Table of Contents

 

 

 

**UNITEDSTATES 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 September 27, 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 EmployerIdentification  No.) |
|                                                                                        |       |                              |
| **4250  North Fairfax Drive****Suite 1200****Arlington, Virginia 22203(703) 284-5600** |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for 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 the definitions of “large acceleratedfiler,”  “accelerated filer,” and “smallerreporting 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 |
|----------------------------|--------|---------------------------|--------|-------------------------------|--------|------------------------------|

 

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 September 27,2008.

 

 

 

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Tableof Contents

 

**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 September 27, 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 September 29,  2007, for the three months ended September 29, 2007, and for the three and  nine months ended September 27, 2008 (successor entity)    | 4 |
|                                                        |                                                                                                                                                                                                                                                                                                         |   |
|                                                        | Condensed  Consolidated Statements of Owner’s/Stockholder’s Equity and Comprehensive  Income (Loss) for the period January 1 to February 14, 2007 (predecessor  entity) and for the period February 15 to September 29, 2007, and for the  nine months ended September 27, 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 September 29,  2007, and for the nine months ended September 27, 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                                                                                                                                                                                                                                                  | 33 |
| Item 4T.                                                    | Controls and  Procedures                                                                                                                                                                                                                                                                                     | 34 |
|                                                        |                                                                                                                                                                                                                                                                                                         |   |
| **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-Q containsvarious forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended (“Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as expectation or belief concerningfuture events.  Forward-lookingstatements involve risks and uncertainties. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,”“plans,” “expects,” “could,” “estimates,” “intends,” “may,” and similarexpressions, or the negative thereof, are intended to identify forward-lookingstatements.  The Company cautions thatthese statements are further qualified by important economic, competitive,governmental and technological factors that could cause our business, strategyor actual results of operations or events to differ materially from those inthe forward-looking statements, including, without limitation, changes in thedemand for services that the Company provides; pursuit of new business in theUnited States and abroad; activities of competitors; bid protests; changes inoperating expenses; our substantial debt; changes the in availability ofcapital; and general economic and business conditions.  Accordingly, such forward-looking statementsdo not purport to be predictions of future events or circumstances, and therecan be no assurance that any forward-looking statement contained herein willprove to be accurate.  The Companyassumes no obligation to update the forward-looking statements.

 

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Tableof Contents

 

**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** | ** ** | **September 27,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Assets**                                                                                      | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Current assets:                                                                                 |       |                        |       |                         |       |
| Cash and cash  equivalents                                                                      |       | $                           | 26,093     |                         | $          | 18,091 |   |
| Trade  receivables, net                                                                         |       | 112,292                     |       | 111,718                      |       |
| Other  receivables and prepaid items                                                            |       | 15,470                      |       | 14,958                       |       |
| Total current  assets                                                                           |       | 153,855                     |       | 144,767                      |       |
|                                                                                            |       |                        |       |                         |       |
| Property and  equipment, net                                                                    |       | 27,579                      |       | 30,023                       |       |
| Intangible  assets, net                                                                         |       | 198,027                     |       | 183,330                      |       |
| Goodwill                                                                                        |       | 301,873                     |       | 303,747                      |       |
| Deferred debt  financing costs, net                                                             |       | 12,448                      |       | 10,751                       |       |
| Other assets                                                                                    |       | 286                         |       | 94                           |       |
| Total assets                                                                                    |       | $                           | 694,068    |                         | $          | 672,712 |   |
|                                                                                            |       |                        |       |                         |       |
| **Liabilities  and Stockholder’s Equity**                                                  |       |                        |       |                         |       |
| Current  liabilities:                                                                           |       |                        |       |                         |       |
| Current portion  of long-term debt                                                              |       | $                           | 7,325      |                         | $          | — |   |
| Accounts payable                                                                                |       | 36,981                      |       | 27,743                       |       |
| Accrued expenses                                                                                |       | 26,267                      |       | 32,145                       |       |
| Accrued interest                                                                                |       | 8,547                       |       | 3,395                        |       |
| Deferred tax  liability                                                                         |       | 852                         |       | 4,098                        |       |
| Advance payments  on contracts                                                                  |       | 4,444                       |       | 2,537                        |       |
| Total current  liabilities                                                                      |       | 84,416                      |       | 69,918                       |       |
|                                                                                            |       |                        |       |                         |       |
| Long-term debt,  net of current portion                                                         |       | 420,875                     |       | 420,366                      |       |
| Other long-term  liabilities                                                                    |       | 3,863                       |       | 6,689                        |       |
| Deferred tax  liability                                                                         |       | 4,625                       |       | 5,924                        |       |
| Total  liabilities                                                                              |       | 513,779                     |       | 502,897                      |       |
| Commitments and  contingencies (Note 8)                                                         |       |                        |       |                         |       |
|                                                                                            |       |                        |       |                         |       |
| 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                     |       | 206,114                      |       |
| Accumulated  other comprehensive loss                                                           |       | (2,937                      | )          | (2,826                       | )          |
| Accumulated  deficit                                                                            |       | (22,049                     | )          | (33,473                      | )          |
| Total  stockholder’s equity                                                                |       | 180,289                     |       | 169,815                      |       |
| Total  liabilities and stockholder’s equity                                                |       | $                           | 694,068    |                         | $          | 672,712 |   |

 

See notes to condensedconsolidated financial statements.

 

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**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Condensed Consolidated Statements ofOperations**

(in thousands)

(unaudited)

 
| ** **                            | ** ** | **Successor Entity**                              | ** ** | ** **                                             | **Predecessor Entity** | ** ** | ** **                                                  | **Successor Entity** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|-----------------------------|------------|-------------------------------------------------------------|---------------------------|------------|
| ** **                            | ** ** | **Three Months  Ended  September 29,  2007** | ** ** | **Three Months  Ended  September 27,  2008** | ** **                  | ** ** | **Period  January 1 to  February 14,  2007** | ** **                | ** ** | **Period  February 15 to  September 29,  2007** | ** ** | **Nine Months  Ended  September 27,  2008** | ** ** |
| Revenue                               |       | $                                                      | 129,610    |                                                   | $                           | 133,391    |                                                        |                      | $          | 58,833 |   |   | $ | 303,656 |   | $ | 400,800 |   |
| Cost of revenue                       |       | 103,983                                                |       | 106,470                                                |                        |       | 48,187                                                      |                      |       | 254,096 |   | 329,570 |   |
| Gross profit                          |       | 25,627                                                 |       | 26,921                                                 |                        |       | 10,646                                                      |                      |       | 49,560 |   | 71,230 |   |
| General and  administrative expenses  |       | 11,544                                                 |       | 12,445                                                 |                        |       | 9,383                                                       |                      |       | 29,982 |   | 38,702 |   |
| Selling and  marketing expenses       |       | 4,190                                                  |       | 3,757                                                  |                        |       | 1,940                                                       |                      |       | 11,039 |   | 11,963 |   |
| Operating income  (loss)              |       | 9,893                                                  |       | 10,719                                                 |                        |       | (677                                                        | )                         |       | 8,539 |   | 20,565 |   |
| Interest expense                      |       | 10,091                                                 |       | 8,719                                                  |                        |       | 34                                                          |                      |       | 24,651 |   | 26,895 |   |
| Interest income                       |       | (360                                                   | )          | (185                                                   | )                           |       | (44                                                         | )                         |       | (561 | ) | (634 | ) |
| Income (loss)  before income taxes    |       | 162                                                    |       | 2,185                                                  |                        |       | (667                                                        | )                         |       | (15,551 | ) | (5,696 | ) |
| Provision  (benefit) for income taxes |       | 1,566                                                  |       | 2,632                                                  |                        |       | (292                                                        | )                         |       | 4,502 |   | 5,728 |   |
| Net loss                              |       | $                                                      | (1,404     | )                                                      | $                           | (447       | )                                                           |                      | $          | (375 | ) |   | $ | (20,053 | ) | $ | (11,424 | ) |

 

See notes to condensedconsolidated financial statements.

