				(32,066	)
Prepaid expenses and other assets			(62	)			(3,538	)
Accounts payable and other liabilities			(9,993	)			(1,635	)
Deferred revenue			2,425				1,352
Continuing operations, net			21,937				(17,013	)
Discontinued operations, net			(87	)			(1,994	)
Net cash provided by (used in) operating activities			21,850				(19,007	)
Cash flows from investing activities
Capital expenditures			(1,896	)			(1,304	)
Continuing operations, net			(1,896	)			(1,304	)
Discontinued operations, net			118				(123	)
Net cash used in investing activities			(1,778	)			(1,427	)
Cash flows from financing activities
Borrowing under revolving credit facility			10,000				—
Repayment of borrowing under revolving credit facility			(10,000	)			—
Repayment of senior secured term loan			(1,401	)			(13,612	)
Other			—				(29	)
Net cash used in financing activities			(1,401	)			(13,641	)
Effect of exchange rate changes on cash and cash equivalents			252				(146	)
Net increase (decrease) in cash and cash equivalents			18,923				(34,221	)
Total cash and cash equivalents, beginning of period			27,515				45,584
Total cash and cash equivalents, end of period			46,438				11,363
Less: Cash and cash equivalents, discontinued operations			—				645
Cash and cash equivalents, continuing operations		$	46,438			$	10,718
Supplemental cash flow information
Interest paid		$	11,635			$	12,709
Income taxes paid			257				54

See notes to the condensed consolidated financial statements.

Vangent, Inc.

(dollars in thousands)

1. Organization and Basis of Presentation

Basis of Presentation

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

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

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

Nature of Operations

Vangent is a global provider of consulting, systems integration, human capital management and business process services to the U.S. federal and international governments, higher education institutions and corporations. The Company’s primary customer focus is U.S. governmental agencies. The Department of Health and Human Services (“HHS”) represented 50% and the Department of Education (“DoED”) represented 17% of total revenue for the three months ended April 2, 2011.

Fiscal Year and Quarterly Periods

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

Principles of Consolidation

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

The Company has a 70% ownership interest in a joint venture in the United States, a 49% ownership interest in a joint venture in the United Kingdom, and a 48% ownership interest in a joint venture in the United Arab Emirates. The Company has guaranteed performance under contracts for which the joint ventures earn revenue from government customers. The three joint ventures are fully consolidated in the financial statements; the consolidated balance sheets include joint-venture assets of $21,006 and liabilities of $17,339 at April 2, 2011, compared with assets of $12,129 and liabilities of $8,419 at December 31, 2010. The Company holds less than a majority ownership interest in the two foreign joint ventures; however, the Company is entitled to 100% of the income and losses and has determined that it is the primary beneficiary of each of the foreign joint ventures and there is no allocation of equity or income/loss attributed to noncontrolling interests.

The Company holds a 70% interest in the domestic joint venture; the remaining 30% ownership share is reported as noncontrolling interest in the consolidated financial statements.

2. Acquisition of Buccaneer Computer Systems & Service, Inc.

In September 2010, Vangent completed the acquisition (“Buccaneer Acquisition”) of Buccaneer Computer Systems & Service, Inc. (“Buccaneer”). Buccaneer is a leading provider of IT services, infrastructure, secure data hosting and data analytics for the government healthcare market. Vangent acquired all outstanding shares of Buccaneer stock in exchange for total purchase consideration of $64,635.

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

The allocation of the purchase price is provisional pending, among other things, final agreement of the adjustment to the purchase price based upon the level of net working capital transferred at closing. A summary of the total purchase consideration and the allocation of the purchase consideration based on estimates of fair value for the assets acquired and the liabilities assumed follows:

Purchase Consideration
Cash paid		$	61,050
Other purchase consideration			3,585
		$	64,635

Other purchase consideration represents estimated future payments relating to the Company’s election under Section 338 (h) (10) of the Internal Revenue Code and the working capital adjustment.

Allocation of Purchase Consideration
Cash		$	897
Accounts receivable			18,224
Property and equipment			2,055
Definite-life intangible assets			25,792
Goodwill			30,457
Other assets			2,009
Less: Liabilities assumed			(14,072	)
Net assets acquired			65,362
Less: Noncontrolling interest			(727	)
		$	64,635
Allocation of Definite-Life Intangible Assets Acquired
Customer relationships (eight-year life)		$	23,809
Non-compete agreements (three-year life)			1,983
		$	25,792

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

Goodwill represents the excess of purchase consideration over the amounts assigned to tangible and intangible assets acquired and liabilities assumed. As a result of the election under Section 338(h) (10) of the Internal Revenue Code, the amount allocated to intangible assets and goodwill for tax purposes is expected to be tax deductible.

