**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

** Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**  | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------|------------|---------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                    |
|   |       | **For  the three months ended March 29, 2008**                                                     |
|   |       |                                                                                                    |
| **o**  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 333-145355**

 

 

**VANGENT, INC.**

 

| **Delaware**                                                                                |       | **20-1961427**                     |
|---------------------------------------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction ofincorporation or organization**)**                           | ** ** | (IRS Employer  Identification No.) |
| ** **                                                                                  |       |                               |
| **4250  North Fairfax Drive  Suite 1200  Arlington, Virginia 22203****(703) 284-5600** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   YES x   NO o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See 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 x                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES o   NO x

 

There were 100 shares ofcommon stock of Vangent, Inc. issued and outstanding at March 29,2008.

 

 

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**VANGENT,INC.**

(formerly Pearson Government Solutions Business)

**Tableof Contents**

 
| ** **                                                  | ** **                                                                                                                                                                                                                                                                                                        | **Page**   |
|-------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I – FINANCIAL INFORMATION** |                                                                                                                                                                                                                                                                                                              |       |
|                                                        |                                                                                                                                                                                                                                                                                                              |       |   |
| Item 1:                                                     | Financial Statements                                                                                                                                                                                                                                                                                              |       |   |
|                                                        | Condensed  Consolidated Balance Sheets as of December 31, 2007 and March 29,  2008 (successor entity)                                                                                                                                                                                                   |       | 3 |
|                                                        |                                                                                                                                                                                                                                                                                                              |       |   |
|                                                        | Condensed  Consolidated Statements of Operations for the period January 1 to  February 14, 2007 (predecessor entity) and for the period February 15 to  March 31, 2007, and the three months ended March 29, 2008  (successor entity)                                                         |       | 4 |
|                                                        |                                                                                                                                                                                                                                                                                                              |       |   |
|                                                        | Condensed  Consolidated Statements of Owner’s/Stockholder’s Equity and Comprehensive  Loss for the period January 1 to February 14, 2007 (predecessor  entity) and for the period February 15 to March 31, 2007, and the  three months ended March 29, 2008 (successor entity) |       | 5 |
|                                                        |                                                                                                                                                                                                                                                                                                              |       |   |
|                                                        | Condensed  Consolidated Statement of Cash Flows for the period January 1 to  February 14, 2007 (predecessor entity) and for the period February 15 to  March 31, 2007, and the three months ended March 29, 2008  (successor entity)                                                          |       | 6 |
|                                                        |                                                                                                                                                                                                                                                                                                              |       |   |
|                                                        | Notes to Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                              |       | 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                                                                                                                                                                                                                                                       |       | 32 |
| Item 4T.                                                    | Controls and  Procedures                                                                                                                                                                                                                                                                                          |       | 33 |
|                                                        |                                                                                                                                                                                                                                                                                                              |       |   |
| **PART II  – OTHER INFORMATION**                  | ** **                                                                                                                                                                                                                                                                                                        | ** ** |
|                                                        |                                                                                                                                                                                                                                                                                                              |       |   |
| Item 1.                                                     | Legal Proceedings                                                                                                                                                                                                                                                                                                 |       | 34 |
| Item 1A.                                                    | Risk Factors                                                                                                                                                                                                                                                                                                      |       | 34 |
| Item 2.                                                     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                      |       | 35 |
| Item 3.                                                     | Defaults  Upon Senior Securities                                                                                                                                                                                                                                                                                  |       | 35 |
| Item 4.                                                     | Submission  of Matters to a Vote

 of Security Holders                                                                                                                                                                                                                                                       |       | 35 |
| Item 5.                                                     | Other Information                                                                                                                                                                                                                                                                                                 |       | 35 |
| Item 6.                                                     | Exhibits                                                                                                                                                                                                                                                                                                          |       | 35 |
| Signature                                                   |                                                                                                                                                                                                                                                                                                              | 35         |

 

**Forward-Looking Statements**

 

**               **This quarterly report on Form 10-Qcontains various forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended (“Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as expectation or belief concerningfuture events.  Forward-looking statementsinvolve risks and uncertainties.  Withoutlimiting the foregoing, the words “believes,” “thinks, “anticipates,” “plans,” “expects,”“could,” “estimates,” “intends,” “may,” and similar expressions, or thenegative thereof, are intended to identify forward-looking statements.  The Company cautions that these statementsare further qualified by important economic, competitive, governmental andtechnological factors that could cause our business, strategy or actual resultsof operations or events to differ materially from those in the forward-lookingstatements, including, without limitation, changes in the demand for servicesthat the Company provides; pursuit of new business in the United States andabroad; activities of competitors; bid protests; changes in operating expenses;our substantial debt; changes the in availability of capital; and generaleconomic and business conditions. Accordingly, such forward-looking statements do not purport to bepredictions of future events or circumstances, and there can be no assurancethat any forward-looking statement contained herein will prove to beaccurate.  The Company assumes noobligation to update the forward-looking statements.

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Condensed Consolidated Balance Sheets**

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

(unaudited)

 
| ** **                                                                                      | ** ** | **December 31,  2007** | ** ** | **March 29,   2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| **Assets**                                                                                      | ** ** | ** **                  | ** ** | ** **                     | ** ** |
| Current assets:                                                                                 |       |                        |       |                           |       |
| Cash and cash  equivalents                                                                      |       | $                           | 26,093     |                           | $          | 22,500 |   |
| Trade  receivables, net                                                                         |       | 112,292                     |       | 122,463                        |       |
| Other  receivables and prepaid items                                                            |       | 15,470                      |       | 19,876                         |       |
| Total current  assets                                                                           |       | 153,855                     |       | 164,839                        |       |
|                                                                                            |       |                        |       |                           |       |
| Property and  equipment, net                                                                    |       | 27,579                      |       | 25,985                         |       |
| Intangible  assets, net                                                                         |       | 198,027                     |       | 192,792                        |       |
| Goodwill                                                                                        |       | 301,873                     |       | 301,873                        |       |
| Deferred debt  financing costs, net                                                             |       | 12,448                      |       | 11,906                         |       |
| Other assets                                                                                    |       | 286                         |       | 211                            |       |
| Total assets                                                                                    |       | $                           | 694,068    |                           | $          | 697,606 |   |
|                                                                                            |       |                        |       |                           |       |
| **Liabilities  and Stockholder’s Equity**                                                  |       |                        |       |                           |       |
| Current  liabilities:                                                                           |       |                        |       |                           |       |
| Current portion  of long-term debt                                                              |       | $                           | 7,325      |                           | $          | 2,309 |   |
| Accounts payable                                                                                |       | 36,981                      |       | 44,663                         |       |
| Accrued expenses                                                                                |       | 26,267                      |       | 35,585                         |       |
| Accrued interest                                                                                |       | 8,547                       |       | 3,499                          |       |
| Deferred tax  liability                                                                         |       | 852                         |       | 852                            |       |
| Advance payments  on contracts                                                                  |       | 4,444                       |       | 3,522                          |       |
| Total current  liabilities                                                                      |       | 84,416                      |       | 90,430                         |       |
|                                                                                            |       |                        |       |                           |       |
| Long-term debt,  net of current portion                                                         |       | 420,875                     |       | 420,366                        |       |
| Other long-term  liabilities                                                                    |       | 3,863                       |       | 5,112                          |       |
| Deferred tax  liability                                                                         |       | 4,625                       |       | 6,148                          |       |
| Total liabilities                                                                               |       | 513,779                     |       | 522,056                        |       |
|                                                                                            |       |                        |       |                           |       |
| Commitments and  contingencies (Note 7)                                                         |       |                        |       |                           |       |
|                                                                                            |       |                        |       |                           |       |
| Stockholder’s  equity:                                                                     |       |                        |       |                           |       |
| Common stock,  $0.01 par value, 1,000 shares authorized, and 100 shares issued and  outstanding |       | —                      |       | —                         |       |
| Additional  paid-in capital                                                                     |       | 205,275                     |       | 205,522                        |       |
| Accumulated  other comprehensive loss                                                           |       | (2,937                      | )          | (5,499                         | )          |
| Accumulated  deficit                                                                            |       | (22,049                     | )          | (24,473                        | )          |
| Total  stockholder’s equity                                                                |       | 180,289                     |       | 175,550                        |       |
| Total  liabilities and stockholder’s equity                                                |       | $                           | 694,068    |                           | $          | 697,606 |   |

 

See notes tocondensed consolidated financial statements.

 

3

----

 

**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Condensed Consolidated Statements ofOperations**

(in thousands)

(unaudited)

 
| ** **                            | ** ** | **Predecessor  Entity**                               | ** ** | ** ** | **Successor Entity**                            | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|------------|------------------------------------------------------|------------|
| ** **                            | ** ** | **Period  January 1 to  February 14,** | ** ** | ** ** | **Period  February 15 to  March 31,** | ** ** | **Three Months  Ended  March 29,** | ** ** |
| ** **                            | ** ** | **2007**                                              | ** ** | ** ** | **2007**                                             | ** ** | **2008** | ** ** |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Revenue                               |       | $                                                     | 58,833     |       |                                                 | $          | 52,462 |   | $ | 143,475 |   |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Cost of revenue                       |       | 48,187                                                |       |       | 47,401                                               |       | 117,166 |   |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Gross profit                          |       | 10,646                                                |       |       | 5,061                                                |       | 26,309 |   |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| General and  administrative expenses  |       | 9,383                                                 |       |       | 5,494                                                |       | 13,784 |   |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Selling and  marketing expenses       |       | 1,940                                                 |       |       | 2,305                                                |       | 4,131 |   |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Operating income  (loss)              |       | (677                                                  | )          |       | (2,738                                               | )          | 8,394 |   |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Interest expense                      |       | 34                                                    |       |       | 4,765                                                |       | 9,218 |   |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Interest income                       |       | (44                                                   | )          |       | —                                               |       | (268 | ) |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Loss before  income taxes             |       | (667                                                  | )          |       | (7,503                                               | )          | (556 | ) |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Provision  (benefit) for income taxes |       | (292                                                  | )          |       | 952                                                  |       | 1,868 |   |
|                                  |       |                                                  |       |       |                                                 |       |   |   |
| Net loss                              |       | $                                                     | (375       | )          |                                                 | $          | (8,455 | ) | $ | (2,424 | ) |

 

See notes tocondensed consolidated financial statements.

 

4

----

 

**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Condensed Consolidated Statements ofOwner’s/Stockholder’s Equity and Comprehensive Loss**

(in thousands,****except shareamounts)

(unaudited)

 
| ** **                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | **Inter-**     | ** ** | ** **             | ** ** | **Total**         | ** ** |
|------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|----------------|------------|------------------------|------------|-------------------|------------|
| ** **                               | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**              | ** ** | **company**    | ** ** | **Accum-**             | ** ** | **Owner’s/** | ** ** |
| ** **                               | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Investment in** | ** ** | **ulated**     | ** ** | **Stockholder’s** | ** ** |
| ** **                               | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Loss**               | ** ** | **Subsidiary** | ** ** | **Deficit**            | ** ** | **Equity**        | ** ** |
| **Predecessor  Entity**                  | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** |                   | ** ** |           | ** ** | ** **             | ** ** | ** **        | ** ** |
| **Balance,  December 31, 2006**     | ** ** | —                |       | $           | **—** |              | $          | **—**             |       | $              | (5,502     | )                      | $          | 534,586           |       | $ | **—** |   | $ | 529,084 |   |
| Foreign currency  translation adjustment |       | —                |       | —      |       | —            |       | (166                   | )          | —         |       | —                 |       | (166              | )          |
| Net loss                                 |       | —                |       | —      |       | —            |       | —                 |       | (375           | )          | —                 |       | (375              | )          |
| Total  comprehensive loss                |       |                  |       |        |       |              |       |                   |       |           |       |                   |       | (541              | )          |
| Equity transfers  and investment         |       | —                |       | —      |       | —            |       | —                 |       | 13,310         |       | —                 |       | 13,310            |       |
| **Balance,  February 14, 2007**     |       | —                |       | $           | —     |              | $          | —                 |       | $              | (5,668     | )                      | $          | 547,521           |       | $ | — |   | $ | 541,853 |   |

 
| ** **                                |   |   |   |   |   |    |   |    |   |   |   |   |   |    |   |
|-------------------------------------------|--------|--------|--------|--------|--------|---------|--------|---------|--------|--------|--------|--------|--------|---------|--------|
| **Successor  Entity**                     |   |   |   |   |   |    |   |    |   |   |   |   |   |    |   |
| **Balance,  February 15, 2007**      |   | — |   | $      | — |    | $      | —  |   | $      | — |   | $      | —  |   | $ | — |   | $ | — |   |
| Effect of hedging  activities, net of tax |   | — |   | — |   | —  |   | (1,149  | )      | — |   | — |   | (1,149  | )      |
| Foreign currency  translation adjustment  |   | — |   | — |   | —  |   | 42      |   | — |   | — |   | 42      |   |
| Net loss                                  |   | — |   | — |   | —  |   | —  |   | — |   | (8,455 | )      | (8,455  | )      |
| Total  comprehensive loss                 |   |   |   |   |   |    |   |    |   |   |   |   |   | (9,562  | )      |
| Issuance of  common stock                 |   | 100    |   | — |   | 203,466 |   | —  |   | — |   | — |   | 203,466 |   |
| **Balance,  March 31, 2007**         |   | 100    |   | $      | — |    | $      | 203,466 |   | $      | (1,107 | )      | $      | —  |   | $ | (8,455 | ) | $ | 193,904 |   |

 
| **Balance  December 31, 2007**       |   | 100    |   | $      | — |   | $      | 205,275 |   | $      | (2,937 | )      | $      | — |   | $ | (22,049 | ) | $ | 180,289 |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|---|---------|---|---|---------|--------|
| Effect of hedging  activities, net of tax |   | — |   | — |   | — |   | (2,643  | )      | — |   | — |   | (2,643 | )      |
| Foreign currency  translation adjustment  |   | — |   | — |   | — |   | 81      |   | — |   | — |   | 81     |   |
| Net loss                                  |   | — |   | — |   | — |   | —  |   | — |   | (2,424 | )      | (2,424 | )      |
| Total  comprehensive loss                 |   |   |   |   |   |   |   |    |   |   |   |   |   | (4,986 | )      |
| Equity-based  compensation                |   | — |   | — |   | 247    |   | —  |   | — |   | — |   | 247    |   |
| **Balance,  March 29, 2008**         |   | 100    |   | $      | — |   | $      | 205,522 |   | $      | (5,499 | )      | $      | — |   | $ | (24,473 | ) | $ | 175,550 |   |

 

See notes to condensed consolidated financialstatements.