 

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**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

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

(in thousands,****except shareamounts)

(unaudited)

** **
| ** **                                | ** ** | **Common Stock** | ** ** | **Additional Paid-in** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Intercompany  Investment in** | ** ** | **Accumulated** | ** ** | **Total  Owner’s/  Stockholder’s** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|-----------------|------------|----------------------------------------------|------------|
| ** **                                | ** ** | **Shares**            | ** ** | **Amount**             | ** ** | **Capital**                           | ** ** | **Income (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 |       | —                |       | —                 |       | —                                |       | (1,040                               | )          | —          |       | —                                       |       | (1,040 | ) |
| Foreign currency  translation adjustment  |       | —                |       | —                 |       | —                                |       | 313                                  |       | —          |       | —                                       |       | 313 |   |
| Net loss                                  |       | —                |       | —                 |       | —                                |       | —                               |       | —          |       | (20,053                                      | )          | (20,053 | ) |
| Total  comprehensive loss                 |       |                  |       |                   |       |                                  |       |                                 |       |            |       |                                         |       | (20,780 | ) |
| Issuance of  common stock                 |       | 100                   |       | —                 |       | 203,466                               |       | —                               |       | —          |       | —                                       |       | 203,466 |   |
| **Balance,  September 29, 2007**     |       | 100                   |       | $                      | —     |                                  | $          | 203,466                              |       | $               | (727       | )                                            | $          | — |   | $ | (20,053 | ) | $ | 182,686 |   |
|                                      |       |                  |       |                   |       |                                  |       |                                 |       |            |       |                                         |       |   |   |
| **Balance  December 31, 2007**       |       | 100                   |       | $                      | —     |                                  | $          | 205,275                              |       | $               | (2,937     | )                                            | $          | — |   | $ | (22,049 | ) | $ | 180,289 |   |
| Effect of  hedging activities, net of tax |       | —                |       | —                 |       | —                                |       | 821                                  |       | —          |       | —                                       |       | 821 |   |
| Foreign currency  translation adjustment  |       | —                |       | —                 |       | —                                |       | (710                                 | )          | —          |       | —                                       |       | (710 | ) |
| Net loss                                  |       | —                |       | —                 |       | —                                |       | —                               |       | —          |       | (11,424                                      | )          | (11,424 | ) |
| Total  comprehensive loss                 |       |                  |       |                   |       |                                  |       |                                 |       |            |       |                                         |       | (11,313 | ) |
| Equity-based  compensation                |       | —                |       | —                 |       | 839                                   |       | —                               |       | —          |       | —                                       |       | 839 |   |
| **Balance,  September 27, 2008**     |       | 100                   |       | $                      | —     |                                  | $          | 206,114                              |       | $               | (2,826     | )                                            | $          | — |   | $ | (33,473 | ) | $ | 169,815 |   |

 

See notes to condensedconsolidated financial statements.

 

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**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**CondensedConsolidated Statements of Cash Flows**

(in thousands)

(unaudited)

 
| ** **                                                                                       | ** ** | **Predecessor  Entity**                               | ** ** | ** ** | **Successor Entity**                                | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **Period  January 1 to  February 14,** | ** ** | ** ** | **Period  February 15 to  September 29,** | ** ** | **Nine Months  Ended  September 27,** | ** ** |
| ** **                                                                                       | ** ** | **2007**                                              | ** ** | ** ** | **2007**                                                 | ** ** | **2008** | ** ** |
| **Cash  flows from operating activities**                                                        |       |                                                  |       |       |                                                     |       |   |   |
| Net loss                                                                                         |       | $                                                     | (375       | )          |                                                     | $          | (20,053 | ) | $ | (11,424 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating  activities: |       |                                                  |       |       |                                                     |       |   |   |
| Amortization of  intangibles                                                                     |       | 132                                                   |       |       | 12,953                                                   |       | 15,851 |   |
| Depreciation and  amortization                                                                   |       | 2,237                                                 |       |       | 7,800                                                    |       | 10,475 |   |
| Equity-based  compensation expense                                                               |       | 1,477                                                 |       |       | 475                                                      |       | 839 |   |
| Deferred income  taxes                                                                           |       | (19                                                   | )          |       | 3,749                                                    |       | 4,889 |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions:                     |       |                                                  |       |       |                                                     |       |   |   |
| Trade  receivables                                                                               |       | (16,445                                               | )          |       | 1,255                                                    |       | 574 |   |
| Other  receivables and prepaid and other assets                                                  |       | 343                                                   |       |       | (14,486                                                  | )          | 2,886 |   |
| Accounts payable  and accrued liabilities                                                        |       | (5,047                                                | )          |       | 21,350                                                   |       | (6,214 | ) |
| Accrued interest  payable                                                                        |       | —                                                |       |       | 4,686                                                    |       | (5,152 | ) |
| Advance payments  on contracts                                                                   |       | (1,206                                                | )          |       | (1,736                                                   | )          | (1,907 | ) |
| Other                                                                                            |       | 7                                                     |       |       | —                                                   |       | 125 |   |
| Net cash (used  in) provided by operating activities                                             |       | (18,896                                               | )          |       | 15,993                                                   |       | 10,942 |   |
| **Cash  flows from investing activities**                                                        |       |                                                  |       |       |                                                     |       |   |   |
| Acquisitions,  net of cash acquired                                                              |       | —                                                |       |       | (615,206                                                 | )          | (3,892 | ) |
| Capital  expenditures                                                                            |       | (3,727                                                | )          |       | (4,412                                                   | )          | (6,796 | ) |
| Net cash used in  investing activities                                                           |       | (3,727                                                | )          |       | (619,618                                                 | )          | (10,688 | ) |
| **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                                          |       | —                                                |       |       | (15,000                                                  | )          | — |   |
| Proceeds from  issuance of senior secured term loan                                              |       | —                                                |       |       | 240,000                                                  |       | — |   |
| Repayment of  senior secured term loan                                                           |       | —                                                |       |       | (1,200                                                   | )          | (7,834 | ) |
| Proceeds from  issuance of senior subordinated notes                                             |       | —                                                |       |       | 190,000                                                  |       | — |   |
| Debt financing  costs                                                                            |       | —                                                |       |       | (14,013                                                  | )          | — |   |
| Investment from  parent                                                                          |       | 13,310                                                |       |       | —                                                   |       | — |   |
| Capital lease  payments                                                                          |       | (39                                                   | )          |       | (131                                                     | )          | (205 | ) |
| Net cash  provided by (used in) financing activities                                             |       | 13,271                                                |       |       | 618,122                                                  |       | (8,039 | ) |
| Effect of  exchange rate changes on cash equivalents                                             |       | (166                                                  | )          |       | 499                                                      |       | (217 | ) |
| Net (decrease)  increase in cash and cash equivalents                                            |       | (9,518                                                | )          |       | 14,996                                                   |       | (8,002 | ) |
| Cash and cash  equivalents, beginning of period                                                  |       | 11,713                                                |       |       | —                                                   |       | 26,093 |   |
| Cash and cash  equivalents, end of period                                                        |       | $                                                     | 2,195      |       |                                                     | $          | 14,996 |   | $ | 18,091 |   |
| **Supplemental noncash investing and financing  activities:**                                    |       |                                                  |       |       |                                                     |       |   |   |
| Leasehold  improvements provided under operating lease                                           |       | $                                                     | —     |       |                                                     | $          | — |   | $ | 2,503 |   |
| **Supplemental  cash flow information**                                                          |       |                                                  |       |       |                                                     |       |   |   |
| Interest paid                                                                                    |       | $                                                     | —     |       |                                                     | $          | 18,470 |   | $ | 30,361 |   |
| Income taxes  paid                                                                               |       | 35                                                    |       |       | 524                                                      |       | 405 |   |