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

Revenue from Buccaneer for the three months ended April 2, 2011 amounted to $32,120 and is reported as part of the Government Group business segment. Operating income was $1,132 and includes charges for the amortization of acquired intangible assets for customer relationships based on an accelerated method.

Unaudited Pro Forma Information

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

Revenue		$	216,788
Income from continuing operations		$	9,025

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

3. Discontinued Operations

In 2009, Vangent completed an evaluation of its international business and committed to a plan to sell its business operations in Latin America that are segregated and reported as discontinued operations. Vangent completed the sales of its operations in Argentina in the third quarter of 2010 and Mexico in the fourth quarter of 2010. The sale of operations in Venezuela was completed in February 2011. Summarized statement of operations data for discontinued operations follows:

		Three Months Ended
		April 2,				April 3,
		2011				2010
Statements of Operations Data
Revenue		$	137			$	7,135
Costs and expenses			144				7,500
Expected loss on sale or disposal			—				2,618
Other (income) expense, net			5				(753	)
Loss from discontinued operations before income taxes			(12	)			(2,230	)
Provision for income taxes			—				207
Loss from discontinued operations, net of tax		$	(12	)		$	(2,437	)

4. Recent Accounting Pronouncements

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

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

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

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

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

5. Trade Receivables

A summary of trade receivables follows:

		April 2,				December 31,
		2011				2010
Billed trade receivables		$	68,699			$	91,126
Billable trade receivables			31,303				22,391
Unbilled trade receivables pending completion of milestones, contract authorizations, or retainage			9,390				8,794
Other			763				806
			110,155				123,117
Allowance for doubtful accounts			(145	)			(177	)
Trade receivables, net		$	110,010			$	122,940
Trade accounts receivable from major customers
Department of Health and Human Services			49	%			46	%
Department of Education			15	%			17	%
Department of Defense			*				11	%

6. Long-Term Debt

A summary of long-term debt follows:

		April 2,				December 31,
		2011				2010
Long-term debt
Term loan under senior secured credit facility with interest at variable rates (2.32% at April 2, 2011), maturing February 15, 2013		$	215,353			$	216,754
9 5/8% Senior subordinated fixed rate notes, due February 15, 2015			190,000				190,000
			405,353				406,754
Less: current portion of long-term debt			—				1,401
Long-term debt, net of current portion		$	405,353			$	405,353
Scheduled maturities of long-term debt
2011		$	—
2012			310
2013			215,043
2014			—
2015			190,000
		$	405,353

Senior Secured Credit Facility

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

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

Borrowings are secured by accounts receivable, cash, intellectual property and other assets and are guaranteed jointly and severally, by all existing and future domestic subsidiaries. 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 April 2, 2011, the Company was in compliance with all of the affirmative and negative covenants.

The more restrictive covenants relate to compliance with a maximum allowable consolidated leverage ratio, as defined in the senior secured credit facility, based on consolidated indebtedness, as defined, reduced by unrestricted cash and cash equivalents in excess of $5,000, divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, adjusted for certain unusual and non-recurring items, as defined) for a twelve-month period. At April 2, 2011, the consolidated leverage ratio was 3.82 to 1, compared with the maximum allowable ratio of 5.50 to 1 applicable to the period. The maximum allowable consolidated leverage ratio steps down to 5.25 at June 30, 2011 and to 5.00 at March 31, 2012.

9 5/8% Senior Subordinated Notes

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

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

7. Accumulated Other Comprehensive Loss

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

		April 2,				December 31,
		2011				2010
Accumulated other comprehensive loss
Effect of hedging activities, net of tax:
Interest rate swap agreements, net of tax		$	—			$	(391	)
Additional deferred tax effect relating to interest rate swap agreement			—				(1,614	)
Continuing operations, net of tax			—				(2,005	)
Foreign currency cumulative translation adjustments:
Continuing operations			(4,650	)			(5,359	)
Discontinued operations			—				(1,729	)
			(4,650	)			(7,088	)
Defined benefit plan overfunding, net of tax			183				176
Total accumulated other comprehensive loss		$	(4,467	)		$	(8,917	)

		Hedging
		Activities
		Interest Rate
		Swap
Summary of changes in accumulated other comprehensive loss
Balance, December 31, 2010		$	(2,005	)
Reclassification of loss to interest expense			646
Reclassification tax effect to provision for income taxes			(255	)
Reclassification of additional deferred tax effect to provision for income taxes			1,614
Balance, April 2, 2011		$	—