 

5

----

 

**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Condensed Consolidated Statements ofCash Flows**

(in thousands)

(unaudited)

** **
| ** **                                                                                 | ** ** | **Predecessor  Entity**                               | ** ** | ** ** | **Successor Entity**                            | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **Period  January 1 to  February 14,** | ** ** | ** ** | **Period  February 15 to  March 31,** | ** ** | **Three Months  Ended  March 29,** | ** ** |
| ** **                                                                                 | ** ** | **2007**                                              | ** ** | ** ** | **2007**                                             | ** ** | **2008** | ** ** |
| ** **                                                                                 | ** ** | ** **                                            | ** ** | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Cash flows from operating activities**                               | ** ** | ** **                                            | ** ** | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net loss                                                                                   |       | $                                                     | (375       | )          |                                                 | $          | (8,455 | ) | $ | (2,424 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |       |                                                  |       |       |                                                 |       |   |   |
| Amortization of  intangibles                                                               |       | 132                                                   |       |       | 2,920                                                |       | 5,235 |   |
| Depreciation and  amortization                                                             |       | 2,237                                                 |       |       | 971                                                  |       | 3,184 |   |
| Equity-based  compensation expense                                                         |       | 1,477                                                 |       |       | —                                               |       | 247 |   |
| Deferred income  taxes                                                                     |       | (19                                                   | )          |       | 778                                                  |       | 1,523 |   |
| Changes in  operating assets and liabilities, net of effect of acquisition:                |       |                                                  |       |       |                                                 |       |   |   |
| Trade  receivables                                                                         |       | (16,445                                               | )          |       | 3,379                                                |       | (10,171 | ) |
| Other  receivables and assets                                                              |       | 350                                                   |       |       | (3,503                                               | )          | (3,789 | ) |
| Accounts payable  and accrued expenses                                                     |       | (5,172                                                | )          |       | 5,915                                                |       | 15,021 |   |
| Accrued interest  payable                                                                  |       | —                                                |       |       | 4,481                                                |       | (5,048 | ) |
| Advance payments  on contracts                                                             |       | (1,206                                                | )          |       | (1,197                                               | )          | (922 | ) |
| Other long-term  liabilities                                                               |       | 125                                                   |       |       | (430                                                 | )          | 700 |   |
| Net cash (used  in) provided by operating activities                                       |       | (18,896                                               | )          |       | 4,859                                                |       | 3,556 |   |
|                                                                                       |       |                                                  |       |       |                                                 |       |   |   |
| **Cash  flows from investing activities**                                                  |       |                                                  |       |       |                                                 |       |   |   |
| Acquisition, net  of cash acquired                                                         |       | —                                                |       |       | (615,206                                             | )          | — |   |
| Capital  expenditures                                                                      |       | (3,727                                                | )          |       | (297                                                 | )          | (1,570 | ) |
| Net cash used in  investing activities                                                     |       | (3,727                                                | )          |       | (615,503                                             | )          | (1,570 | ) |
|                                                                                       |       |                                                  |       |       |                                                 |       |   |   |
| **Cash  flows from financing activities**                                                  |       |                                                  |       |       |                                                 |       |   |   |
| Proceeds from  issuance of common stock                                                    |       | —                                                |       |       | 203,466                                              |       | — |   |
| Borrowings under  revolving credit facility                                                |       | —                                                |       |       | 15,000                                               |       | — |   |
| Repayment of  borrowing under revolving credit facility                                    |       | —                                                |       |       | (5,000                                               | )          | — |   |
| Proceeds from  issuance of senior secured term loan                                        |       | —                                                |       |       | 240,000                                              |       | — |   |
| Repayment of  senior secured term loan                                                     |       | —                                                |       |       | —                                               |       | (5,525 | ) |
| Proceeds from  issuance of senior subordinated notes                                       |       | —                                                |       |       | 190,000                                              |       | — |   |
| Debt financing  costs                                                                      |       | —                                                |       |       | (14,013                                              | )          | — |   |
| Investment from  parent                                                                    |       | 13,310                                                |       |       | —                                               |       | — |   |
| Capital lease  payments                                                                    |       | (39                                                   | )          |       | —                                               |       | (74 | ) |
| Net cash  provided by (used in) financing activities                                       |       | 13,271                                                |       |       | 629,453                                              |       | (5,599 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                              |       | (166                                                  | )          |       | 42                                                   |       | 20 |   |
| Net (decrease) increase  in cash and cash equivalents                                      |       | (9,518                                                | )          |       | 18,851                                               |       | (3,593 | ) |
| Cash and cash  equivalents, beginning of period                                            |       | 11,713                                                |       |       | —                                               |       | 26,093 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                                     | 2,195      |       |                                                 | $          | 18,851 |   | $ | 22,500 |   |
|                                                                                       |       |                                                  |       |       |                                                 |       |   |   |
| **Supplemental  cash flow information**                                                    |       |                                                  |       |       |                                                 |       |   |   |
| Interest paid                                                                              |       | $                                                     | —     |       |                                                 | $          | 104 |   | $ | 13,630 |   |
| Income taxes  paid                                                                         |       | 35                                                    |       |       | 176                                                  |       | 204 |   |

 

See notes to condensed consolidated financialstatements.

 

6

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**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Notes to Condensed ConsolidatedFinancial Statements**

 (in thousands)

(unaudited)

 

**1.  Organization and Basis of Presentation**

 

*Basis of Presentation*

 

**               **Vangent, Inc.(“Vangent” or “Company” or “Successor Entity”) (formerly Pearson GovernmentSolutions Business) is a 100%-owned subsidiary of Vangent Holding Corp.  Vangent Holding LLC (formerly PGS HoldingLLC) is the majority shareholder in Vangent Holding Corp.  Vangent Holding LLC is 90% owned by TheVeritas Capital Fund III, L.P. and 10% owned by Pearson plc (“Pearson”).

 

On February 14,2007, The Veritas Capital Fund III, L.P., Vangent Holding LLC (“Buyer Parent”)and Vangent Holding Corp. (“Buyer”) consummated a stock purchase agreement withPearson and certain other seller entities under which the Buyer acquired all ofthe equity interests of Pearson Government Solutions (“Predecessor Entity”).

 

 The condensed consolidated financialstatements for the Predecessor Entity were prepared from Pearson’s accountingrecords and are presented on a carve-out basis to include the results ofoperations applicable to the managed group of entities under Pearson known asPearson Government Solutions Business. Owner’s equity is presented for the Predecessor Entity in lieu ofstockholder’s equity.

 

 Unaudited consolidated financialstatements are presented for the Predecessor Entity for the period January 1to February 14, 2007, and are presented for the Successor Entity for theperiod February 15 to March 31, 2007 and for the three months ended March 29,2008. As a result of the application of the purchase accounting method and thevaluation of assets and liabilities at fair value as of the date of theacquisition, the consolidated financial statements of the Successor Entity arenot comparable with the Predecessor Entity.

 

 The unaudited condensedconsolidated financial statements include the accounts of the Company and itsdomestic and foreign subsidiaries and have been prepared in accordance withgenerally accepted accounting principles for interim financial information andthe instructions to Form 10-Q and Article 10 of Regulation S-X.Certain information and footnote disclosures normally included in complete financial statements have beencondensed or omitted pursuant to the applicable rules and regulations. TheCompany believes that all disclosures are adequate to make the informationpresented not misleading. The condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andthe related notes thereto included in the Company’s annual report on Form 10-Kfor the year ended December 31, 2007.

 

In the opinion of management, all normal and recurring adjustmentsnecessary to fairly present the financial position and results of operations asof and for the periods presented have been included. The results of operationspresented are not necessarily indicative of the results to be expected for thefull fiscal year or for any future periods. The Company uses estimates andassumptions in the preparation of its financial statements. The estimates areprimarily based on historical experience and business knowledge and are revisedas circumstances change. Actual results could differ materially from thoseestimates.

 

*Nature of Operations*

 

 Vangent serves customers in theU.S. government, international governments, higher education, and thecommercial human resource management sector. The Company’s primary customerfocus is U.S. and international governmental agencies which utilize third-partyproviders to design build and operate technologically advanced systems. Theorganizational structure focuses on defense, intelligence, homeland security,public health care sectors of the government market, as well as other civilianagencies.  The Department of Health andHuman Services (“HHS”) represented 46% and the Department of Education (“DoED”)represented 16% of total revenue for the period February 15 to December 31,2007.  HHS represented 48% and DoEDrepresented 17% of total revenue for the three months ended March 29,2008.

 

7

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*FiscalYear and Quarterly Periods*

 

                The Company’s fiscal year begins on January 1and ends on December 31.  Quarterlyperiods are based on a four-week, four-week, five-week methodology ending onthe Saturday nearest to the end of the quarter to align with the Company’sbusiness processes.

 

**2.  Vangent Acquisition Transaction (“Acquisition”)**

 

On February 14,2007, The Veritas Capital Fund III, L.P. (“Veritas Capital”) and the Buyerconsummated a stock purchase agreement with Pearson and certain other sellerentities under which the Buyer acquired all of the equity interests of (i) PearsonGovernment Solutions, Inc. and (ii) the domestic and internationalaffiliates of Pearson Government Solutions, Inc. The purchase price forthe Acquisition was as follows: (i) $560,000 in cash; (ii) $35,000 inSeries A preferred stock of the Buyer; (iii) $5,000 in Series Bpreferred stock of the Buyer; and (iv) 10% of the Class A interestsin the Buyer Parent. The cash portion of the purchase price wasincreased post-closing by $50, based upon an increase in the net assets ofthe business at closing as compared to net assets as of September 30,2006.

 

In addition to theinvestments discussed above, the Acquisition was funded by:

 
| · |   | Class A common  equity investments in the Buyer Parent of $155,000 by Veritas Capital and  Series B preferred stock in the Buyer of $2,000 by a third party  investor;                                                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | 9 5/8% senior  subordinated notes of $190,000 maturing on February 15, 2015; and                                                                                                                                                                                            |
| · |   | Borrowings under a  senior secured credit facility, consisting of a $240,000 term loan at the  interest rate of the three-month LIBOR rate plus 2.25% and $5,000 drawn under  a $50,000 revolving credit facility at an interest rate of the three-month  LIBOR rate plus 2.50%. |

 

Under the terms of thepurchase agreement, Pearson paid $1,828 to Vangent, less an accrued tax benefitof $548 payable to Pearson, representing the actuarially determined unfundedliability of the portion of the Pearson pension plan applicable to certainVangent employees.

 

The Acquisition wasaccounted for under Emerging Issues Task Force Issue No. 88-16,*Basis in Leveraged Buyout Transactions* (“EITF 88-16”).In accordance with EITF 88-16, the portion of Pearson’s (“continuingstockholder”) basis in Vangent represented by its 10% residual interest wasassigned to the assets and liabilities acquired. The remainder of theinvestment in the assets and liabilities acquired by the Buyer (the remaining90%) was recorded at fair value. As a result, the assets and liabilities havebeen assigned new values which include part carryover basis and part fair valuebasis. The continuing stockholder’s residual interest in Vangent was applied tothe incremental debt resulting from the Acquisition, and was accounted for as adeemed dividend and recognized as a reduction of equity.  Additional purchase accounting adjustmentswere made in accordance with SFAS No. 141,*Accounting for Business Combinations,*and related interpretations.The excess of the purchase price over assets acquired and liabilities assumedwas allocated to goodwill.