 

See notes to condensedconsolidated financial statements.

 

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**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Notes to Condensed ConsolidatedFinancial Statements**

(in thousands)

(unaudited)

 

**1.****         Organization and Basis ofPresentation**

** **

*Basis of Presentation*

* *

Vangent, Inc. (“Vangent”or “Company” or “Successor Entity”) (formerly Pearson Government SolutionsBusiness) 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 financial statements for the PredecessorEntity were prepared from Pearson’s accounting records and are presented on acarve-out basis to include the results of operations applicable to the managedgroup of entities under Pearson known as Pearson Government SolutionsBusiness.  Owner’s equity is presentedfor the Predecessor Entity in lieu of stockholder’s equity. Unauditedconsolidated financial statements for the Predecessor Entity are presented forthe period January 1 to February 14, 2007. As a result of theapplication of the purchase accounting method and the valuation of assets andliabilities at fair value as of the date of the acquisition, the consolidatedfinancial statements of the Successor Entity are not comparable with thePredecessor Entity.

 

The unauditedcondensed consolidated financial statements include the accounts of the Companyand its domestic and foreign subsidiaries and have been prepared in accordancewith generally accepted accounting principles for interim financial informationand the instructions to Form 10-Q and Article 10 of Regulation S-X.Certain information and footnote disclosures normally included in complete financial statements have been condensed or omittedpursuant to the applicable rules and regulations. The Company believesthat all disclosures are adequate to make the information presented notmisleading. The condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and the related notesthereto included in the Company’s annual report on Form 10-K for the yearended December 31, 2007.

 

In the opinion of management, all normal andrecurring adjustments necessary to fairly present the financial position andresults of operations as of and for the periods presented have been included.The results of operations presented are not necessarily indicative of theresults to be expected for the full fiscal year or for any future periods. TheCompany uses estimates and assumptions in the preparation of its financialstatements. The estimates are primarily based on historical experience andbusiness knowledge and are revised as circumstances change. Actual resultscould differ materially from those estimates.

 

*Nature of Operations*

* *

Vangent serves customers in the U.S. government, internationalgovernments, higher education, and the commercial human resource managementsector. The Company’s primary customer focus is U.S. and internationalgovernmental agencies which utilize third-party providers to design, build andoperate technologically advanced systems. The Department of Health and Human Services (“HHS”) represented 46% andthe Department of Education (“DoED”) represented 17% of revenue for the ninemonths ended September 27, 2008.

 

*Fiscal Yearand Quarterly Periods*

* *

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

 

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**2.****              Acquisitions**

** **

*Acquisitionof Aptiv Technology Partners*

* *

In May 2008,Vangent purchased the government health integration group assets of AptivTechnology Partners for cash consideration of $3,892, including acquisitionfees.  In accordance with SFAS No. 141,*Business Combinations*, and the purchasemethod of accounting, the assets and liabilities acquired were recorded attheir estimated fair values at the date of the acquisition, and the results ofoperations of the acquired business has been included in Vangent’s consolidatedfinancial statements from the date of the acquisition.  The acquired business is part of thegovernment business segment. The allocation of the purchase considerationresulted in intangible assets of $1,154 scheduled to be amortized over athree-year period and goodwill of $2,703 that is expected to be tax deductible.The pro forma effect on results of operations for the nine months ended September 27,2008, giving effect to the acquisition as if it occurred on January 1,2008, was not material.

 

*VangentAcquisition 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 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 wereassigned new values which include part carryover basis and part fair valuebasis.

 

A summary of the purchaseconsideration and related allocation follows:

 
| **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 |   |

 

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| **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                                 |   | (55,824 | )       |
| Net assets  acquired                                       |   | 631,414 |    |
| Additional cash  received from Buyer                       |   | 7,052   |    |
| Net assets                                                 |   | $       | 638,466 |   |
|                                                       |   |    |    |
| **Allocation  of Intangible Assets Acquired**              |   |    |    |
| Customer  relationships (10.8 years weighted average life) |   | $       | 204,570 |   |
| Intellectual  property (indefinite life)                   |   | 11,178  |    |
| Other                                                      |   | 658     |    |
|                                                       |   | $       | 216,406 |   |

** **

**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.

 

On October 10, 2008,the FASB issued FASB Staff Position No. 157-3, *Determining the Fair Value of a Financial Asset When the Market forThat Asset Is Not Active*, toclarify the application of SFAS 157 in measuring fair value in a market that isnot active. The guidance reaffirms the notion of fair value as an exit price asof the measurement date and clarifies: how management’s internal cash flow anddiscount rate assumptions should be considered when measuring fair value whenrelevant observable data do not exist; how observable market information in amarket that is not active should be considered when measuring fair value; andhow the use of market quotes should be considered when assessing the relevanceof observable and unobservable data available to measure fair value.

 

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 of SFAS 159.

 

In December 2007 the FASBissued SFAS No.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-outarrangements 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.

 

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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 in which the Company engages.

 

In April 2008, the FASB issued FASBStaff Position No. 142-3, *Determination of theUseful life of Intangible Assets*, to amend the factors that shouldbe considered in developing renewal or extension assumptions used to determinethe useful life of an intangible asset and to improve the consistency betweenthe useful life of an intangible asset and the period of expected cash flowsused to measure the fair value of the asset. The new standards become effectivefor Vangent beginning on January 1, 2009, and will be appliedprospectively only to intangible assets acquired after the effective date.

 

In May 2008,the FASB issued SFAS No.162, *The Hierarchy of GenerallyAccepted Accounting Principles.*The new standard is intended toimprove financial reporting by identifying a consistent framework, orhierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with U.S. generallyaccepted accounting principles. The Company is currently evaluating the impactof the new standard on its results of operations and financial position, butdoes not believe there will be a material impact.