8. Derivative Instruments, Hedging Activities and Financial Instruments

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

Derivative Instruments and Hedging Activities

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

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

Statements of Operations Data

Amount of Gain

(Loss) Recognized

Amount of Gain

Location of Gain

Amount of Gain

Location of Gain

in Income on

(Loss)

(Loss)

(Loss)

(Loss) Recognized in

Derivative

Recognized in

Reclassified from

Reclassified from

Income on Derivative

(Ineffective

OCI on

Accumulated OCI

Accumulated OCI

(Ineffective Portion

Portion and

Derivative

into Income

into Income

and Amount

Amount Excluded

(Effective

(Effective

(Effective

Excluded from

from Effectiveness

Derivative Contracts

Portion)

Portion)

Portion)

Effectiveness Testing)

Testing)

Three Months Ended April 2, 2011

Derivatives that qualify as cash flow hedges

Interest rate swap agreements

Interest expense

$

(646

)

Tax effect of interest rate swap agreements

Provision for income taxes

255

Additional deferred tax effect relating to interest rate swap agreements

Provision for income taxes

(1,614

)

Three Months Ended April 3, 2010

Derivatives that qualify as cash flow hedges

Interest rate swap agreements

$

(631

)

Interest expense

(1,666

)

Interest expense

$

23

Foreign currency forward contracts

(8

)

Discontinued operations

(304

)

Derivatives that do not qualify as cash flow hedges

Foreign currency forward contracts

Discontinued operations

(89

)

Fair Value of Financial Instruments

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

		Carrying
		Amounts				Fair Value
Long-term debt
Variable-rate term loan under the senior secured credit facility		$	215,353			$	215,353
9 5/8% senior subordinated notes, due February 15, 2015			190,000				189,525
		$	405,353			$	404,878

The carrying amounts of the variable-rate borrowing and term loan under the senior secured credit facility approximate fair value. The fair value of the 9 5/8% senior subordinated notes is based on quoted market prices. At April 2, 2011, the quoted market price was $99.75 per $100 reflecting a yield of 9.896%. The carrying amounts of other financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate fair value due to their short term nature.

9. Income Taxes

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

The provision for income taxes for the corresponding period in 2010 reflects a reduction in the tax valuation allowance for deferred tax assets from the utilization of a portion of the net operating loss carryforward. The Company has concluded based upon all available evidence, that it is more likely than not that U.S. deferred tax assets will be realizable, except for a portion relating to a net capital loss carryforward.

The Company has accrued a provision for income taxes of $229 on a specific portion of the current year’s undistributed earnings of one of its foreign operations since this specific portion is not considered to be reinvested indefinitely. When the earnings are distributed, federal income and foreign withholding taxes would apply. The amount of the unrecognized income tax associated with the undistributed earnings of all other foreign subsidiaries where the earnings are considered to be reinvested indefinitely was not material at April 2, 2011.

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

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

10. Commitments and Contingencies

Federal government agencies routinely audit the Company’s books and records. These agencies review contract performance, cost structure and compliance with applicable laws, regulations and standards. Such agencies also review the adequacy of, and compliance with, internal control systems and policies, including purchasing, property, estimating, compensation and management information systems. Audits of the Company’s incurred cost submissions for 2005 and subsequent years are open. The Company is also subject to audits, legal proceedings, investigations and claims arising out of the ordinary course of business and accrues a liability if an unfavorable outcome is probable. In the opinion of management, resolution of such matters is not expected to have a material effect on the Company’s results of operations and cash flows or financial position.

11. Equity-Based Compensation

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

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

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

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

Charges for equity-based compensation expense amounted to $301 for three months ended April 2, 2011 and $262 for the corresponding period in 2010. The unamortized amount of equity-based compensation was $2,398 at April 2, 2011, and is scheduled to be charged to expense as follows:

Years Ending December 31
2011 (remaining nine months)		$	809
2012			545
2013			437
2014			321
2015			257
2016			29
		$	2,398

12. Related Party Transactions

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

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

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

Vangent pays an annual management fee of $1,000 to Veritas Capital of which $250 was paid for the three months ended April 2, 2011, along with advisory fees of $13.

Vangent purchased administrative services under contracts and leases with Pearson amounting to $1,404 for the three months ended April 2, 2011. Pearson holds $35,000 of Series A preferred stock and $5,000 of Series B preferred stock in Vangent Holding Corp., and holds 10% of the Class A membership interests in Vangent Holding LLC.

13. Business Segments and Major Customers

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

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

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

The Human Capital Group primarily serves the private sector and provides workforce solutions that automate and improve the recruitment, assessment, selection, training and development of a customer’s workforce and provides learning infrastructure development solutions for public sector clients.