 

Adjustments to thepurchase price allocation resulted in a net increase of $3,579 to goodwillduring the period February 15 to December 31, 2007, as follows:  accounts receivable were reduced by $5,021,other assets were reduced by $418, and liabilities assumed were reduced by$1,860.  The adjusted price allocationfollows:

 

8

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| **Purchase  Consideration**                                      |   |    |    |
|------------------------------------------------------------------|--------|---------|---------|
| Cash paid to  Pearson                                            |   | $       | 560,000 |   |
| 10% of  Class A interests in Buyer Parent issued to Pearson |   | 54,185  |    |
| Less: deemed  dividend                                           |   | (47,697 | )       |
| Series A  preferred stock of Buyer issued to Pearson        |   | 35,020  |    |
| Series B  preferred stock of Buyer issued to Pearson        |   | 4,958   |    |
| Transaction  costs                                               |   | 32,000  |    |
|                                                             |   | $       | 638,466 |   |
|                                                             |   |    |    |
| **Allocation  of Purchase Consideration**                        |   |    |    |
| Cash                                                             |   | $       | 2,195   |   |
| Accounts  receivable                                             |   | 113,881 |    |
| Property and  equipment                                          |   | 31,007  |    |
| Deferred debt  financing costs                                   |   | 14,013  |    |
| Other assets                                                     |   | 7,863   |    |
| Identifiable  intangible assets                                  |   | 216,406 |    |
| Goodwill                                                         |   | 301,873 |    |
| Less:  liabilities assumed                                       |   | (55,825 | )       |
| Net assets  acquired                                             |   | 631,414 |    |
| Additional cash  received from Buyer                             |   | 7,052   |    |
| Net assets                                                       |   | $       | 638,466 |   |

 

                Goodwill of $301,873 resultedfrom the Acquisition, of which $235,383 is estimated to be tax deductible.Goodwill is amortized for income tax purposes. In accordance with EITF 88-16, 10% of the residual value of thehistorical intangible assets was retained and 90% of the appraised value ofidentifiable intangible assets was recorded at fair value. A summary ofintangible assets acquired follows:

 
| ** **                     | ** ** | **Weighted  Average Life** | ** ** | **Amount** | ** **    |
|--------------------------------|------------|---------------------------------|------------|------------|---------------|
| ** **                     | ** ** | **(in years)**             | ** ** | ** ** | ** **    |
| Customer relationships    | ** ** | 10.8                            |       | $          |  204,570 | ** ** |
| Intellectual  property         |       | Indefinite                      |       | 11,178     |          |
| Core and  developed technology |       | 4                               |       | 603        |          |
| Other                          |       | 0.5                             |       | 55         |          |
|                           |       |                            |       | $          | 216,406       |   |

 

*Pro FormaFinancial Information*

 

Pro forma resultsof operations for the three months ended March 31, 2007, that give effectto the Acquisition as if it took place on January 1, 2007, resulted in proforma revenue of $111,295, the same as reported, and pro forma net loss of$16,801, compared with the reported net loss of $8,830.

 

**3.  RecentAccounting Pronouncements**

 

 In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157,*Fair Value Measurements* (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements.  The Company adopted SFAS157 for financial assets and financial liabilities on January 1, 2008, andthere was no material effect on the consolidated financial statements.  The FASB deferred the effective date as itrelates to fair value measurement requirements for non-financial assets andnon-financial liabilities to January 1, 2009. The Company is evaluatingthe impact of adopting SFAS 157 for non-financial assets and liabilities on itsresults of operations and financial position.

 

9

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In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment of SFAS No.115* (“SFAS159”). SFAS 159 permits entities to choose to measure eligible financial assetsand liabilities that are not otherwise required to be measured at fairvalue.  The Company adopted SFAS 159 on January 1,2008, and there was no effect on the consolidated financial statements sincethe Company did not elect the fair value option for assets and liabilitieswithin the scope.

 

In December 2007 the FASB issued SFASNo.141 (revised 2007), **Business Combinations****,**and SFAS No. 160, **Noncontrolling Interests in Consolidated Financial****Statements,****anamendment of ARB No. 51.** The new standards willsignificantly change how business acquisitions are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. Some of the changes, such as the accounting for contingentconsideration, will introduce more volatility into earnings and may impact acompany’s acquisition strategy. Key changes include: transaction costs andrestructuring charges will be charged to expense; accounting for certain assetsacquired and liabilities assumed in an acquisition will change significantly;certain contingent assets and liabilities will be recognized at fair value;earn-out arrangements will be measured at fair value until settled; in partialacquisitions, when control is obtained, the acquiring company will recognizeand measure at fair value 100% of the assets and liabilities, includinggoodwill, as if the entire target company had been acquired; and minorityinterests will be recharacterized as noncontrolling interests and classified asa component of equity.  The new standardsbecome effective for Vangent beginning January 1, 2009, and will beapplied prospectively.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging**Activities,* torequire expanded disclosures about how and why a company engages in derivativeand hedging activities, how derivative instruments and related hedged items areaccounted for, and their effect on financial position and results of operationsfor each major type of derivative instrument, including interest rates,foreign exchange, equity, commodity, and credit contracts. The new standardsbecome effective January 1, 2009. The Company is evaluating the additionaldisclosure requirements with respect to interest rate swaps that are designedto hedge interest expense on a portion of the variable-rate term loan, the onlyderivative instruments the Company engages in.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3,*Determination of the Useful life of IntangibleAssets*, to amend the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of anintangible asset and to improve the consistency between the useful life of anintangible asset and the period of expected cash flows used to measure the fairvalue of the asset. The new standards become effective for Vangent beginning onJanuary 1, 2009, and will be applied prospectively only to intangibleassets acquired after the effective date.

 

**4.  Long-TermDebt and Interest Rate Swap**

 

A summary of long-term debt follows:

 
| ** **                                                                                              | ** ** | **December 31,  2007** | ** ** | **March 29,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                              | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Senior secured  credit facility:                                                                        |       |                        |       |                     |       |
| Term loan, due  February 14, 2013, with interest at variable rates (5.35% at March 29,  2008) |       | $                           | 238,200    |                     | $          | 232,675 |   |
| 9 5/8% Senior  subordinated fixed rate notes, due February 15, 2015                                |       | 190,000                     |       | 190,000                  |       |
|                                                                                                    |       | 428,200                     |       | 422,675                  |       |
| Less: current  portion                                                                                  |       | (7,325                      | )          | (2,309                   | )          |
| Long-term debt,  less current portion                                                                   |       | $                           | 420,875    |                     | $          | 420,366 |   |

 

10

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Scheduledmaturities of long-term debt as of March 29, 2008, follow:

 
| Nine months  ending December 31, 2008 |   | $       | 2,309   |   |
|--------------------------------------------|--------|---------|---------|--------|
| 2009                                       |   | —  |    |
| 2010                                       |   | 1,781   |    |
| 2011                                       |   | 2,375   |    |
| 2012                                       |   | 2,375   |    |
| 2013                                       |   | 223,835 |    |
| 2014                                       |   | —  |    |
| 2015                                       |   | 190,000 |    |
|                                       |   | $       | 422,675 |   |

 

Debt financing costs of $14,498 were incurred inconnection with the borrowings relating to the Acquisition in February 2007.  The costs are deferred and are beingamortized to interest expense over the term of the debt.

 

*SeniorSecured Credit Facility*

 

At March 29, 2008, the senior secured creditfacility consists of a term loan of $232,675 due February 14, 2013, anavailable revolving credit facility of up to $49,590 that expires February 14,2012, and a letter of credit of $410. There were no borrowings outstanding under the revolving credit facilityat March 29, 2008 or December 31, 2007.  A commitment fee of .50% per year is paid onthe available unused portion of the revolving credit facility.

 

Borrowings under the**senior secured credit facility bear interest at a rateequal to, at the Company’s option, either: (i) the base rate, as defined,plus an applicable margin of 1.25-1.50%, or (ii) the adjusted LIBOR rate,as defined, plus an applicable margin of 2.25-2.50%. The term loan is scheduledto be repaid in 11 quarterly installments of $594 beginning June 2010 withthe balance due February 14, 2013. Borrowings are subject to mandatory prepayment with (i) 100% of thenet cash proceeds of certain asset sales; (ii) 50% of the net cashproceeds of equity offerings or capital contributions subject to certainexceptions; (iii) 100% of the net cash proceeds of additional debt; and (iv) apercentage of annual excess cash flow, as defined in the term loanagreement.  Payments resulting from theannual excess cash flow requirement are due 90 days following the yearend.   Borrowings under the seniorsecured credit facility are subject to mandatory prepayment based on apercentage of annual excess cash flow, as defined.  Payments aggregating $7,834, including amandatory prepayment of $7,234, are scheduled for 2008, of which $5,525 waspaid in the three months ended March 29, 2008, and $2,309 was paid at thebeginning of second quarter of 2008. Since the excess cash flow requirement is based on annual cash flow, itis not possible to estimate the amount, if any, that would become payable in March 2009or subsequent years.

 

Borrowings are secured byaccounts receivable, cash, intellectual property and other assets and areguaranteed jointly and severally, by all existing and future domesticsubsidiaries.  Foreign subsidiaries donot guarantee the borrowings.  The seniorsecured credit facility contains various customary affirmative and negativecovenants and events of default, including, but not limited to, restrictions onthe disposal of assets, incurring additional indebtedness or guarantee obligations,paying dividends, creating liens on assets, making investments, loans oradvances, and compliance with a maximum total leverage ratio.  As of March 29, 2008, the Company was incompliance with the covenants.

 

*9 5/8%Senior Subordinated Notes*

 

In February 2007, the Company completed an offering of $190,000principal 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.Proceeds of the offering were used to fund the Acquisition.  The notes are general unsecured obligationsof the Company and are subordinated to all existing and future senior loansincluding borrowings under the senior secured credit facility.  The notes are guaranteed, jointly andseverally, by all existing and future domestic subsidiaries. Foreignsubsidiaries do not guarantee the notes.

 

11

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On or prior to February 15, 2010, the Company may redeem the noteswith the net cash proceeds of one or more equity offerings at 109.625% of theprincipal amount, provided that at least 65% of the principal amount of thenotes originally issued remains outstanding immediately following suchredemption.  At any time prior to February 15, 2011, the Company mayredeem all or part of the notes at a redemption price of 100% of the principalamount plus an applicable premium, as defined, and additional interest, asdefined.  The notes are redeemable at theoption of the Company at the redemption price of 104.8125% of the principalamount on or after February 15, 2011, 102.4063% on or after February 15,2012, and 100% on or after February 15, 2013.

 

*Interest Rate Swap on Variable-Rate Term Loan under Senior SecuredCredit Facility*

 

In February 2007,the Company entered into a three-year interest rate swap agreement withWachovia Bank, N.A. to eliminate the variability of probable cash flows due tofluctuations in LIBOR interest rates on a notional amount of $140,000 of thesenior secured term loan. The notional amount of $140,000 amortized down to$120,000 in February 2008, and will amortize down to $110,000 in February 2009,until expiration in February 2010. Under the terms of the swap agreement,the Company exchanged its floating LIBOR interest rate for a fixed interestrate of 5.215%.

 

The counterpartyis a highly rated financial institution. In the unlikely event that thecounterparty fails to meet the terms, the Company’s exposure is limited to theinterest rate differential on the notional amount at each quarterly settlement periodover the life of the agreement. We do not anticipate non-performance by thecounterparty.

 

The Company documented its risk management objective and nature of therisk being hedged and designated the interest rate swap as a cash flow hedge atinception of the agreement.  The Companyperforms a quarterly analysis of the effectiveness of the hedge and concludedthat the hedging relationship is highly effective due to the consistencyof critical terms of the interest rate swap and related term loan under thesenior secured credit facility.  The fair value of $6,195 for the interestrate swap at March 29, 2008, is reported as a liability  (current portion of $3,503) in theconsolidated balance sheet, the unrealized loss of $6,005 is reported inaccumulated other comprehensive loss in the consolidated statement ofstockholder’s equity, and the remaining ineffective portion of $190 has beenreported as interest expense.

 

The use ofderivative financial instruments is limited to interest rate swaps, the purposeof which is to hedge interest expense on a portion of the variable-rate termloan. The Company does not hold or issue derivative financial instruments forspeculative purposes.

 

**5. Fair Value Measurements**

 

                The Company adopted SFAS 157, *Fair ValueMeasurements*, on January 1, 2008, for financial assets andfinancial liabilities. SFAS 157 defines fair value, establishes a framework formeasuring fair value, and expands disclosures about fair valuemeasurements.  SFAS 157 utilizes a fair value hierarchy thatprioritizes the inputs to valuation techniques used to measure fair value intothree broad levels, summarized as follows:

 
| · |   | Level 1 | Observable inputs such  as quoted prices (unadjusted) in active markets for identical assets or  liabilities.                                                                                                                                                                                        |
|--------|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Level 2 | Inputs, other than  quoted prices that are observable for the asset or liability, either directly  or indirectly. These include quoted prices for similar assets or liabilities  in active markets and quoted prices for identical or similar assets or  liabilities in markets that are not active. |
| · |   | Level 3 | Unobservable inputs  that reflect the reporting entity’s own assumptions.                                                                                                                                                                                                                       |

 

                A summary of the bases used to measure certainfinancial assets and financial liabilities reported at fair value on arecurring basis in the consolidated balance sheet follows:

 

12

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| ** **                                  | ** ** | ** **                  | ** ** | **Basis of Fair Value Measurements**                       | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Balance  March 29,** | ** ** | **Quoted Prices in  Active Markets  for Identical  Items** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| ** **                                  | ** ** | **2008**                    | ** ** | **(Level 1)**                                                             | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                                        |       |                        |       |                                                                           |       |   |   |   |   |
| Interest rate  swap reported as a liability |       | $                           | 6,195      |                                                                           | $          | — |   | $ | 6,195 |   | $ | — |   |
|                                             |            |                             |            |                                                                                |            |  |  |  |  |  |  |  |  |

 

**6. Income Taxes**

 

For the threemonths ended March 29, 2008, the Company recorded an income tax provisionof $1,868 composed of U.S., state and local and foreign income taxes whichincludes a charge of $2,416 for a tax valuation allowance against U.S. deferredtax assets.

 

The total deferredtax liability of $7,000 at March 29, 2008, relates to an indefinite livedintangible asset (goodwill) that is amortized and deducted for income taxpurposes in the United States, but is not amortized under U.S. generallyaccepted accounting principles.  TheCompany continues to believe, based on available evidence at March 29,2008, it is more likely than not the U.S. federal and state and local deferredtax assets will not be realizable.  Therefore, a valuation allowance hasbeen provided against U.S. deferred tax assets.

 

                FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes—an Interpretationof FASB Statement No. 109* (“FIN 48”), prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of tax positions taken, or expected to be taken, in a tax return.Pursuant to the Acquisition agreement, Vangent is indemnified and is not liablefor any income taxes that relate to the pre-Acquisition periods prior to February 15,2007. There was no liability for unrecognized tax benefits at March 29,2008.  Vangent does not expect changes inunrecognized tax benefits, if any, within the next 12 months to have a materialimpact on the provision for income taxes or the effective tax rate.