 

**4.   IntangibleAssets and Goodwill**

** **

A summary of intangibleassets at September 27, 2008, follows:

 
| ** **              | ** ** | **Weighted**          | ** ** | ** ** | ** ** | ** **       | ** ** | **Net**      | ** ** |
|-------------------------|------------|-----------------------|------------|------------|------------|------------------|------------|--------------|------------|
| ** **              | ** ** | **Average Life** | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Carrying** | ** ** |
| ** **              | ** ** | **(in years)**   | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Amount**   | ** ** |
| Customer  relationships |       | 10.8                  |       | $          | 205,724    |             | $          | (33,930      | )          | $ | 171,794 |   |
| Intellectual  property  |       | Indefinite            |       | 11,178     |       | —           |       | 11,178       |       |
| Other                   |       | 4                     |       | 658        |       | (300             | )          | 358          |       |
|                    |       |                  |       | $          | 217,560    |             | $          | (34,230      | )          | $ | 183,330 |   |

** **

Amortization of intangible assets was $15,851 for thenine months ended September 27, 2008, and $12,953 for the period February 15to September 29, 2007. Amortization of intangible assets for each of thenext five years is estimated to range from $20,900 to $21,400 per year.

 

A summary of changes in the carrying value of goodwillfor the nine months ended September 27, 2008, follows:

 
| ** **                                | ** ** | **Net**      | ** ** |
|-------------------------------------------|------------|--------------|------------|
| ** **                                | ** ** | **Carrying** | ** ** |
| ** **                                | ** ** | **Amount**   | ** ** |
| Balance,  December 31, 2007          |       | $            | 301,873    |   |
| Acquisition of  Aptiv Technology Partners |       | 2,703        |       |
| Deferred income  tax adjustment           |       | (829         | )          |
| Balance, September 27,  2008         |       | $            | 303,747    |   |

 

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

** **

A summary of long-term debt follows:

 
| ** **                                                                                                  | ** ** | **December 31,  2007** | ** ** | **September 27,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Senior secured  credit facility:                                                                            |       |                        |       |                         |       |
| Term loan, due  February 14, 2013, with interest at variable rates  (4.82% at September 27, 2008) |       | $                           | 238,200    |                         | $          | 230,366 |   |
|                                                                                                        |       |                        |       |                         |       |
| 9 5/8% Senior  subordinated fixed rate notes, due February 15, 2015                                    |       | 190,000                     |       | 190,000                      |       |
|                                                                                                        |       | 428,200                     |       | 420,366                      |       |
| Less: current  portion                                                                                      |       | (7,325                      | )          | —                       |       |
| Long-term debt,  less current portion                                                                       |       | $                           | 420,875    |                         | $          | 420,366 |   |
|                                                                                                        |       |                        |       |                         |       |
| Scheduled  maturities of long-term debt as of September 27, 2008, follow:                              |       |                        |       |                         |       |

 
| 2009   |   |   |   | $       | —  |   |
|--------|--------|--------|--------|---------|---------|--------|
| 2010   |   |   |   | 1,781   |    |
| 2011   |   |   |   | 2,375   |    |
| 2012   |   |   |   | 2,375   |    |
| 2013   |   |   |   | 223,835 |    |
| 2014   |   |   |   | —  |    |
| 2015   |   |   |   | 190,000 |    |
|   |   |   |   | $       | 420,366 |   |

 

*Senior Secured Credit Facility*

* *

At September 27, 2008, the senior secured creditfacility consisted of a term loan of $230,366 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 outstandingunder the revolving credit facility at September 27, 2008 or December 31,2007. A commitment fee of .50% per year is paid on the available unused portionof the revolving credit facility.

 

Borrowingsunder the**senior securedcredit facility bear interest at a rate equal to, at the Company’s option,either: (i) the base rate, as defined, plus an applicable margin of1.00-1.50%, or (ii) the adjusted LIBOR rate, as defined, plus anapplicable margin of 2.00-2.50%. The term loan is scheduled to be repaid in 11quarterly installments of $594 beginning June 2010 with 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. Payments resulting from theannual excess cash flow requirement are due 90 days following the year end.Repayments of $7,834, primarily a mandatory prepayment, were made in the ninemonths ended September 27, 2008. Because the excess cash flow requirementis based on annual cash flow, it is not possible to estimate the amount, ifany, that would become payable in March 2009 or 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 do not guarantee the borrowings. The senior securedcredit facility contains various customary affirmative and negative covenantsand events of default, including, but not limited to, restrictions on thedisposal 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 September 27,2008, the Company was in compliance with the covenants.

* *

*9 5/8%Senior Subordinated Notes*

* *

In February 2007,the Company completed an offering of $190,000 principal amount of 9 5/8% seniorsubordinated notes due February 15, 2015. Interest accrues at the fixedrate of 9 5/8% and is paid semi-annually. Proceeds of the offering were used tofund the Acquisition. The notes are general unsecured obligations of theCompany and are subordinated to all existing and future senior loans includingborrowings under the senior secured

 

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credit facility. Thenotes are guaranteed, jointly and severally, by all existing and futuredomestic subsidiaries. Foreign subsidiaries do not guarantee the notes.

 

In the event of an equity offering on or prior to February 15,2010, the Company may redeem the notes with the net cash proceeds of one ormore equity offerings at 109.625% of the principal amount, provided that atleast 65% of the principal amount of the notes originally issued remainsoutstanding immediately following such redemption.

 

With respect to a redemption not related to an equity offering at anytime prior to February 15, 2011, the Company may redeem all or part of thenotes at a redemption price of 100% of the principal amount plus an applicablepremium, as defined, and additional interest, as defined. The notes areredeemable at the option of the Company at the redemption price of 104.8125% ofthe principal amount on or after February 15, 2011, 102.4063% on or after February 15,2012, and 100% on or after February 15, 2013.

 

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

* *

The Company hasentered into interest rate swap agreements with Wachovia Bank, N.A., ascounterparty, to hedge fluctuations in LIBOR interest rates on a portion of theterm-loan borrowing under the senior secured credit facility. The Companyexchanged its variable LIBOR interest rate for a fixed interest rate, asfollows:

 
| ** **            | ** ** | ** **   | ** ** | **Fixed**                | ** ** | **Variable**                 | ** ** | ** **                               | ** **                               |
|-----------------------|------------|--------------|------------|--------------------------|------------|------------------------------|------------|------------------------------------------|------------------------------------------|
| ** **            | ** ** | **Notional** | ** ** | **Interest Rate**   | ** ** | **Interest Rate**       | ** ** | ** **                               | ** **                               |
| **Date Entered** | ** ** | **Amount**   | ** ** | **to be Paid** | ** ** | **to be Received** | ** ** | **Period Covered**                  | ** **                               |
| February 2007    |       | $            | 140,000    |                     | 5.215      | %                            | LIBOR      |                                     | February 2007 to February 2008 |   |
|                  |       | 120,000      |       | 5.215                    | %          | LIBOR                        |       | February 2008 to February 2009 |                                     |
|                  |       | 110,000      |       | 5.215                    | %          | LIBOR                        |       | February 2009 to February 2010 |                                     |
|                  |       |         |       |                     |       |                         |       |                                     |                                     |
| April 2008       |       | $            | 75,000     |                     | 3.280      | %                            | LIBOR      |                                     | April 2008 to February 2010    |   |
|                  |       | 150,000      |       | 3.280                    | %          | LIBOR                        |       | February 2010 to February 2011 |                                     |

 

The Companydocumented its risk management objective and nature of the risks being hedgedand has designated the interest rate swaps as cash flow hedges at inception ofthe agreements. The Company performs a quarterly analysis of the effectivenessof the hedge and has concluded that the hedging relationship is highlyeffective due to the consistency of critical terms of the interest rate swapand related term loan under the senior secured credit facility. The fairvalue of the net interest rate swap liability was $2,688 at September 27, 2008,resulting in an unrealized loss of $2,540 reported in accumulated othercomprehensive loss in the consolidated statement of stockholder’s equity and arealized loss of $148 for the ineffective portion reported as interest expense.