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

		Three Months Ended
		April 2,				April 3,
		2011				2010
Revenue by business segment
Government Group		$	152,048			$	177,237
International Group			19,009				11,825
Human Capital Group			4,922				6,135
Elimination			(130	)			(1,000	)
Total revenue		$	175,849			$	194,197
Operating income (loss) by business segment
Government Group		$	13,213			$	18,869
International Group			935				62
Human Capital Group			(750	)			(820	)
Other			(28	)			(5	)
Total operating income			13,370				18,106
Interest expense, net			7,491				8,236
Income from continuing operations before income taxes		$	5,879			$	9,870
Depreciation and amortization
Government Group		$	8,674			$	7,305
International Group			976				727
Human Capital Group			192				325
Total depreciation and amortization		$	9,842			$	8,357
Revenue from major customers as a percent of total revenue
Department of Health and Human Services			50	%			34	%
Department of Education			17	%			15	%
Department of Commerce			*				26	%

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

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

Condensed Combining Balance Sheets (Unaudited)

						Guarantor				Non-Guarantor
		Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		April 2, 2011
Current assets:
Cash and cash equivalents		$	29,660			$	22			$	16,756			$	—			$	46,438
Trade receivables, net			77,084				23,748				9,178				—				110,010
Prepaid expenses and other			9,286				1,141				3,040				—				13,467
Total current assets			116,030				24,911				28,974				—				169,915
Property and equipment, net			19,190				2,790				4,601				—				26,581
Goodwill and intangible assets			372,564				50,733				18,444				—				441,741
Deferred tax asset (liability)			20,659				(682	)			—				—				19,977
Deferred debt financing costs			6,971				867				275				—				8,113
Investment in and advances to subsidiaries			99,868				—								(99,868	)			—
Total assets		$	635,282			$	78,619			$	52,294			$	(99,868	)		$	666,327
Current liabilities		$	61,565			$	10,094			$	21,510			$	(3,216	)		$	89,953
Long-term debt			405,353				—				—				—				405,353
Other long-term liabilities			4,205				711				1,946				—				6,862
Total liabilities			471,123				10,805				23,456				(3,216	)			502,168
Total equity			164,159				67,814				28,838				(96,652	)			164,159
Total liabilities and equity		$	635,282			$	78,619			$	52,294			$	(99,868	)		$	666,327
		December 31, 2010
Current assets:
Cash and cash equivalents		$	20,477			$	—			$	6,717			$	—			$	27,194
Trade receivables, net			90,879				20,504				11,557				—				122,940
Prepaid expenses and other			9,140				1,227				2,534				—				12,901
Total current assets			120,496				21,731				20,808				—				163,035
Property and equipment, net			20,640				2,393				4,998				—				28,031
Goodwill and intangible assets, net			377,721				52,075				18,127				—				447,923
Deferred tax asset			21,923				—				—				—				21,923
Deferred debt financing costs and other			8,089				471				263				—				8,823
Investment in and advances to subsidiaries			94,738				—				—				(94,738	)			—
Total assets		$	643,607			$	76,670			$	44,196			$	(94,738	)		$	669,735
Current liabilities		$	76,188			$	12,572			$	16,039			$	(5,101	)		$	99,698
Long-term debt, net of current portion			405,353				—				—				—				405,353
Other long-term liabilities			4,695				711				1,907				—				7,313
Total liabilities			486,236				13,283				17,946				(5,101	)			512,364
Total equity			157,371				63,387				26,250				(89,637	)			157,371
Total liabilities and equity		$	643,607			$	76,670			$	44,196			$	(94,738	)		$	669,735

Condensed Combining Statements of Operations (Unaudited)

						Guarantor				Non-Guarantor
		Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		Three Months Ended April 2, 2011
Revenue		$	124,946			$	29,680			$	21,336			$	(113	)		$	175,849
Cost of revenue			101,025				26,616				17,664				(113	)			145,192
Gross profit			23,921				3,064				3,672				—				30,657
General and administrative expenses			8,854				1,437				1,858				—				12,149
Selling and marketing expenses			4,039				467				632				—				5,138
Operating income			11,028				1,160				1,182				—				13,370
Interest expense, net			7,437				—				54				—				7,491
Equity in net income of subsidiaries			1,579				—				—				(1,579	)			—
Income from continuing operations before income taxes			5,170				1,160				1,128				(1,579	)			5,879
Provision for income taxes			3,033				465				232				—				3,730
Income from continuing operations			2,137				695				896				(1,579	)			2,149
Loss from discontinued operations, net of tax			—				—				(12	)			—				(12	)
Net income			2,137				695				884				(1,579	)			2,137
Net loss attributable to noncontrolling interest			—				—				(8	)			—				(8	)
Net income attributable to Vangent		$	2,137			$	695			$	892			$	(1,579	)		$	2,145