 

                Vangent and its subsidiariesconduct business and are subject to income taxes in the United States and certainforeign countries.  Vangent expects tofile its initial income tax returns beginning with the period February 15to December 31, 2007, which will be subject to examination by federal,state, local, or foreign tax authorities. Interest and penalties relating to income taxes are charged to theprovision for income taxes.

 

**7.  Commitments and Contingencies**

 

*University of California CASAContract*

 

In July 2007, the Companyreceived a notice from the University of California that it deemed the Companyto be in breach of one of the contracts and directing the Company to stop workon that contract.  The contract was forthe development of a Centralized Admissions and Scholarships Application(“CASA”) system.  In May 2008, theCompany and the University of California reached a settlement of claims relatedto this contract, under which the Company agreed to pay $4,995 to theUniversity of California.  The settlementis subject to the approval of The Regents of the University of California andthe execution of the definitive settlement agreement.  The Company has made a claim for coverageunder its professional liability policy with respect to this matter.  The insurance carrier previously denied theinitial request for coverage, which denial was disputed by the Company.  On May 8, 2008, the carrier agreed tocontribute $2,000 to fund the settlement with the University of Californiaunder a mutual reservation of rights and reimbursement agreement. To the extentthe carrier seeks reimbursement of all or a portion of its contribution and issuccessful in such action, the Company would be required to reimburse up to theamount paid plus interest. As a result of the settlement with the University ofCalifornia and the reservation of rights and reimbursement agreement with theinsurance carrier, the Company recorded a charge of $3,995 to general andadministrative expense for the three months ended March 29, 2008, increasingits settlement liability to $4,995 at March 29, 2008, and recorded a reductionof $2,000 in general and administrative expense and recorded a receivable inthe same amount from the insurance carrier at March 29, 2008.

 

13

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*Loss ofData*

 

In September 2007,the Company became aware of an event which could lead to the loss of thirdparty confidential information. The Company believes that it is adequatelyinsured with respect to this exposure under its professional liabilityinsurance beyond a $500 retention; however there can be no assurances that thiswill be the case.

 

*Transportation Security Administration*

 

In February 2002,the Transportation Security Administration (“TSA”) awarded the PredecessorEntity a contract to assess and recruit passenger screeners for airports by November 19,2002, the date mandated by Congress. The contract expired on December 31,2002, and the Predecessor Entity was not awarded the subsequent contract.During the term of the agreement, the contract was modified multiple times andthe contract value increased from an original bid of $100,000 to $742,000. Thisamount was eventually fully funded by TSA. As of December 31, 2002,Predecessor Entity had earned the maximum allowed under the core contractfunding level of $731,000 together with an additional $11,000 in connectionwith the pilot program. The pilot program contract ended in 2003.

 

 The Department of Homeland Security InspectorGeneral is investigating the contract in conjunction with the U.S. Departmentof Justice (“DOJ”) to determine whether the Predecessor Entity or itssubcontractors violated the Civil False Claims Act. Monetary liability underthe Civil False Claims Act includes treble damages plus civil penalties of $5.5to $11.0 per false claim. The Acquisition agreement provides that Pearson willindemnify Vangent, the Buyer and its other affiliates without regard to anytime limitation for 50% of any losses incurred in connection with theinvestigation up to the aggregate amount of $20,000 and for 100% of any lossesin excess of $20,000.

 

                As of February 14, 2007, theremaining balance of the accrued liability established by the PredecessorEntity was $5,959 for settlement negotiations with respect to the ongoinginvestigation of its performance and billings under the TSA contract, includingan expense of $1,000 recorded for the period January 1 to February 14,2007, as settlement negotiations between the parties continued. The balance ofthe accrued liability was $5,648 at March 29, 2008.  In connection with the Acquisition andrelated cost-sharing provisions, a receivable of $2,824 from Pearsonrepresenting 50% of the expected accrued losses is included in otherreceivables.  There are continuingdiscussions between the parties with regard to a settlement.

 

*Insurance and Third-Party Recovery*

 

                In connection with therecognition of liabilities for loss contingencies, the Company records relatedreceivables for insurance and third-party recoveries that are deemedprobable.  In assessing the probability of recovery, judgments are madeconcerning insurance and third-party coverage that we believe are reasonableand consistent based on our experience, our knowledge of the relevant issuesand various judicial determinations, and consideration of the impact of anylikely settlements.

 

*Other*

 

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

 

14

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**8.  Equity-Based Compensation**

 

*Successor Entity*

 

No stock options areauthorized and no stock options have been granted by Vangent.

 

Beginning in June 2007,certain members of management of Vangent and certain outside directors ofVangent Holding Corp. were granted Class B interests in Vangent HoldingLLC, the majority shareholder of Vangent Holding Corp. which in turn owns allof Vangent’s common stock.   At March 29,2008, the aggregate individual grants of Class B interests represented5.4% of the profit interests in Vangent Holding LLC. The Class B interestsare subject to a vesting schedule which vests 20% on each February 14until February 14, 2012, when such ownership becomes fully vested or oneach anniversary of the date on which a Class B member became a full-timeemployee or outside director after February 14, 2007 until fully vested.The unvested portion of Class B interests reverts to the holders of Class Ainterests in the event they are forfeited or reduced in accordance with theterms of the operating agreement governing Vangent Holding LLC. Class Binterests are granted with no exercise price or expiration date. Pursuant tothe terms of the operating agreement governing Vangent Holding LLC, the holdersof Class B interests are entitled to receive their respective proportionalinterest of all distributions made by Vangent Holding LLC provided the holdersof the Class A interests have received an 8% per annum internal rate ofreturn on their invested capital. Additionally, the Vangent Holding LLCoperating agreement limits Class B interests to 7.5% in the aggregate.

 

A summary of activity forgrants of Class B interests in Vangent Holdings LLC follows:

 
| ** **                       | ** ** | **Class B  Interests** | ** ** | **Fair Value at  Date of  Grant** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|
| Balance,  February 15, 2007 | ** ** | **—**                  |       | $                                           | —     |   |
| Grants                           |       | 5.3                         | %          | 5,946                                       |       |
| Forfeitures                      |       | (0.4                        | )          | (454                                        | )          |
| Balance,  December 31, 2007 |       | 4.9                         | %          | 5,492                                       |       |
| Grants                           |       | 0.9                         |       | 967                                         |       |
| Forfeitures                      |       | (0.4                        | )          | (445                                        | )          |
| Balance,  March 29, 2008    |       | 5.4                         | %          | 6,014                                       |       |
|                                  |            |                             |            |                                             |            |  |

 

The fair value ofthe Class B interests at the date of grant is based upon the value of theinterests of Vangent Holding LLC less a 35% discount for lack of liquidity. Thevalue was determined based upon the amount paid for 90% of the Class Ainterests of Vangent Holding LLC by Veritas Capital and the value of Pearson’s10% Class A interests in February 2007.  Equity-based compensation expense is recordedbased on the grant-date fair value on a straight-line basis over the totalrequisite service period for the award, and amounted to $247 for the threemonths ended March 29, 2008.  Theunamortized amount of equity-based compensation expense was $4,858 at March 29,2008, and amortization of approximately $1,200 per year is scheduled for eachof the next four years.

 

*Predecessor Entity*

 

The Predecessor Entity accounted for equity-based compensation usingthe fair value method. Under the fair value method, stock options were valuedon the date of grant, and equity-based compensation expense was recognized overthe service period. Grants of restricted stock awards were measured at fair valueon the date of grant based on the number of shares granted and the quoted priceof the underlying stock, and such value was recognized as an expense over thecorresponding service period.  Theremaining balances of unvested equity-based awards were vested in full inconnection with the Acquisition, resulting in equity-based compensation expenseof $1,477 for the period January 1 to February 14, 2007.

 

15

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**9.  Related Party Transactions**

 

Vangent pays an annual management fee of $1,000 toVeritas Capital for general business management, financial, strategic andconsulting services.

 

Included in the purchaseconsideration relating to the Acquisition in February 2007 is a one-timetransaction fee of $10,000 paid to Veritas Capital as consideration inconnection with planning, structuring and consummating the Acquisition.

 

Certain members ofmanagement of Vangent and certain outside directors of Vangent Holding Corp.were granted Class B interests in Vangent Holding LLC, the majorityshareholder of Vangent Holding Corp. which in turn owns all of Vangent’s commonstock.

 

**10.  Accumulated Other Comprehensive Income (Loss)**

 

The components ofaccumulated other comprehensive income (loss) follow:

 
| ** **                                | ** ** | **December 31,** | ** ** | **March 29,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                | ** ** | **2007**              | ** ** | **2008**           | ** ** |
| Effect of  hedging activities, net of tax |       | $                     | (3,362     | )                  | $          | (6,005 | ) |
| Foreign currency  translation adjustment  |       | 425                   |       | 506                |       |
|                                      |       | $                     | (2,937     | )                  | $          | (5,499 | ) |

 

**11.   Business Segments and Major Customers**

 

Operating segments are defined as components of an enterprise aboutwhich separate financial information is available that is evaluated regularlyby the chief operating decision maker in deciding how to allocate resources andin assessing performance.

 

Vangent reports operating results and financial datafor three business segments: government group, commercial group andinternational group. The government group customers are primarily U.S. federalagencies.  The government group assistscivilian, defense and intelligence agencies as well as government-relatedentities with the design and execution of information and technology strategy,helps develop and maintain their complex, mission-critical systems and deliversa wide range of business process outsourcing solutions.  The commercial group primarily serves theprivate sector and designs, builds, and operates workforce solutions thatautomate and improve the recruitment, assessment, selection and development ofan organization’s workforce.  Theinternational group provides consulting, systems integration and businessprocess outsourcing solutions to both commercial and foreign local and centralgovernment customers.

 

Vangent evaluates theperformance of its operating segments based on operating income, but does notmeasure revenue or operating income by its major service offerings, either forinternal management or external financial reporting purposes, as it would beimpractical to do so.  The new basis ofaccounting resulting from the Acquisition in February 2007 has asignificant effect on results of operations.

 

16

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Summarizedfinancial information for business segments and major customers follows:

 
| ** **                                                    | ** ** | **Predecessor  Entity**                                     | ** ** | ** ** | **Successor Entity**                                  | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------|------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Period  January 1 to  February 14,  2007** | ** ** | ** ** | **Period  February 15 to  March 31,  2007** | ** ** | **Three Months  Ended  March 29,  2008** | ** ** |
| Revenue:                                                      |       |                                                        |       |       |                                                       |       |   |   |
| Government group                                              |       | $                                                           | 47,011     |       |                                                       | $          | 38,852 |   | $ | 117,132 |   |
| Commercial group                                              |       | 3,302                                                       |       |       | 4,739                                                      |       | 7,552 |   |
| International  group                                          |       | 8,520                                                       |       |       | 8,871                                                      |       | 18,791 |   |
|                                                          |       | $                                                           | 58,833     |       |                                                       | $          | 52,462 |   | $ | 143,475 |   |
|                                                          |       |                                                        |       |       |                                                       |       |   |   |
| Operating income  (loss):                                     |       |                                                        |       |       |                                                       |       |   |   |
| Government group                                              |       | $                                                           | 647        |       |                                                       | $          | (2,939 | ) | $ | 8,417 |   |
| Commercial group                                              |       | (496                                                        | )          |       | 28                                                         |       | (11 | ) |
| International  group                                          |       | (281                                                        | )          |       | 173                                                        |       | 235 |   |
|                                                          |       | (130                                                        | )          |       | (2,738                                                     | )          | 8,641 |   |
| Corporate (1)                                                 |       | (547                                                        | )          |       | —                                                     |       | (247 | ) |
|                                                          |       | $                                                           | (677       | )          |                                                       | $          | (2,738 | ) | $ | 8,394 |   |
|                                                          |       |                                                        |       |       |                                                       |       |   |   |
| Major customers  (representing 10% or more of total revenue): |       |                                                        |       |       |                                                       |       |   |   |
| Department of  Health and Human Services                      |       | 36                                                          | %          |       | 34                                                         | %          | 48 | % |
| Department of  Education                                      |       | 23                                                          | %          |       | 22                                                         | %          | 17 | % |

 

----

(1)          Corporate represents equity-based compensationexpense.

 

**12. Condensed Guarantor and Non-Guarantor Financial Information**

 

In connection withthe Acquisition by Veritas Capital and the related financing, Vangent issued$190,000 of 9 5/8% senior subordinated notes due 2015. The notes were sold toqualified institutional buyers under the provisions of Rule 144A under theSecurities Act of 1933 and to non-U.S. persons under the provisions ofRegulation S under the Securities Act of 1933. The notes are generalobligations of Vangent, Inc. and are jointly and severally, irrevocablyand unconditionally, guaranteed on a senior basis by certain 100%-ownedsubsidiaries consisting of Blueprint Technologies, Inc. and PAS, Inc.(“Guarantors”). Certain other 100%-owned subsidiaries do not guarantee the notes(“Non-Guarantors”). These entities include Vangent Canada, Limited, VangentMexico, and S.A. de C.V., Vangent Servicios de Mexico, S.A. de C.V., VangentArgentina, S.A., Vangent Venezuela, C.A., Vangent Puerto Rico, Inc., andVangent, Ltd.