 

In the unlikelyevent that the counterparty fails to meet the terms, the Company’s exposure islimited to the interest rate differential on the notional amount at eachquarterly settlement period over the life of the agreement. We do notanticipate non-performance by the counterparty. The use of derivative financialinstruments is limited to interest rate swaps, the purpose of which is to hedgeinterest expense on a portion of the variable-rate term loan. The Company doesnot hold or issue derivative financial instruments for speculative purposes.

 

**6. Fair Value Measurements**

** **

The Company adopted SFAS157, *Fair Value Measurements*, on January 1,2008, for financial assets and financial liabilities. SFAS 157 defines fairvalue, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements. SFAS 157 utilizes a fair valuehierarchy that prioritizes the inputs to valuation techniques used to measurefair value into three 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.                                                                                                                                                                                                                       |

 

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A summary of the basesused to measure certain financial assets and financial liabilities reported atfair value on a recurring basis in the consolidated balance sheet follows:

 
| ** **                        | ** ** | ** **                      | ** ** | **Basis of Fair Value Measurements**                   | ** ** |
|-----------------------------------|------------|---------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Balance  September 27,** | ** ** | **Quoted Prices  in Active  Markets for  Identical  Items** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| ** **                        | ** ** | **2008**                        | ** ** | **(Level 1)**                                                         | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Interest rate  swaps included in: |       |                            |       |                                                                       |       |   |   |   |   |
| Short-term  liabilities           |       | $                               | 875        |                                                                       | $          | — |   | $ | 875 |   | $ | — |   |
| Long-term  liabilities            |       | 1,813                           |       | —                                                                     |       | 1,813 |   | — |   |
|                              |       | $                               | 2,688      |                                                                       | $          | — |   | $ | 2,688 |   | $ | — |   |

 

**7. IncomeTaxes**

** **

The provision for incometaxes amounted to $2,632 for the three months and $5,728 for the nine monthsended September 27, 2008, and is composed of U.S. federal, state and localand foreign income taxes and reflects a tax valuation allowance against U.S.deferred tax assets. The tax valuation allowance of $2,401 for the three monthsand $7,119 for the nine months ended September 27, 2008, results primarilyfrom the effect on the U.S. net operating losses from the tax amortization ofgoodwill. Goodwill is an indefinite lived asset that is amortized for taxpurposes, but is not amortized under U.S. generally accepted accountingprinciples.

 

A valuation allowance is recorded againstdeferred tax assets when it is determined that it is more likely than not thata tax benefit will not be realized. Realization of net deferred tax assets isdependent on generating sufficient future taxable income prior to theexpiration of the U.S. net operating loss carryforward. Based on an assessmentof available evidence, including the net operating losses, the Companydetermined that it was more likely than not that its future taxable incomewould not be sufficient to realize the U.S. federal, state and local deferredtax assets at September 27, 2008. Accordingly, a full valuation allowancehas been established against the U.S. deferred tax assets. If the valuationallowance is reduced in future periods, a portion of the reduction would berecorded as a reduction to goodwill, except beginning January 2009, withthe implementation of SFAS No. 141(R), *Business Combinations*,reductions to the tax valuation allowance would be recorded as an adjustment tothe provision for income taxes.

 

The net deferredtax liability aggregated $10,022 at September 27, 2008, and includes$9,911 that relates to an indefinite lived intangible asset (goodwill) that isamortized and deducted for income tax purposes in the United States, but is notamortized under U.S. generally accepted accounting principles.

 

FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes—an Interpretation of FASB Statement No. 109* (“FIN48”), prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of tax positions taken, orexpected to be taken, in a tax return. Pursuant to the Acquisition agreement,Vangent is indemnified and is not liable for any income taxes that relate tothe pre-Acquisition periods prior to February 15, 2007. There was noliability for unrecognized tax benefits at September 27, 2008. Vangentdoes not expect changes in unrecognized tax benefits, if any, within the next 12months to have a material impact on the provision for income taxes or theeffective tax rate.

 

Vangent and itssubsidiaries conduct business and are subject to income taxes in the UnitedStates and certain foreign countries. In 2008, Vangent filed its initial incometax returns for the period February 15 to December 31, 2007, whichwill be subject to examination by federal, state, local, or foreign taxauthorities. Interest and penalties, if any, relating to income taxes arecharged to the provision for income taxes.

 

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**8. Commitmentsand Contingencies**

 

*University of California Contract*

* *

In July 2007, theCompany received a notice from the University of California that it deemed theCompany to be in breach of one of the contracts and directing the Company tostop work on that contract. In July 2008, the Company and The Regents ofthe University of California executed a definitive settlement agreement underwhich the Company subsequently paid $4,995 to the University of California. TheCompany has made a claim for coverage under its professional liability policywith respect to this matter. The insurance carrier previously denied theinitial request for coverage, which denial was disputed by the Company. In August 2008,the carrier contributed $1,998 to fund the settlement with the University ofCalifornia pursuant to a mutual reservation of rights and reimbursementagreement entered into on May 8, 2008. To the extent the carrier seeksreimbursement of all or a portion of its contribution and is successful in suchaction, the Company would be required to reimburse up to the amount paid plusinterest. As a result of the settlement with the University of California andthe reservation of rights and reimbursement agreement with the insurancecarrier, the Company recorded a charge of $3,995 to general and administrativeexpense for the nine months ended September 27, 2008, made a settlementpayment of $4,995 in August 2008, and recorded a reduction of $1,998 togeneral and administrative expense for the amount received from the insurancecarrier in August 2008.

 

*Loss ofData*

* *

In September 2007,the Company became aware of an event which could lead to the loss of thirdparty confidential information. As of September 27, 2008, the Company hasincurred costs of $4,541 to mitigate the risk of damages to any third party asa result of the loss. The Company believes that $4,041 of these costs arerecoverable under its professional liability insurance and such amount isincluded in other receivables in the consolidated balance sheet as of September 27,2008.