		Three Months Ended April 3, 2010
Revenue		$	182,423			$	—			$	11,774			$	—			$	194,197
Cost of revenue			148,150				—				10,076				—				158,226
Gross profit			34,273				—				1,698				—				35,971
General and administrative expenses			11,588				—				602				—				12,190
Selling and marketing expenses			5,131				—				544				—				5,675
Operating income			17,554				—				552				—				18,106
Interest expense, net			8,285				—				(49	)			—				8,236
Equity in net (loss) of subsidiaries			(1,676	)			—				—				1,676				—
Income from continuing operations before income taxes			7,593				—				601				1,676				9,870
Provision for income taxes			1,715				—				119				—				1,834
Income from continuing operations			5,878				—				482				1,676				8,036
Loss from discontinued operations, net of tax			(279	)			—				(2,158	)			—				(2,437	)
Net income (loss)		$	5,599			$	—			$	(1,676	)		$	1,676			$	5,599

Condensed Combining Statements of Cash Flows (Unaudited)

						Guarantor				Non-Guarantor				Elim-
		Issuer				Subsidiaries				Subsidiaries				inations				Consolidated
		Three Months Ended April 2, 2011
Cash flows from operating activities
Continuing operations, net		$	8,140			$	874			$	12,923			$	—				21,937
Discontinued operations, net			—				—				(87	)			—				(87	)
Net cash provided by operating activities			8,140				874				12,836				—				21,850
Cash flows from investing activities
Intercompany loan from Vangent Ltd. to Vangent, Inc.			3,216								—				(3,216	)			—
Capital expenditures			(772	)			(852	)			(272	)			—				(1,896	)
Continuing operations, net			2,444				(852	)			(272	)			(3,216	)			(1,896	)
Discontinued operations, net			—				—				118				—				118
Net cash provided by (used in) investing activities			2,444				(852	)			(154	)			(3,216	)			(1,778	)
Cash flows from financing activities
Intercompany loan from Vangent Ltd. to Vangent, Inc.			—				—				(3,216	)			3,216				—
Repayment of senior secured loan			(1,401	)			—				—				—				(1,401	)
Net cash provided by (used in) financing activities			(1,401	)			—				(3,216	)			3,216				(1,401	)
Effect of exchange rate changes on cash and cash equivalents			—				—				252				—				252
Net increase in cash and cash equivalents			9,183				22				9,718				—				18,923
Total cash and cash equivalents, beginning of period			20,477				—				7,038				—				27,515
Total cash and cash equivalents, end of period		$	29,660			$	22			$	16,756			$	—			$	46,438
		Three Months Ended April 3, 2010
Cash flows from operating activities
Continuing operations, net		$	(18,109	)		$	—			$	1,096			$	—			$	(17,013	)
Discontinued operations, net			—				—				(1,994	)			—				(1,994	)
Net cash used in operating activities			(18,109	)			—				(898	)			—				(19,007	)
Cash flows from investing activities
Loans to Non-Guarantor Subsidiary, net			(605	)			—				—				605				—
Capital expenditures			(1,163	)			—				(141	)			—				(1,304	)
Continuing operations, net			(1,768	)			—				(141	)			605				(1,304	)
Discontinued operations, net			—				—				(123	)			—				(123	)
Net cash used in investing activities			(1,768	)			—				(264	)			605				(1,427	)
Cash flows from financing activities
Repayment of senior secured loan			(13,612	)			—				—				—				(13,612	)
Other			(29	)							—								(29	)
Continuing operations, net			(13,641	)			—				—				—				(13,641	)
Discontinued operations, net			—				—				605				(605	)			—
Net cash provided by (used in) financing activities			(13,641	)			—				605				(605	)			(13,641	)
Effect of exchange rate changes on cash and cash equivalents			—				—				(146	)			—				(146	)
Net decrease in cash and cash equivalents			(33,518	)			—				(703	)			—				(34,221	)
Total cash and cash equivalents, beginning of period			41,099				—				4,485				—				45,584
Total cash and cash equivalents, end of period			7,581				—				3,782				—				11,363
Less: Cash and cash equivalents, discontinued operations			—				—				645				—				645
Cash and cash equivalents, continuing operations		$	7,581			$	—			$	3,137			$	—			$	10,718