 

Condensed combining balance sheets, statements ofoperations, and statements of cash flows for the Issuer and Guarantors and forthe Non-Guarantors follow:

 

17

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*Guarantorand Non-Guarantor Financial Information*

*CondensedCombining Balance Sheets*

 
| ** **                                       | ** ** | **December 31, 2007** | ** ** | **March 29, 2008** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **Issuer  and  Guarantor**      | ** ** | **Non-Guarantors**           | ** ** | **Total** | ** ** | **Issuer  and  Guarantor** | ** ** | **Non-Guarantors** | ** ** | **Total** | ** ** |
| **Assets**                                       |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| Current assets                                   |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                               | 19,022     |                         | $          | 7,071 |   | $ | 26,093 |   | $ | 14,510 |   | $ | 7,990 |   | $ | 22,500 |   |
| Trade  receivables, net                          |       | 102,398                         |       | 9,894                        |       | 112,292 |   | 108,346 |   | 14,117 |   | 122,463 |   |
| Other  receivables and prepaid items             |       | 11,163                          |       | 4,307                        |       | 15,470 |   | 14,969 |   | 4,907 |   | 19,876 |   |
| Total current  assets                            |       | 132,583                         |       | 21,272                       |       | 153,855 |   | 137,825 |   | 27,014 |   | 164,839 |   |
| Property and  equipment, net                     |       | 16,891                          |       | 10,688                       |       | 27,579 |   | 16,097 |   | 9,888 |   | 25,985 |   |
| Intangible  assets, net                          |       | 198,027                         |       | —                       |       | 198,027 |   | 192,792 |   | — |   | 192,792 |   |
| Goodwill                                         |       | 266,836                         |       | 35,037                       |       | 301,873 |   | 266,836 |   | 35,037 |   | 301,873 |   |
| Deferred debt  financing costs, net              |       | 12,448                          |       | —                       |       | 12,448 |   | 11,906 |   | — |   | 11,906 |   |
| Other assets                                     |       | 154                             |       | 132                          |       | 286 |   | 168 |   | 43 |   | 211 |   |
| Total assets                                     |       | $                               | 626,939    |                         | $          | 67,129 |   | $ | 694,068 |   | $ | 625,624 |   | $ | 71,982 |   | $ | 697,606 |   |
|                                             |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| **Liabilities  and Stockholder’s Equity**   |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| Current  liabilities                             |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| Current portion  of long-term debt               |       | $                               | 7,325      |                         | $          | — |   | $ | 7,325 |   | $ | 2,309 |   | $ | — |   | $ | 2,309 |   |
| Accounts payable                                 |       | 34,743                          |       | 2,238                        |       | 36,981 |   | 39,126 |   | 5,537 |   | 44,663 |   |
| Accrued expenses                                 |       | 19,825                          |       | 6,442                        |       | 26,267 |   | 28,431 |   | 7,154 |   | 35,585 |   |
| Accrued interest                                 |       | 8,547                           |       | —                       |       | 8,547 |   | 3,499 |   | — |   | 3,499 |   |
| Deferred tax  liability                          |       | 852                             |       | —                       |       | 852 |   | 852 |   | — |   | 852 |   |
| Advance payments  on contracts                   |       | 2,715                           |       | 1,729                        |       | 4,444 |   | 2,380 |   | 1,142 |   | 3,522 |   |
| Total current  liabilities                       |       | 74,007                          |       | 10,409                       |       | 84,416 |   | 76,597 |   | 13,833 |   | 90,430 |   |
| Long-term debt,  net of current portion          |       | 420,875                         |       | —                       |       | 420,875 |   | 420,366 |   | — |   | 420,366 |   |
| Other long-term  liabilities                     |       | 3,746                           |       | 117                          |       | 3,863 |   | 5,000 |   | 112 |   | 5,112 |   |
| Deferred tax  liability                          |       | 4,440                           |       | 185                          |       | 4,625 |   | 5,952 |   | 196 |   | 6,148 |   |
| Total  liabilities                               |       | 503,068                         |       | 10,711                       |       | 513,779 |   | 507,915 |   | 14,141 |   | 522,056 |   |
| Stockholder’s  equity                       |       | 123,871                         |       | 56,418                       |       | 180,289 |   | 117,709 |   | 57,841 |   | 175,550 |   |
| Total  liabilities and stockholder’s equity |       | $                               | 626,939    |                         | $          | 67,129 |   | $ | 694,068 |   | $ | 625,624 |   | $ | 71,982 |   | $ | 697,606 |   |

 

18

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*Guarantor and Non-GuarantorFinancial Information*

*CondensedCombining Statements of Operations*

 
| ** **                            | ** ** | **Predecessor Entity**                                             | ** ** | ** **     | **Successor Entity**                                              | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------|------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Period January 1 to February 14, 2007** | ** ** | ** **     | **Period February 15 to March 31, 2007** | ** ** |
| ** **                            | ** ** | **Issuer and**                                                     | ** ** | **Non-**       | ** **                                                             | ** ** | ** ** | ** ** | **Issuer and** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Guarantors**                                                          | ** ** | **Guarantors** | ** **                                                             | **Total**  | ** ** | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Total** | ** ** |
| Revenue                               |       | $                                                                       | 50,349     |           | $                                                                      | 8,484      |   | $ | 58,833 |   |   | $ | 43,647 |   | $ | 8,815 |   | $ | 52,462 |   |
| Cost of revenue                       |       | 40,437                                                                  |       | 7,750          |                                                                   | 48,187     |   |   | 39,793 |   | 7,608 |   | 47,401 |   |
| Gross profit                          |       | 9,912                                                                   |       | 734            |                                                                   | 10,646     |   |   | 3,854 |   | 1,207 |   | 5,061 |   |
| General and  administrative expenses  |       | 9,001                                                                   |       | 382            |                                                                   | 9,383      |   |   | 5,193 |   | 301 |   | 5,494 |   |
| Selling and  marketing expenses       |       | 1,590                                                                   |       | 350            |                                                                   | 1,940      |   |   | 1,939 |   | 366 |   | 2,305 |   |
| Operating income  (loss)              |       | (679                                                                    | )          | 2              |                                                                   | (677       | ) |   | (3,278 | ) | 540 |   | (2,738 | ) |
| Interest  (income) expense, net       |       | (21                                                                     | )          | 11             |                                                                   | (10        | ) |   | 4,765 |   | — |   | 4,765 |   |
| Income (loss)  before income taxes    |       | (658                                                                    | )          | (9             | )                                                                      | (667       | ) |   | (8,043 | ) | 540 |   | (7,503 | ) |
| Provision  (benefit) for income taxes |       | (327                                                                    | )          | 35             |                                                                   | (292       | ) |   | 774 |   | 178 |   | 952 |   |
| Net income  (loss)                    |       | $                                                                       | (331       | )              | $                                                                      | (44        | ) | $ | (375 | ) |   | $ | (8,817 | ) | $ | 362 |   | $ | (8,455 | ) |

 
| ** **                           | ** ** | **Three Months Ended March 29, 2008** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                           | ** ** | **Issuer and**                                            | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Guarantors**                                                 | ** ** | **Guarantors** | ** ** | **Total** | ** ** |
| Revenue                              |       | $                                                              | 124,782    |   | $ | 18,693 |   | $ | 143,475 |   |
| Cost of revenue                      |       | 101,300                                                        |       | 15,866 |   | 117,166 |   |
| Gross profit                         |       | 23,482                                                         |       | 2,827 |   | 26,309 |   |
| General and  administrative expenses |       | 12,766                                                         |       | 1,018 |   | 13,784 |   |
| Selling and  marketing expenses      |       | 3,281                                                          |       | 850 |   | 4,131 |   |
| Operating income                     |       | 7,435                                                          |       | 959 |   | 8,394 |   |
| Interest  (income) expense, net      |       | 8,992                                                          |       | (42 | ) | 8,950 |   |
| Income (loss)  before income taxes   |       | (1,557                                                         | )          | 1,001 |   | (556 | ) |
| Provision for  income taxes          |       | 1,512                                                          |       | 356 |   | 1,868 |   |
| Net income  (loss)                   |       | $                                                              | (3,069     | ) | $ | 645 |   | $ | (2,424 | ) |

 

19

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*Guarantorand Non-Guarantor Financial Information*

*CondensedCombining Statements of Cash Flows*

 
| ** **                                                    | ** ** | **Predecessor Entity**                                             | ** ** | ** **     | **Successor Entity**                                              | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------|------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Period January 1 to February 14, 2007** | ** ** | ** **     | **Period February 15 to March 31, 2007** | ** ** |
| ** **                                                    | ** ** | **Issuer and**                                                     | ** ** | **Non-**       | ** **                                                             | ** ** | ** ** | ** ** | **Issuer and** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Guarantors**                                                          | ** ** | **Guarantors** | ** **                                                             | **Total**  | ** ** | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Total** | ** ** |
| Net cash (used  in) provided byoperating activities           |       | $                                                                       | (14,238    | )              | $                                                                      | (4,658     | ) | $ | (18,896 | ) |   | $ | 3,739 |   | $ | 1,120 |   | $ | 4,859 |   |
| Net cash (used  in) provided by investing activities          |       | (3,669                                                                  | )          | (58            | )                                                                      | (3,727     | ) |   | (619,939 | ) | 4,436 |   | (615,503 | ) |
| Net cash  provided by financing activities                    |       | 10,029                                                                  |       | 3,242          |                                                                   | 13,271     |   |   | 629,453 |   | — |   | 629,453 |   |
| Effect of  exchange rate changes on cash and cash equivalents |       | —                                                                  |       | (166           | )                                                                      | (166       | ) |   | — |   | 42 |   | 42 |   |
| Net (decrease)  increasein cash and  cash equivalents         |       | (7,878                                                                  | )          | (1,640         | )                                                                      | (9,518     | ) |   | 13,253 |   | 5,598 |   | 18,851 |   |
| Cash and cash  equivalents, beginning of period               |       | 8,341                                                                   |       | 3,372          |                                                                   | 11,713     |   |   | — |   | — |   | — |   |
| Cash and cash  equivalents, end of period                     |       | $                                                                       | 463        |           | $                                                                      | 1,732      |   | $ | 2,195 |   |   | $ | 13,253 |   | $ | 5,598 |   | $ | 18,851 |   |

 
| ** **                                                    | ** ** | **Three Months Ended March 29, 2008** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Issuer and  Guarantors**                                | ** ** | **Non-  Guarantors** | ** ** | **Total** | ** ** |
| Net cash  provided by operating activities                    |       | $                                                              | 2,455      |   | $ | 1,101 |   | $ | 3,556 |   |
| Net cash used in  investing activities                        |       | (1,368                                                         | )          | (202 | ) | (1,570 | ) |
| Net cash used in  financing activities                        |       | (5,599                                                         | )          | — |   | (5,599 | ) |
| Effect of  exchange rate changes on cash and cash equivalents |       | —                                                         |       | 20 |   | 20 |   |
| Net (decrease)  increase in cash and cash equivalents         |       | (4,512                                                         | )          | 919 |   | (3,593 | ) |
| Cash and cash  equivalents, beginning of period               |       | 19,022                                                         |       | 7,071 |   | 26,093 |   |
| Cash and cash  equivalents, end of period                     |       | $                                                              | 14,510     |   | $ | 7,990 |   | $ | 22,500 |   |

 

**13.**  **Subsequent Events**

 

*Interest Rate Swap on Variable-Rate Term Loan under Senior Secured CreditFacility*

 

In April 2008,the Company entered into an additional interest rate swap agreement hedging thenotional amount of $75,000, increasing to $150,000 in February 2010,exchanging its floating LIBOR interest rate for a fixed rate of 3.28% until expirationin February 2011.

 

*University of California CASA Contract*

 

Reference is made to Note 7, Commitments and Contingencies, forinformation on the settlement of claims in May 2008 relating to a contract withthe University of California.

 

20

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** **

**ITEM2.   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion and analysis of ourconsolidated financial condition and results of operations should be read inconjunction with the condensed consolidated financial statements and theaudited consolidated financial statements, and notes thereto, and Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in our annual report on Form 10-K for the year ended December 31,2007.*

 

**Overview**

 

We are a leading provider of information management and businessprocess outsourcing services to several U.S. civilian government agencies, aswell as select U.S. defense and intelligence agencies, foreign governmentorganizations and private sector entities. We design, build and operatemission-critical systems and processes to seamlessly deliver vital information,services and programs to our customers and their constituents. Most of ourrevenue is generated from long-term contracts that typically have a duration offour to six years, including option years. As of March 29, 2008, our totalcontract backlog was $1.9 billion.

 

We manage our business through three segments: the Government Group,the International Group and the Commercial Group.  For 2007, our two largest customers were theDepartment of Health and Human Services and the Department of Education,representing 45% and 17% of revenue, respectively.

 

The Government Group is our largest segment and has over 30 yearsof experience in providing information management and business processoutsourcing to several civilian and defense agencies of the federal government,including a 28-year history with the Department of Education, over 10 yearswith the Defense Information Systems Agency and seven years with the Centersfor Medicare and Medicaid Services.  TheGovernment Group is also responsible for the development, management, analysisand dissemination of healthcare information to the public sector and is one ofthe largest non-government providers of health information in the UnitedStates.  The Government Group represented79% of total revenue for 2007.

 

The International Group serves local governments, central governmentsand commercial customers, primarily in the United Kingdom, Canada and LatinAmerica. This segment provides consulting, systems integration and businessprocess outsourcing to address a variety of managerial disciplines, includingcustomer interaction, as well as the management of data, identity, revenue andhuman capital. The International Group represented 14% of total revenue for2007.

 

The Commercial Group primarily serves the private sector and designs,builds and operates workforce solutions that automate and improve therecruitment, assessment, selection and development of a customer’s workforce.We provide solutions that automate pre-employment screening, which improves thequality and retention of new employees and reduces the cost and time associatedwith hiring an hourly workforce. The Commercial Group represented 7% of totalrevenue for 2007.