 

*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, thePredecessor 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 investigated the contract in conjunction with the U.S. Department ofJustice (“DOJ”) to determine whether the Predecessor Entity or itssubcontractors violated the Civil False Claims Act. Monetary liability under theCivil False Claims Act includes treble damages plus civil penalties of $5.5 to$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, the remaining balance of the accruedliability established by the Predecessor Entity was $5,959, of which $5,648 wasfor settlement negotiations with respect to the ongoing investigation of itsperformance and billings under the TSA contract, including an expense of $1,000recorded for the period January 1 to February 14, 2007, as settlementnegotiations between the parties continued. The balance of the accruedliability was $5,648 at December 31, 2007. In connection with theAcquisition and related cost-sharing provisions, a receivable of $2,824 fromPearson representing 50% of the expected accrued losses was included in otherreceivables at December 31, 2007.

 

In October 2008, Pearson and Vangent, without admitting anyliability, executed a settlement and release agreement which Vangent expectsDOJ will sign within 60 days. Within five business days of full execution ofthe agreement, Pearson will pay $5,648 to the United States and Vangent willpay $2,824 to Pearson. As a result of the agreement, Vangent reduced itsaccrued receivable from Pearson from $2,824 to zero and recorded acorresponding reduction of $2,824 in the accrued settlement liability; therewas no effect on costs and expenses. Vangent’s remaining obligation of $2,824under the agreement is reflected as an accrued liability in the consolidatedbalance sheet as of September 27, 2008.

 

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*Insuranceand Third-Party Recoveries*

* *

In connection with the recognition of liabilities for losscontingencies, the Company records related receivables for insurance andthird-party recoveries that are deemed probable. In assessing the probabilityof recovery, judgments are made concerning insurance and third-party coveragethat we believe are reasonable and consistent based on our experience, ourknowledge of the relevant issues and various judicial determinations, andconsideration of the impact of any likely settlements.

 

*Other*

* *

The Company issubject to legal proceedings, investigations and claims arising out of theordinary course of business and accrues a liability if an unfavorable outcomeis probable. In the opinion of management, resolution of such matters is notexpected to have a material effect on the Company’s results of operations orfinancial position.

** **

**9.  Equity-Based Compensation**

** **

*Successor Entity*

* *

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

 

Certain members ofmanagement of Vangent and outside directors of Vangent Holding Corp. have beengranted Class B interests in Vangent Holding LLC, the majority shareholderof Vangent Holding Corp. which in turn owns all of Vangent’s common stock.   At September 27, 2008, the outstandingbalance of grants of Class B interests represented 5.6% of the profitinterests in Vangent Holding LLC. Pursuant to the terms of the operatingagreement governing Vangent Holdings, LLC, the Class B interests aresubject to a five-year vesting schedule, except in the event of a change ofcontrol.  The unvested portion of Class Binterests reverts to the holders of Class A interests in Vangent HoldingLLC.  Class B interests are grantedwith no exercise price or expiration date. Holders of Class B interests are entitled to receive theirrespective proportional interest of all distributions made by Vangent HoldingLLC provided the holders of the Class A interests have received an 8% perannum internal rate of return on their invested capital.  Grants of Class B interests are limitedto 7.5% in the aggregate.

 

A summary ofactivity for grants and the outstanding balance of Class B interests inVangent Holding LLC follow:

 
| ** **                        | ** ** | **Class B  Interests   Available   for Grant** | ** ** | **Class B  Interests   Outstanding** | ** ** | **Fair Value of   Class B   Interests at  Date of   Grant** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| Balance,  February 15, 2007  |       | —                                                             | %          | —                                         | %          | $                                                                                                   | —     |   |
| Authorized                        |       | 7.5                                                                |       | —                                         |       | —                                                                                              |       |
| Granted                           |       | (5.3                                                               | )          | 5.3                                            |       | 5,946                                                                                               |       |
| Forfeited                         |       | 0.4                                                                |       | (0.4                                           | )          | (454                                                                                                | )          |
| Balance,  December 31, 2007  |       | 2.6                                                                |       | 4.9                                            |       | 5,492                                                                                               |       |
| Granted                           |       | (1.5                                                               | )          | 1.5                                            |       | 1,695                                                                                               |       |
| Forfeited                         |       | 0.8                                                                |       | (0.8                                           | )          | (948                                                                                                | )          |
| Balance,  September 27, 2008 |       | 1.9                                                                | %          | 5.6                                            | %          | $                                                                                                   | 6,239      |   |
|                              |       |                                                               |       |                                           |       |                                                                                                |       |
| At  September 27, 2008:      |       |                                                               |       |                                           |       |                                                                                                |       |
| Vested                            |       |                                                               |       | 0.9                                            | %          |                                                                                                |       |
| Not yet vested                    |       |                                                               |       | 4.7                                            |       |                                                                                                |       |
|                              |       |                                                               |       | 5.6                                            | %          |                                                                                                |       |

 

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 $839 for the ninemonths ended September 27, 2008. The unamortized amount of equity-based compensation expense was $4,491at September 27, 2008, and amortization of approximately $1,100 per yearis scheduled for each of the next four years.

 

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*Predecessor Entity*

* *

The PredecessorEntity accounted for equity-based compensation using the fair value method.Under the fair value method, stock options were valued on the date of grant,and equity-based compensation expense was recognized over the service period.Grants of restricted stock awards were measured at fair value on the date ofgrant based on the number of shares granted and the quoted price of theunderlying 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.

 

**10.  Related Party Transactions**

** **

Vangent pays an annual management fee of $1,000 to Veritas Capital forgeneral business management, financial, strategic and consulting services.

 

Included in the purchaseconsideration relating to the Acquisition in February 2007 was 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 majority shareholderof Vangent Holding Corp. which in turn owns all of Vangent’s common stock.

 

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

 

The components ofaccumulated other comprehensive income (loss) follow:

 
| ** **                                | ** ** | **December 31,** | ** ** | **September 27,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2007**              | ** ** | **2008**               | ** ** |
| Effect of  hedging activities, net of tax |       | $                     | (3,361     | )                      | $          | (2,540 | ) |
| Foreign currency  translation adjustment  |       | 424                   |       | (286                   | )          |
|                                      |       | $                     | (2,937     | )                      | $          | (2,826 | ) |

 

**12.   Business Segments and Major Customers**

** **

Operating segmentsare defined as components of an enterprise about which separate financialinformation is available that is evaluated regularly by the chief operatingdecision maker in deciding how to allocate resources and in assessingperformance.

 

Vangent reports operating results and financial data for three businesssegments: government group, commercial group and international group. Thegovernment group customers are primarily U.S. federal agencies.  The government group assists civilian,defense and intelligence agencies as well as government-related entities withthe design and execution of information and technology strategy, helps developand maintain their complex, mission-critical systems and delivers a wide rangeof business process outsourcing solutions. 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 an organization’sworkforce.  The international groupprovides consulting, systems integration and business process outsourcingsolutions to both commercial and foreign local and central governmentcustomers.

 

Vangent evaluatesthe performance of its operating segments based on operating income, but doesnot measure revenue or operating income by its major service offerings eitherfor internal management or external financial reporting purposes. The new basisof accounting resulting from the Acquisition in February 2007 has asignificant effect on results of operations.