 

**The Acquisition**

 

On February 14, 2007, Vangent Holding Corp. (the “Buyer”)consummated the Acquisition of all of the equity interests of (i) PearsonGovernment Solutions, Inc., an indirect 100%-owned subsidiary of Pearson,and (ii) the domestic and international affiliates of Pearson GovernmentSolutions, Inc. engaged in the consulting, systems integration andbusiness process outsourcing business operated by the Pearson GovernmentSolutions operating unit of Pearson and the other seller entities, which isreferred to as the “Acquisition.”  Uponcompletion of the Acquisition, all domestic and international affiliates ofPearson Government Solutions, Inc. engaged in such business became ourdirect or indirect subsidiaries. Pearson and the other seller entities arereferred to as the “sellers” or Predecessor Entity.

 

21

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*ClosingPrice and Purchase Adjustments. *Thepurchase price for the Acquisition was as follows: (i) $560.0 millionin cash; (ii) $35.0 million in Series A preferred stock of theBuyer; (iii) $5.0 million in Series B preferred stock of theBuyer and (iv) 10% of the Class A membership interests of VangentHolding LLC (the “Buyer Parent”).

 

*General.*  The stock purchase agreement containscustomary representations, warranties, covenants and indemnities, by and forthe benefit of the Buyer and the sellers.

 

*Indemnification.*  The sellers’ obligation, which is joint andseveral, to indemnify the Buyer for breaches of representations and warrantiesrelating to tax, employee benefits and broker representations survive until theapplicable statute of limitations, and certain corporate and environmentalrepresentations survive for three years following the closing of theAcquisition. The sellers’ obligations to indemnify the Buyer and its affiliatesand the Buyer’s obligation to indemnify the sellers for breaches ofrepresentations and warranties is, subject to certain exceptions, subject to a$9.0 million deductible, which includes a separate $1.0 milliondeductible for certain tax indemnifications, and $50,000 per individual claim.The Buyer’s and the sellers’ aggregate indemnification obligations for breachesof representations and warranties are generally capped at $60.0 million inthe aggregate subject to certain exceptions.

 

The stock purchase agreement also provides that the sellers willindemnify us, the Buyer and its other affiliates without regard to any timelimitation for any losses incurred by us, our parent and its other affiliatesin connection with an investigation by the U.S. Government through theDepartment of Justice and the Inspector General of the Department of HomelandSecurity to determine whether we and NCS Pearson Inc. violated the Civil FalseClaims Act or other federal laws in connection with a contract awarded by theTransportation Security Administration to NCS Pearson Inc. in 2002, except thatthe first $20.0 million in losses resulting from such investigation willbe shared equally. Upon closing of the Acquisition, we entered into a jointdefense agreement with one of the sellers, NCS Pearson Inc., pursuant to whichboth parties assumed joint defense with respect to such investigation.

 

*AdditionalCovenants.*  The stockpurchase agreement includes customary covenants by the sellers to maintain theconfidentiality of certain proprietary information about the Buyer and itsaffiliates. In addition, the sellers and certain of their affiliates haveagreed not to compete with the Buyer, us and our affiliates with respect to anyof our existing contracts or certain agreed upon future business opportunitiesfor a period of two years and not to solicit for employment or hire certain ofour employees for a period of two years after the closing of the Acquisition.

 

*Section 338Election.*  The sellersand the Buyer made an election under Section 338(h) (10) of theInternal Revenue Code for one of the domestic entities. The electionsignificantly increased the tax basis of our assets and increases future taxdeductions for depreciation and amortization. These future deductions mayreduce future cash taxes, if any.

 

*TheAcquisition.*  Inaddition to the equity investments discussed above, the Acquisition was fundedby:

 

·                  Preferred and common equity investments in the Buyerof $157.0 million in the aggregate by Veritas Capital and certain thirdparty investors;

·                  9 5/8 % senior subordinated notes due 2015; and

·                  Borrowings underour senior secured credit facility, consisting of a $240.0 million termloan facility and $5.0 million drawn under a $50.0 million revolvingcredit facility.

 

All references to the “transaction” refer to (i) the consummationof the Acquisition, (ii) the borrowings under our senior secured creditfacility entered into in connection with the Acquisition and the application ofthe proceeds therefrom, (iii) the issuance by the Buyer of preferred stockto Pearson and certain third party investors, (iv) the issuance of Class Amembership interests of the Buyer Parent to Pearson, (v) the equity investmentsby Veritas Capital and certain third party investors; and (vi) theissuance of the 9 5/8 % senior subordinated notes due 2015 and the applicationof the proceeds therefrom.

 

22

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**Basis ofPresentation**

 

The financial statements for the Predecessor Entity have been preparedin accordance with generally accepted accounting principles in the UnitedStates from the historical accounting records of Pearson plc and are presentedon a carve-out basis until February 14, 2007, the date of the Acquisition.The carve-out financial statements include allocations from Pearson forcorporate expenses based on a percentage of revenue or headcount measures tocover support and administrative services.

 

For management discussion and analysis purposes, thestatements of operations data for the three months ended March 31, 2007represent the mathematical addition of the results for the Predecessor Entityfor the period January 1 to February 14, 2007, and for the SuccessorEntity for the period February 15 to March 31, 2007. Although thisapproach is not consistent with generally accepted accounting principles, webelieve it is the most meaningful way to review the statements of operationsdata for such periods. A discussion of the partial period January 1 to February 14,2007, separately from the period February 15 to March 31, 2007,compared with the three months ended March 29, 2008, would not bemeaningful.

 

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

 

**FactorsAffecting Our Results of Operations**

 

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

 

*Dependence on Federal GovernmentContracts.*  Contractsfunded by U.S. government agencies represented 74% of total revenue in 2007,and revenue from contracts in which we acted as the prime contractorrepresented 90% of revenue in 2007. Revenue from cost-plus, fixed-price andtime and materials contracts was split as follows:

 
| ** **          | ** ** | **Years Ended**  | ** ** | **Three Months Ended** | ** ** |
|---------------------|------------|-----------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **December 31,** | ** ** | **March 31,**               | ** ** | **March 29,** | ** ** |
| ** **          | ** ** | **2006**              | ** ** | **2007**                         | ** ** | **2007** | ** ** | **2008** | ** ** |
|                |       |                  |       |                             |       |   |   |   |   |
| Cost-plus           |       | 39                    | %          | 44                               | %          | 34 | % | 49 | % |
| Fixed-price         |       | 55                    | %          | 50                               | %          | 57 | % | 47 | % |
| Time and  materials |       | 6                     | %          | 6                                | %          | 9 | % | 4 | % |
|                |       | 100                   | %          | 100                              | %          | 100 | % | 100 | % |

 

*Cost of Revenue.*  Our most significant expense is cost ofrevenue, which includes labor, facilities, direct contract costs, overhead,management and support, amortization of intangible assets, depreciation, andother costs attributable to serving our customers. Labor includes salaries,wages and related employee benefits associated with the professional andcustomer service staff. Facilities costs include rent for commercial officespace and a portion of headquarters costs. Direct contract costs include travel, hardware and software, and costsof subcontractors. The number and types of personnel, including their salariesand other costs, have a significant impact on cost of revenue.

 

*General and Administrative Expenses.*  General and administrative expenses are notdirectly associated with performing work for our customers and include salariesand wages, associated fringe benefits, facilities, depreciation, travel, andinsurance. Among the functions covered by these expenses are human resources,information systems, accounting, general management, legal, finance, contracts,and purchasing. Most of these expenses qualify as allowable costs under thecost accounting standards for contracting with the federal government and arerecoverable under cost-plus contracts.

 

*Selling and Marketing Expenses.*  Selling and marketing expenses for the salesand business development group include salaries, wages and commissions,associated fringe benefits, facilities, travel, depreciation, and bid andproposal expenses.

 

23

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*Purchase Accounting Adjustments.*  The Acquisition was accounted for underEmerging Issues Task Force Issue No. 88-16, *Basis in Leveraged Buyout Transactions* (“EITF 88-16”). Inaccordance with EITF 88-16, the portion of Pearson plc’s (“continuing stockholder”)basis in us represented by its 10% residual interest was assigned to the assetsand liabilities acquired. The remainder of the investment in the assets andliabilities acquired (the 90%) by the Buyer was recorded at fair value. As aresult, the assets and liabilities have been assigned new values which includepart carryover basis and part fair value basis. The continuing stockholder’sresidual interest in the Company was applied to the incremental debt resultingfrom the Acquisition, and was accounted for as a deemed dividend and recognizedas a reduction of equity.  Additionalpurchase accounting adjustments were made in accordance with SFAS No. 141,*Business Combinations,* andrelated interpretations. The excess of the purchase price over assets acquiredand liabilities assumed amounted to $301.9 million and was allocated togoodwill.

 

*Income Taxes.*  The Buyer made an election under Section 338(h) (10) ofthe Internal Revenue Code that significantly increased the tax basis of ourassets, primarily intangible assets and goodwill, and increased tax deductionsfor the related amortization of intangibles and goodwill. The tax deductionsfor amortization contributed to the net operating losses for the periodssubsequent to the Acquisition, and the net operating loss carryforward plusfuture tax amortization are available to reduce future cash taxes.

 

**Contract Backlog**

 

Total contract backlog is the amount of revenue we expect to realizeover the remaining term of the contracts. We do not include contract ceilingvalues under government-wide acquisition contracts or indefinite delivery,indefinite quantity contracts in backlog. Firm contract backlog is the value of the base period plus all currentlyexercised options.  Funded backlog is theportion for which funding has been authorized under the U.S. governmentcontracts.  A significant portion of ourbacklog represents work relating to the continuation of services undercontracts or projects where we are the incumbent provider.  Most of our federal government contractsallow the customer the option of extending the period of performance for aperiod of one or more years.

 

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

 
| ** **           | ** ** | **December 31, 2007** | ** ** | **March 29, 2008** | ** ** |
|----------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **           | ** ** | **Total   Contract  Backlog**   | ** ** | **Firm  Contract  Backlog**  | ** ** | **Funded  Contract  Backlog** | ** ** | **Total  Contract  Backlog** | ** ** | **Firm  Contract  Backlog** | ** ** | **Funded  Contract  Backlog** | ** ** |
| Government Group     |       | $                               | 1,422.7    |                         | $          | 180.7 |   | $ | 135.9 |   | $ | 1,535.7 |   | $ | 293.3 |   | $ | 187.4 |   |
| International  Group |       | 335.4                           |       | 215.9                        |       | 215.9 |   | 334.7 |   | 217.5 |   | 217.5 |   |
| Commercial Group     |       | 11.8                            |       | 11.8                         |       | 11.8 |   | 10.3 |   | 10.3 |   | 10.3 |   |
|                 |       | $                               | 1,769.9    |                         | $          | 408.4 |   | $ | 363.6 |   | $ | 1,880.7 |   | $ | 521.1 |   | $ | 415.2 |   |
|                      |            |                                 |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Critical Accounting Policies**

 

**CriticalAccounting Estimates**

 

The critical accounting estimates used in the preparation of thecondensed consolidated financial statements are described in our annual reporton Form 10-K for the year ended December 31, 2007.  There hasbeen no significant change in the critical accounting estimates:

 
| · | Revenue  recognition and cost estimation on long-term contracts |
|--------|-----------------------------------------------------------------|
| · | Intangible  assets                                              |
| · | Goodwill                                                        |
| · | Litigation and  contingencies                                   |
| · | Equity-based  compensation                                      |
| · | Income taxes                                                    |

 

24

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The process ofpreparing financial statements in conformity with generally accepted accountingprinciples requires the use of estimates and assumptions to determine certainof the assets, liabilities, revenue and expenses. These estimates andassumptions are based upon what we believe is the best information available atthe time of the estimates or assumptions. The estimates and assumptions couldchange materially as conditions within and beyond our control change.Accordingly, actual results could differ materially from those estimates.

 

**Results of Operations**

 

Statements of operations data follow (dollars in thousands):

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **March 31,**               | ** ** | **March 29,** | ** ** |
| ** **                                                  | ** ** | **2007 (1)**                | ** ** | **2008** | ** ** |
| **Statements  of Operations Data**                          |       |                             |       |   |   |
| Revenue                                                     |       | $                                | 111,295    |   | $ | 143,475 |   |
| Cost of revenue                                             |       | 95,588                           |       | 117,166 |   |
| Gross profit                                                |       | 15,707                           |       | 26,309 |   |
| General and  administrative expenses                        |       | 14,877                           |       | 13,784 |   |
| Selling and  marketing expenses                             |       | 4,245                            |       | 4,131 |   |
| Operating income  (loss)                                    |       | (3,415                           | )          | 8,394 |   |
| Interest  expense, net                                      |       | 4,755                            |       | 8,950 |   |
| Loss before  income taxes                                   |       | (8,170                           | )          | (556 | ) |
| Provision for  income taxes                                 |       | 660                              |       | 1,868 |   |
| Net loss                                                    |       | $                                | (8,830     | ) | $ | (2,424 | ) |
|                                                        |       |                             |       |   |   |
| **Statements  of Operations Data as a Percent of Revenue**  |       |                             |       |   |   |
| Revenue                                                     |       | 100                              | %          | 100 | % |
| Cost of revenue                                             |       | 86                               |       | 82 |   |
| Gross profit  margin                                        |       | 14                               |       | 18 |   |
| General and  administrative expenses                        |       | 13                               |       | 9 |   |
| Selling and  marketing expenses                             |       | 4                                |       | 3 |   |
| Operating income  (loss)                                    |       | (3                               | )          | 6 |   |
| Interest  expense, net                                      |       | 4                                |       | 6 |   |
| Loss before  income taxes                                   |       | (7                               | )          | (0 | ) |
| Provision for  income taxes                                 |       | 1                                |       | 2 |   |
| Net loss                                                    |       | (8                               | )%         | (2 | )% |
| ** **                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Revenue  by Business Segment**                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Government Group                                            |       | $                                | 85,863     |   | $ | 117,132 |   |
| Commercial Group                                            |       | 8,041                            |       | 7,552 |   |
| International  Group                                        |       | 17,391                           |       | 18,791 |   |
|                                                        |       | $                                | 111,295    |   | $ | 143,475 |   |
|                                                        |       |                             |       |   |   |
| **Business  Segment Revenue as a Percent of Total Revenue** |       |                             |       |   |   |
| Government Group                                            |       | 77                               | %          | 82 | % |
| Commercial Group                                            |       | 7                                | %          | 5 | % |
| International  Group                                        |       | 16                               | %          | 13 | % |
|                                                        |       | 100                              | %          | 100 | % |

 

----

(1)          Represents themathematical addition of the Predecessor Entity for the period January 1to February 14, 2007, and the Successor Entity for the period February 15to March 31, 2007.

 

25

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***Three Months Ended March 29,2008 and March 31, 2007***

 

*Revenue*

 

The Department of Health and Human Services (“HHS”), as a majorcustomer, represented 48% of total revenue in the three months ended March 29,2008, compared with 35% in the corresponding period in 2007.  The Department of Education (“DoED”), as amajor customer, represented 17% of total revenue in the three months ended March 29,2008, compared with 23% in the 2007 period.

 

The increase of $32.2 million, or 29%, in total revenue reflectsan increase of $31.3 million, or 36%, in revenue from the Government Group that resultedfrom an increase of $28.7 million in contract revenue from higher prescriptiondrug enrollment volume under continuing Medicare related outsourcing contracts,a net revenue increase of $2.1 million from Department of Defense (“DoD”)contracts reflecting new contract awards, and $1.4 million from new HHScontracts.  The increases were partiallyoffset by reductions of $1.2 million from the completion of a contract with theVeterans Administration, $0.6 million from completion of a contract with EqualEmployment Opportunity Commission, and $0.4 million from the termination of acontract with the University of California in 2007.

 

The decline of $0.5 million, or 6%, in Commercial Group revenue wasprimarily due to a net decrease of $0.7 million in commercial assessmentservices for various commercial customers and a net decrease of $0.3 million intraining services and assessment related services for several Fortune 500customers, offset in part by an increase of $0.6 million in services performedunder a contract with the Air Force.

 

Theincrease of $1.4 million, or 8%, in International Group revenue reflectstwo new contracts in Canada.

 

*Costof Revenue*

 

The increase of $21.6 million, or 23%, in cost ofrevenue reflects increased labor and services provided under governmentcontracts and an increase of $2.2 million from amortization of intangiblesresulting from the Acquisition on February 14, 2007.  Amortization of intangibles was recorded forthe three months ended March 29, 2008, compared with 44 days in thecorresponding period of 2007.  Cost ofrevenue was 82% of revenue, an improvement over 86% in the corresponding periodin 2007.  Costs in the 2007 periodincluded a charge of $3.1 million resulting from the termination of a contractwith the University of California.

 

*Generaland Administrative Expenses*

 

General and administrative expenses were $1.1 million,or 7%, lower for the three months ended March 29, 2008.  Expenses declined to 9% of revenue, comparedwith 13% in the corresponding period in 2007. Expenses for the three months ended March 29, 2008 include a charge of $4.0million resulting from a settlement of claims relating to a contract dispute withthe University of California, partly offset by a reduction of $2.0 million resultingfrom an agreement with the Company’s insurance carrier under which the carrieragreed to contribute $2.0 million to fund the settlement with the University ofCalifornia under a mutual reservation of rights and reimbursement agreement.  Expenses in the 2008 period reflect anincrease of $1.1 million in legal fees and consulting expenses.  Expenses in the 2007 period includedtransition-related expenses of $3.1 million, including sales and retentionbonuses of $1.6 million and equity-based compensation of $1.5 million resultingfrom the accelerated vesting of equity-based awards by the Predecessor Entityin connection with the Acquisition, and a charge of $1.0 million for anincrease in expected settlement costs relating to a terminated contract withthe Transportation Security Administration recorded by the Predecessor Entity.

 

26

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*OperatingIncome (Loss)*

 

A summary of operating income (loss) bybusiness segment follows (dollars in thousands):

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **March 31,**               | ** ** | **March 29,** | ** ** |
| ** **                                                         | ** ** | **2007**                         | ** ** | **2008** | ** ** |
| Operating income  (loss):                                          |       |                             |       |   |   |
| Government Group                                                   |       | $                                | (2,292     | ) | $ | 8,417 |   |
| Commercial Group                                                   |       | (468                             | )          | (11 | ) |
| International  Group                                               |       | (108                             | )          | 235 |   |
|                                                               |       | (2,868                           | )          | 8,641 |   |
| Corporate                                                          |       | (547                             | )          | (247 | ) |
|                                                               |       | $                                | (3,415     | ) | $ | 8,394 |   |
| Operating income  (loss) as a percent of business segment revenue: |       |                             |       |   |   |
| Government Group                                                   |       | (3                               | )%         | 7 | % |
| Commercial Group                                                   |       | (6                               | )%         | 0 | % |
| International  Group                                               |       | (1                               | )%         | 1 | % |

 

The increase of $11.8 million in totaloperating income reflects the increase in revenue and higher gross profitmargin for the Government Group.  Theoperating loss in the 2007 period included transition-related expenses of $3.1million for bonuses and equity-based compensation.

 

The increase of $10.7 million in operating income for theGovernment Group reflects increases of $7.2 million from Medicare relatedoutsourcing contracts, $1.8 million from DoD contracts, $0.7 million from DoEDcontracts, and $0.8 million from HHS contracts. The increases were partially offset by an increase of $2.4 million inamortization of intangibles resulting from the Acquisition on February 14,2007.  Operating income for theGovernment Group in the three months ended March 29, 2008, reflects acharge of $4.0 million for the settlement of claims with the University ofCalifornia, partly offset by a reduction to expense of $2.0 million inconnection with an agreement with the Company’s insurance carrier. Theoperating loss in the 2007 period included a loss of $4.0 million in connectionwith the disputed contract with the University of California.

 

The reduction of $0.5 million in the Commercial Group operating lossreflects a cost reduction of $0.8 million primarily from lower depreciation andamortization and lower facility expense, partly offset by the reduction of $0.5million in revenue.  General and administrative expenses in the 2007period included transition-related expenses of $0.3 million.

 

The increase of $0.3 million in operating income for the InternationalGroup reflects two newcontracts in Canada.

 

*Interest Expense, Net*

 

The increase of $4.2 million, or 88%, in netinterest expense reflects interest accrued on an average outstanding debt levelof $428 million for the three months ended March 29, 2008, compared withan average debt level of $438 million for 44 days in the corresponding periodin 2007.  Interest expense resulted fromthe borrowings in connection with the Acquisition on February 14, 2007,including the $240.0 million term loan under the senior secured credit facilityand the $190.0 million 9 5/8% senior subordinated notes due 2015.

 

*Provisionfor Income Taxes*

 

Theprovision for income taxes of $1.9 million in the three months ended March 29,2008, reflects a charge of $2.4 million for a tax valuation allowance againstU. S. deferred tax assets.  The  provision for income taxes of $0.7 millionfor the three months ended March 31, 2007, reflects a charge of $2.3million for a tax valuation allowance. The valuation allowance resultedprimarily from net operating losses generated since the Acquisition, and thenet operating losses reflect amortization of tax deductible goodwill.

 

27

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                Accounting forincome taxes by the Successor Entity differs significantly from the PredecessorEntity.  As a result of the Acquisition,the tax basis of assets and liabilities changed significantly, primarilyintangible assets and goodwill.  TheCompany has concluded, based upon available evidence, it is more likely thannot that the U.S. federal, state, and local deferred tax assets at March 29,2008, will not be realizable. Therefore, a valuation allowance has beenprovided against U.S. deferred tax assets.

 

*Net Loss*

 

                The reduction of $6.4million in the net loss reflects the increase in operating income partiallyoffset by the increase in interest expense with Acquisition-related debtoutstanding for the full three-month period ended March 29, 2008.

 

**Liquidity and Capital Resources**

 

                Our primary source of liquidity has been availablecash and cash equivalents, cash flows from operating activities, and availablerevolving credit under the senior secured credit facility.  Cash and cash equivalents amounted to $22.5million at March 29, 2008, cash flow from operating activities was $3.6million for the three months ended March 29, 2008, and $49.6 million wasavailable under the revolving credit facility. Based on our current level of operations, we believe our cash and cashequivalents, cash flow from operations, and available borrowings under therevolving credit facility will be adequate to meet our liquidity needs for atleast the next twelve months.

 

                Our long term debt matures in the years 2013 and 2015.In view of current credit market conditions and our credit ratings and in theevent we were to refinance the senior secured credit facility or the seniorsubordinated notes, we would likely encounter higher interest rates andlimited availability of debt financing capacity.

 

                A summary of working capitalfollows (in thousands):

 
| ** **                             | ** ** | **December 31,** | ** ** | **March 29,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                             | ** ** | **2007**              | ** ** | **2008**           | ** ** |
| Cash and cash  equivalents             |       | $                     | 26,093     |               | $          | 22,500 |   |
| Trade  receivables                     |       | 112,292               |       | 122,463            |       |
| Other  receivables and prepaid items   |       | 15,470                |       | 19,876             |       |
| Current portion  of long-term debt     |       | (7,325                | )          | (2,309             | )          |
| Accounts payable  and accrued expenses |       | (63,248               | )          | (80,248            | )          |
| Accrued interest                       |       | (8,547                | )          | (3,499             | )          |
| Other                                  |       | (5,296                | )          | (4,374             | )          |
| Working capital                        |       | $                     | 69,439     |               | $          | 74,409 |   |

 

                Cash and cash equivalents arecomposed of highly liquid instruments with original maturities of 90 days orless.  Cash in bank accounts at times mayexceed federally insured limits.  Cashequivalents are comprised of repurchase agreements with a major commercial bankunder which cash is invested in U.S. Treasury and U.S. government agencysecurities.

 

28

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A summary of net cash flows (in thousands):

 
| ** **                         | ** ** | **Predecessor  Entity**                               | ** ** | ** ** | **Successor Entity**                            | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **Period  January 1 to  February 14,** | ** ** | ** ** | **Period  February 15 to  March 31,** | ** ** | **Three Months  Ended  March 29,** | ** ** |
| ** **                         | ** ** | **2007**                                              | ** ** | ** ** | **2007**                                             | ** ** | **2008** | ** ** |
| Cash flows (used  in) provided by: |       |                                                  |       |       |                                                 |       |   |   |
| Operating  activities              |       | $                                                     | (18,896    | )          |                                                 | $          | 4,859 |   | $ | 3,556 |   |
| Investing  activities              |       | (3,727                                                | )          |       | (615,503                                             | )          | (1,570 | ) |
| Financing  activities              |       | 13,271                                                |       |       | 629,453                                              |       | (5,599 | ) |
|                                    |            |                                                       |            |            |                                                      |            |  |  |  |  |  |

 

*Operating Activities*

 

*               *Net cash flow of $3.6 million provided byoperating activities for the three months ended March 29, 2008, reflectsnoncash charges of $5.2 million for amortization of intangibles and $3.2million for depreciation and amortization, partially offset by a net reductionof $5.0 million in accrued interest payable reflecting the semi-annual paymentof interest of $9.1 million on the senior subordinated notes in February 2008.  A net increase of $15.0 million in accountspayable and accrued expenses was partially offset by a net increase of $10.2million in trade receivables from the timing of collections from customers.

 

                Net cash flow of$4.9 million provided by operating activities for the period February 15to March  31, 2007, reflects interest of $4.5 million accrued on long-termdebt, an increase of $4.3 million in other accrued expenses, and a reduction of$3.4 million in accounts receivable from improved collections, partially offsetby the net loss of $8.5 million.

 

                Net cash flow of $18.9 millionused in operating activities for the period January 1 to February 14,2007, reflects an increase of $16.4 million in accounts receivable from thetiming of customer collections.

 

*InvestingActivities*

 

                Capital expenditures were $1.6million for the three months ended March 29, 2008.  Capital expenditures are expected to total$14.5 million for 2008 primarily for anticipated contractual and generalinfrastructure requirements and new business growth.

 

Net cash flow of $615.5 million used in investing activities forthe period February 15 to March 31, 2007, reflects $615.2 millionresulting from the Acquisition.

 

                Net cash flow of$3.7 million used in investing activities for the period January 1 toFebruary 14, 2007, represents capital expenditures.

 

*FinancingActivities*

 

                Borrowings under the seniorsecured credit facility are subject to mandatory prepayment based on apercentage of annual excess cash flow, as defined.  Payments aggregating $7.8 million, includinga mandatory prepayment of $7.2 million, are scheduled for 2008, of which $5.5million was paid in the three months ended March 29, 2008, and $2.3million was paid at the beginning of second quarter of 2008.

 

                Net cash of $629.5 millionprovided by financing activities for the period February 15 to March 31,2007, reflects debt of $430.0 million and equity of $203.5 million issued inconnection with the Acquisition.  Debtfinancing costs of $14.0 million were paid in connection with financing for theAcquisition.

 

                Net cash of $13.3 millionprovided by financing activities for the period January 1 to February 14,2007, reflects a net investment by Predecessor Entity.

 

29

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*SeniorSecured Credit Facility*

 

                At March 29, 2008, thesenior secured credit facility consists of a term loan of $232.7 million due February 14,2013, an available revolving credit facility of up to $49.6 million thatexpires February 14, 2012 and a letter of credit of $0.4 million.  There were no borrowings outstanding underthe revolving credit facility at March 29, 2008 or December 31,2007.  A commitment fee of .50% per yearis paid on the available unused portion of the revolving credit facility.