 

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Summarized financial information for business segments and majorcustomers follows:

 
| ** **                               | ** ** | ** **                | ** ** | ** **             | ** ** | ** ** | **Predecessor**            | ** **                | ** ** | ** **                   | ** ** | ** **             | ** ** |
|------------------------------------------|------------|---------------------------|------------|------------------------|------------|------------|----------------------------|---------------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **Successor Entity** | ** ** | ** **             | **Entity** | ** ** | ** **                 | **Successor Entity** | ** ** |
| ** **                               | ** ** | **Three Months**     | ** ** | **Three Months**  | ** ** | ** ** | **Period**                 | ** **                | ** ** | **Period**                   | ** ** | **Nine Months**   | ** ** |
| ** **                               | ** ** | **Ended**                 | ** ** | **Ended**              | ** ** | ** ** | **January 1 to** | ** **                | ** ** | **February 15 to** | ** ** | **Ended**              | ** ** |
| ** **                               | ** ** | **September 29,**    | ** ** | **September 27,** | ** ** | ** ** | **February 14,**      | ** **                | ** ** | **September 29,**       | ** ** | **September 27,** | ** ** |
| ** **                               | ** ** | **2007**                  | ** ** | **2008**               | ** ** | ** ** | **2007**                   | ** **                | ** ** | **2007**                     | ** ** | **2008**               | ** ** |
| **Revenue**                              |       |                      |       |                   |       |       |                       |                      |       |                         |       |                   |       |
| Government group                         |       | $                         | 102,896    |                   | $          | 107,949    |                       |                      | $          | 47,011                       |       |                   | $          | 236,154 |   | $ | 320,845 |   |
| Commercial group                         |       | 8,555                     |       | 7,161                  |       |       | 3,302                      |                      |       | 21,794                       |       | 21,892                 |       |
| International  group                     |       | 18,159                    |       | 18,281                 |       |       | 8,520                      |                      |       | 45,708                       |       | 58,063                 |       |
|                                     |       | $                         | 129,610    |                   | $          | 133,391    |                       |                      | $          | 58,833                       |       |                   | $          | 303,656 |   | $ | 400,800 |   |
|                                     |       |                      |       |                   |       |       |                       |                      |       |                         |       |                   |       |
| **Operating  income (loss)**             |       |                      |       |                   |       |       |                       |                      |       |                         |       |                   |       |
| Government group                         |       | $                         | 8,996      |                   | $          | 10,273     |                       |                      | $          | 647                          |       |                   | $          | 6,148 |   | $ | 20,263 |   |
| Commercial group                         |       | 915                       |       | 244                    |       |       | (496                       | )                         |       | 1,971                        |       | (58                    | )          |
| International  group                     |       | (38                       | )          | 450                    |       |       | (281                       | )                         |       | 420                          |       | 1,199                  |       |
|                                     |       | 9,873                     |       | 10,967                 |       |       | (130                       | )                         |       | 8,539                        |       | 21,404                 |       |
| Corporate (1)                            |       | 20                        |       | (248                   | )          |       | (547                       | )                         |       | —                       |       | (839                   | )          |
|                                     |       | $                         | 9,893      |                   | $          | 10,719     |                       |                      | $          | (677                         | )          |                   | $          | 8,539 |   | $ | 20,565 |   |
|                                     |       |                      |       |                   |       |       |                       |                      |       |                         |       |                   |       |
| **Depreciation  and amortization**       |       |                      |       |                   |       |       |                       |                      |       |                         |       |                   |       |
| Government group                         |       | $                         | 6,748      |                   | $          | 7,375      |                       |                      | $          | 1,352                        |       |                   | $          | 16,512 |   | $ | 21,446 |   |
| Commercial group                         |       | 150                       |       | 397                    |       |       | 447                        |                      |       | 816                          |       | 1,281                  |       |
| International  group                     |       | 1,357                     |       | 1,188                  |       |       | 570                        |                      |       | 3,425                        |       | 3,598                  |       |
|                                     |       | $                         | 8,255      |                   | $          | 8,960      |                       |                      | $          | 2,369                        |       |                   | $          | 20,753 |   | $ | 26,325 |   |
|                                     |       |                      |       |                   |       |       |                       |                      |       |                         |       |                   |       |
| **Major  customers**                     |       |                      |       |                   |       |       |                       |                      |       |                         |       |                   |       |
| Department of  Health and Human Services |       | 49                        | %          | 46                     | %          |       | 36                         | %                         |       | 46                           | %          | 46                     | %          |
| Department of  Education                 |       | 16                        | %          | 16                     | %          |       | 23                         | %                         |       | 17                           | %          | 17                     | %          |

 

----

(1)          Corporate represents equity-based compensation expense.

 

**13. Condensed Issuer and Non-Guarantor Financial Information**

** **

In connection with the Acquisition by Veritas Capitaland the related financing, Vangent Inc. (“Issuer”) issued $190,000 of 9 5/8%senior subordinated notes due 2015. The notes were sold to qualifiedinstitutional 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, fully,irrevocably and unconditionally, guaranteed by Blueprint Technologies, Inc.and PAS, Inc., 100%-owned subsidiaries of Vangent Inc.  As a result of an internal restructuring, theassets and liabilities and operations of Blueprint Technologies, Inc. andPAS, Inc. have been transferred to Vangent Inc., and, accordingly, theirfinancial statements are not presented separately. Certain other 100%-ownedsubsidiaries do not guarantee the notes (“Non-Guarantors”). These entities include Vangent Canada,Limited, Vangent Mexico, and S.A. de C.V., Vangent Servicios de Mexico, S.A. deC.V., Vangent Argentina, S.A., Vangent Venezuela, C.A., Vangent Puerto Rico, Inc.,and Vangent, Ltd.

 

The presentation of the condensed combining balancesheets, statements of operations, and statements of cash flows for the Issuerand for the Non-Guarantor subsidiaries as of December 31, 2007, for thethree months ended September 29, 2007, and the period February 15 to September 29,2007, has been revised to separately present financial data for the Issuer,reclassify certain intangible assets and the amortization of intangibleassets  from the Issuer to theNon-Guarantors, and to present the Issuer’s investment in and advances to theNon-Guarantor subsidiaries under the equity method of accounting along with therelated elimination of the investment and advances.

 

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

 