 

*               *Borrowings under the**senior secured credit facility bear interest at a rateequal to, at the Company’s option, either: (i) the base rate, as defined,plus an applicable margin of 1.25-1.50%, or (ii) the adjusted LIBOR rate,as defined, plus an applicable margin of 2.25-2.50%. The term loan is scheduledto be repaid in 11 quarterly installments of $0.6 million beginning June 2010with the balance due February 14, 2013. Borrowings are subject to mandatory prepayment with (i) 100% of thenet cash proceeds of certain asset sales; (ii) 50% of the net cashproceeds of equity offerings or capital contributions subject to certainexceptions; (iii) 100% of the net cash proceeds of additional debt; and (iv) apercentage of annual excess cash flow, as defined in the term loanagreement.    Payments resulting from theannual excess cash flow requirement are due 90 days following the yearend.  Since the excess cash flowrequirement is based on annual cash flow, it is not possible to estimate theamount, if any, that would become payable in March 2009 or subsequentyears.

 

Borrowings aresecured by accounts receivable, cash, intellectual property and other assetsand are guaranteed, jointly and severally, by all existing and future domesticsubsidiaries. Foreign subsidiaries do not guarantee the borrowings.  Thesenior secured credit facility contains various customary affirmative andnegative covenants and events of default, including, but not limited to,restrictions on the disposal of assets, incurring additional indebtedness orguarantee obligations, paying dividends, creating liens on assets, makinginvestments, loans or advances, and compliance with a maximum total leverageratio.  At March 29, 2008, theCompany was in compliance with the covenants.

 

*9 5/8%Senior Subordinated Notes*

 

                In February 2007, theCompany completed an offering of $190.0 million principal amount of 9 5/8 %senior subordinated notes due February 15, 2015. Interest accrues at thefixed rate of 9 5/8% and is paid semi-annually. Proceeds of the offering wereused to fund the Acquisition.  The notesare general unsecured obligations of the Company and are subordinated to allexisting and future senior loans including borrowings under the senior securedcredit facility.  The notes areguaranteed, jointly and severally, by all existing and future domesticsubsidiaries. Foreign subsidiaries do not guarantee the notes.

 

On or prior to February 15, 2010, the Company may redeem the noteswith the net cash proceeds of one or more equity offerings at 109.625% of theprincipal amount, provided that at least 65% of the principal amount of thenotes originally issued remains outstanding immediately following suchredemption.  At any time prior to February 15, 2011, the Company mayredeem all or part of the notes at a redemption price of 100% of the principalamount plus an applicable premium, as defined, and additional interest, asdefined. The notes are redeemable at the option of the Company at theredemption 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.

 

30

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*Interest Rate Swap on Variable-Rate Term Loan under Senior SecuredCredit Facility*

 

In February 2007,the Company entered into a three-year interest rate swap agreement withWachovia Bank, N.A. to eliminate the variability of probable cash flows due tofluctuations in LIBOR interest rates on a notional amount of $140.0 million ofthe senior secured term loan. The notional amount of $140.0 million amortizeddown to $120.0 million in February 2008, and will amortize down to $110.0million in February 2009, until expiration in February 2010. Underthe terms of the swap agreement, the Company exchanged its floating LIBORinterest rate for a fixed interest rate of 5.215%.  In April 2008, the Company entered intoan additional interest rate swap agreement for the notional amount of $75.0million, increasing to $150.0 million in February 2010, exchanging itsfloating LIBOR interest rate for a fixed rate of 3.28% until expiration in February 2011.

 

The counterpartyis a highly rated financial institution. In the event that the counterpartyfails to meet the terms, the Company’s exposure is limited to the interest ratedifferential on the notional amount at each quarterly settlement period overthe life of the agreement. We do not anticipate non-performance by thecounterparty.

 

The Company documented its risk management objective and nature of therisk being hedged and designated the interest rate swap as a cash flow hedge atinception of the agreement.  The Companyperforms a quarterly analysis of the effectiveness of the hedge and concludedthat the hedging relationship is highly effective due to the consistencyof critical terms of the interest rate swap and related term loan under thesenior secured credit facility.  The fair value of $6.2 million for theinterest rate swap at March 29, 2008, is reported as a liability (currentportion of $3.5 million) in the consolidated balance sheet, the unrealized lossof $6.0 million is reported in accumulated other comprehensive loss in theconsolidated statement of stockholder’s equity and the remaining ineffectiveportion of $0.2 million was reported as interest expense.

 

The use ofderivative financial instruments is limited to interest rate swaps, the purposeof which is to hedge interest expense on a portion of the variable-rate termloan. The Company does not hold or issue derivative financial instruments forspeculative purposes.

 

*CreditRatings*

 

***               ***The debt-to-equity ratio was 241% at March 29,2008. There have been no changes in the ratings assigned by Standard and Poor’sin April 2007 and by Moody’s in January 2007, as follows:

 
| ** **                          | ** ** | **Standard &  Poor’s** | ** ** | **Moody’s** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|------------------|------------|
| Senior secured  credit facility     |       | BB                                   |       | Ba3              |       |
| Senior  subordinated notes due 2015 |       | B-                                   |       | Caal             |       |
| Corporate credit                    |       | B+                                   |       | B-2              |       |
| Outlook                             |       | Negative                             |       | Stable           |       |

 

*ContractualObligations*

 

                Contractual commitments to makefuture cash payments under long-term debt agreements, contracts and contingentcommitments at March 29, 2008, follow (in millions):

 

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| ** **                                          | ** ** | ** ** | ** ** | **Payments  Due by Period** | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **Total**  | ** ** | **Less than 1  Year**            | ** ** | **1 to 3  Years** | ** ** | **4 to 5  Years** | ** ** | **More than 5  Years** | ** ** |
| Long-term debt:                                |       |       |       |                                       |       |   |   |   |   |   |   |
| Term loan under  senior secured credit facility (1) |       | 232.7      |       | $                                          | 2.3        |   | $ | 2.4 |   | $ | 228.0 |   | $ | — |   |
| Senior  subordinated notes due 2015                 |       | 190.0      |       | —                                     |       | — |   | — |   | 190.0 |   |
| Interest  relating to long-term debt (2)            |       | 192.7      |       | 33.7                                       |       | 63.2 |   | 59.2 |   | 36.6 |   |
| Operating and  capital leases                       |       | 78.9       |       | 15.3                                       |       | 25.9 |   | 18.1 |   | 19.6 |   |
| Purchase  commitments                               |       | 0.9        |       | 0.9                                        |       | — |   | — |   | — |   |
|                                                |       | $          | 695.2      |                                       | $          | 52.2 |   | $ | 91.5 |   | $ | 305.3 |   | $ | 246.2 |   |
|                                                     |            |            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1)    |   | There were no  borrowings under the senior secured revolving credit facility at  March 29, 2008. Scheduled payments for the term loan under the senior  secured credit facility do not give effect to possible future additional  mandatory payments resulting from excess cash flow. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                       |
| (2)    |   | Future interest  payments consist of interest on the variable-rate term loan under the senior  secured credit facility based on the prevailing rate of 4.95% at  March 29, 2008, the related interest rate swap, and the fixed rate of 9  5/8% for the senior subordinated notes.     |

 

*Off-Balance Sheet Arrangements*

 

As of March 29, 2008 and December 31, 2007, there were nooff-balance sheet arrangements other than operating leases for officefacilities and a letter of credit issued under the senior secured creditfacility.

 

**Recent Accounting Pronouncements**

 

Reference is made to the notes to the condensed consolidated financialstatements for information on recent accounting pronouncements.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

*Financial Instruments*

 

The fair value of financialinstruments at March 29, 2008, follows (in thousands):

 
| ** **                                                    | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|
| Long-term debt:                                               |       |                 |       |                |       |
| Variable-rate  term loan under senior secured credit facility |       | $                    | 232,675    |                | $          | 232,675 |   |
| 9 5/8% senior  subordinated notes, due February 15, 2015 |       | 190,000              |       | 152,475             |       |
| Liabilities:                                                  |       |                 |       |                |       |
| Interest rate  swap (notional amount of $120,000)             |       | 6,195                |       | 6,195               |       |
|                                                               |            |                      |            |                     |            |  |  |

 

The carrying amount of the variable-rate term loan under the seniorsecured credit facility approximates fair value. The fair value of the 9 5/8%senior subordinated notes is based on quoted market prices; the fair valuechanges based on market conditions and changes in interest rates. The carryingamounts of other financial instruments, including cash and cash equivalents,trade accounts receivable and accounts payable and accrued expenses,approximate fair value due to their short term nature.

 

*Interest Rate Risk*

 

We are subject to interest rate risk in connection with the unhedgedportion of the variable-rate term loan of $232.7 million and the availablerevolving credit facility of $49.6 million under the senior secured creditfacility.  At March 29, 2008, thenotional amount of $120.0 million was hedged under an interest rate swapagreement that expires in February 2010, and, in April 2008, theCompany entered into an additional interest rate swap agreement 

 

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hedging thenotional amount of $75.0 million, increasing to $150.0 million in February 2010,until expiration in February 2011.

 

*Foreign Currency Risk*

 

                We invoice customers primarilyin U.S. dollars and in local currencies in the countries in which we haveforeign operations. We are exposed to foreign exchange rate fluctuations fromthe time customers are invoiced in local currency until such currency isexchanged for U.S. dollars.  At March 29,2008, 12% of our trade receivables were denominated in foreign currencies.

 

*Inflation Risk*

 

                We have generally been able toanticipate increases in costs when pricing our contracts. Bids for longer-termfixed-unit price and time and materials contracts typically include sufficientlabor and other cost escalations in amounts expected to cover cost increasesover the period of performance. Consequently, since costs and revenue includean inflationary increase commensurate with the general economy where weoperate, our gross margin expressed as a percentage of revenue has not beensignificantly impacted by inflation.

 

**ITEM4T.  CONTROLS AND PROCEDURES**

 

Evaluation of Disclosure Controls and Procedures

 

Our management,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, has evaluated our disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended). Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of the period covered by this report, our disclosure controls andprocedures were effective to ensure that information required to be disclosedin reports that we file or submit under the Securities Exchange Act are: (i) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms; and (ii) accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

                During the three months ended March 29,2008, there have been no changes in the internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, internal control over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

*University of California CASAContract*

 

In July 2007, the Companyreceived a notice from the University of California that it deemed the Companyto be in breach of one of the contracts and directing the Company to stop workon that contract.  The contract was forthe development of a Centralized Admissions and Scholarships Application(“CASA”) system.  In May 2008, theCompany and the University of California reached a settlement of claims relatedto this contract, under which the Company agreed to pay $5.0 million to theUniversity of California.  The settlementis subject to the approval of The Regents of the University of California andthe execution of the definitive settlement agreement.  The Company has made a claim for coverageunder its professional liability policy with respect to this matter.  The insurance carrier previously denied theinitial request for coverage, which denial was disputed by the Company.  On May 8, 2008, the carrier agreed tocontribute $2.0 million to fund the settlement with the University ofCalifornia under a mutual reservation of rights and reimbursement agreement. Tothe extent the carrier seeks reimbursement of all or a portion of itscontribution and is successful in such action, the Company would be required toreimburse up to the amount paid plus interest. As a result of the settlementwith the University of California and the reservation of rights andreimbursement agreement with the insurance carrier, the Company recorded acharge of $4.0 million to general and administrative expense for the threemonths ended March 29, 2008, increasing its settlement liability to $5.0million at March 29, 2008, and recorded a reduction of $2.0 million in generaland administrative expense and recorded a receivable in the same amount fromthe insurance carrier at March 29, 2008.

 

*Transportation SecurityAdministration*

 

Our contracts with thefederal government are subject to various legal and regulatory requirementsand, from time to time, agencies of the federal government may investigate theconduct of our operations in accordance with these requirements. The UnitedStates government, through the Department of Justice and the Inspector Generalof the Department of Homeland Security, is investigating to determine whetherwe and NCS Pearson violated the Civil False Claims Act and other federal lawsin connection with a contract awarded by the Transportation SecurityAdministration to us in 2002. In the event we are determined to have violatedthe Civil False Claims Act or other federal laws in connection with theperformance of this contract, we may face administrative, civil or criminalliabilities, including repayments, fines or penalties being imposed upon us.Pearson and the other sellers under the stock purchase agreement have agreed toindemnify us, the Buyer and its other affiliates without regard to any timelimitation for any losses incurred by us, our parent and its other affiliatesin connection with such investigation, except that the first $20.0 million inlosses resulting from such investigation which will be shared equally.

 

*Other*

 

We are also involved invarious claims and lawsuits from time to time, including employment and thirdparty liability claims and litigation. We do not believe that the ultimateresolution of any of these other actions will have a material adverse effect onour financial position, results of operations, liquidity or capital resources.

 

**ITEM 1A.RISK FACTORS**

 

There have been nomaterial changes in the information relating to risk factors reported in ourannual report on Form 10-K for the year ended December 31, 2007.

 

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**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

                None

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

                None

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

                None

 

**ITEM5.  OTHER INFORMATION**

 

                None

 

**ITEM6.  EXHIBITS**

** **
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 *                    |       | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
|                      |       |                                                                                                                                                           |
| 31.2 *                    |       | Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
|                      |       |                                                                                                                                                           |
| 32.1 *                    |       | Certification of  Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                           |
| 32.2 *                    |       | Certification of  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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*****Filed herewith.

 

** **

**SIGNATURE**

 

                Pursuant to the requirements ofthe Section 13 or 15 (d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| ** **         | **Vangent, Inc.**                                                                                      |
|--------------------|-------------------------------------------------------------------------------------------------------------|
|               |                                                                                                        |
|               |                                                                                                        |
| May 13,  2008 | /s/ Christine M.  Bailey                                                                                    |
|               | Christine M.  Bailey                                                                                        |
|               | Senior Vice  President and Chief Financial Officer   (Principal Financial and Principal Accounting Officer) |

 

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