*Issuerand Non-Guarantor Financial Information*

*CondensedCombining Balance Sheets*

 
| ** **                                                   | ** ** | **December 31, 2007** | ** ** | **September 27, 2008** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | ** **                      | ** ** | **Non-**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Issuer**                      | ** ** | **Guarantors**                   | ** ** | **Eliminations** | ** ** | **Total** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Assets**                                                   |       |                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                              |       |                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                   |       | $                               | 19,022     |                             | $          | 7,071 |   | $ | — |   | $ | 26,093 |   | $ | 13,307 |   | $ | 4,784 |   | $ | — |   | $ | 18,091 |   |
| Trade receivables,  net                                      |       | 102,398                         |       | 9,894                            |       | — |   | 112,292 |   | 95,807 |   | 15,911 |   | — |   | 111,718 |   |
| Other receivables  and prepaid items                         |       | 11,163                          |       | 4,307                            |       | — |   | 15,470 |   | 10,511 |   | 4,447 |   | — |   | 14,958 |   |
| Total current  assets                                        |       | 132,583                         |       | 21,272                           |       | — |   | 153,855 |   | 119,625 |   | 25,142 |   | — |   | 144,767 |   |
| Property and  equipment, net                                 |       | 16,891                          |       | 10,688                           |       | — |   | 27,579 |   | 22,378 |   | 7,645 |   | — |   | 30,023 |   |
| Intangible  assets, net                                      |       | 185,544                         |       | 12,483                           |       | — |   | 198,027 |   | 171,372 |   | 11,958 |   | — |   | 183,330 |   |
| Goodwill                                                     |       | 266,836                         |       | 35,037                           |       | — |   | 301,873 |   | 269,539 |   | 34,208 |   | — |   | 303,747 |   |
| Deferred debt  financing costs and other                     |       | 12,602                          |       | 132                              |       | — |   | 12,734 |   | 10,845 |   | — |   | — |   | 10,845 |   |
| Investment in and  advances to Non-Guarantor subsidaries     |       | 68,901                          |       | —                           |       | (68,901 | ) | — |   | 67,940 |   | — |   | (67,940 | ) | — |   |
| Total assets                                                 |       | $                               | 683,357    |                             | $          | 79,612 |   | $ | (68,901 | ) | $ | 694,068 |   | $ | 661,699 |   | $ | 78,953 |   | $ | (67,940 | ) | $ | 672,712 |   |
|                                                         |       |                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholder’s Equity** |       |                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                                        |       |                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current portion  of long-term debt                           |       | $                               | 7,325      |                             | $          | — |   | $ | — |   | $ | 7,325 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Accounts payable  and accrued expenses                       |       | 54,568                          |       | 8,680                            |       | — |   | 63,248 |   | 49,795 |   | 10,093 |   | — |   | 59,888 |   |
| Accrued interest                                             |       | 8,547                           |       | —                           |       | — |   | 8,547 |   | 3,395 |   | — |   | — |   | 3,395 |   |
| Deferred tax  liability                                      |       | 852                             |       | —                           |       | — |   | 852 |   | 4,098 |   | — |   | — |   | 4,098 |   |
| Advance payments  on contracts                               |       | 2,715                           |       | 1,729                            |       | — |   | 4,444 |   | 1,709 |   | 828 |   | — |   | 2,537 |   |
| Total current  liabilities                                   |       | 74,007                          |       | 10,409                           |       | — |   | 84,416 |   | 58,997 |   | 10,921 |   | — |   | 69,918 |   |
| Long-term debt,  net of current portion                      |       | 420,875                         |       | —                           |       | — |   | 420,875 |   | 420,366 |   | — |   | — |   | 420,366 |   |
| Other long-term  liabilities                                 |       | 3,746                           |       | 3,319                            |       | (3,202 | ) | 3,863 |   | 6,597 |   | 371 |   | (279 | ) | 6,689 |   |
| Deferred tax  liability                                      |       | 4,440                           |       | 185                              |       | — |   | 4,625 |   | 5,924 |   | — |   | — |   | 5,924 |   |
| Total liabilities                                            |       | 503,068                         |       | 13,913                           |       | (3,202 | ) | 513,779 |   | 491,884 |   | 11,292 |   | (279 | ) | 502,897 |   |
| Stockholder’s  equity                                   |       | 180,289                         |       | 65,699                           |       | (65,699 | ) | 180,289 |   | 169,815 |   | 67,661 |   | (67,661 | ) | 169,815 |   |
| Total liabilities  and stockholder’s equity             |       | $                               | 683,357    |                             | $          | 79,612 |   | $ | (68,901 | ) | $ | 694,068 |   | $ | 661,699 |   | $ | 78,953 |   | $ | (67,940 | ) | $ | 672,712 |   |

 

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*Issuerand Non-Guarantor Financial Information*

*CondensedCombining Statements of Operations*

 
| ** **                                          | ** ** | **Three Months Ended September 29, 2007** | ** ** | **Three Months Ended September 27, 2008** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                                         | ** ** | **Non-**                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Issuer**                                                         | ** ** | **Guarantors**                                                     | ** ** | **Eliminations** | ** ** | **Total** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                             |       | $                                                                  | 111,529    |                                                               | $          | 18,081 |   | $ | — |   | $ | 129,610 |   | $ | 115,192 |   | $ | 18,199 |   | $ | — |   | $ | 133,391 |   |
| Cost of revenue                                     |       | 88,294                                                             |       | 15,689                                                             |       | — |   | 103,983 |   | 91,014 |   | 15,456 |   | — |   | 106,470 |   |
| Gross profit                                        |       | 23,235                                                             |       | 2,392                                                              |       | — |   | 25,627 |   | 24,178 |   | 2,743 |   | — |   | 26,921 |   |
| General and  administrative expenses                |       | 10,519                                                             |       | 1,025                                                              |       | — |   | 11,544 |   | 11,377 |   | 1,068 |   | — |   | 12,445 |   |
| Selling and  marketing expenses                     |       | 3,343                                                              |       | 847                                                                |       | — |   | 4,190 |   | 3,111 |   | 646 |   | — |   | 3,757 |   |
| Operating income                                    |       | 9,373                                                              |       | 520                                                                |       | — |   | 9,893 |   | 9,690 |   | 1,029 |   | — |   | 10,719 |   |
| Interest (income)  expense, net                     |       | 9,759                                                              |       | (28                                                                | )          | — |   | 9,731 |   | 8,463 |   | 71 |   | — |   | 8,534 |   |
| Income (loss)  before income taxes                  |       | (386                                                               | )          | 548                                                                |       | — |   | 162 |   | 1,227 |   | 958 |   | — |   | 2,185 |   |
| Provision for  income taxes                         |       | 1,458                                                              |       | 108                                                                |       | — |   | 1,566 |   | 1,676 |   | 956 |   | — |   | 2,632 |   |
| Equity in net  income of Non-Guarantor subsidiaries |       | 440                                                                |       | —                                                             |       | (440 | ) | — |   | 2 |   | — |   | (2 | ) | — |   |
| Net income (loss)                                   |       | $                                                                  | (1,404     | )                                                                  | $          | 440 |   | $ | (440 | ) | $ | (1,404 | ) | $ | (447 | ) | $ | 2 |   | $ | (2 | ) | $ | (447 | ) |

 
| ** **                                                 | ** ** | **Predecessor Entity**                                             | ** ** | ** **     | **Successor Entity**                                                  | ** **      |
|------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------|----------------------------------------------------------------------------|-----------------|
| ** **                                                 | ** ** | **Period January 1 to February 14, 2007** | ** ** | ** **     | **Period February 15 to September 29, 2007** | ** **      |
| ** **                                                 | ** ** | ** **                                                              | ** ** | **Non-**       | ** **                                                                 | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Issuer**                                                              | ** ** | **Guarantors** | ** **                                                                 | **Elimnations** | ** ** | **Total** | ** ** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Elimnations** | ** ** | **Total** | ** ** |
| Revenue                                                    |       | $                                                                       | 50,349     |           | $                                                                          | 8,484           |   | $ | — |   | $ | 58,833 |   |   | $ | 258,163 |   | $ | 45,493 |   | $ | — |   | $ | 303,656 |   |
| Cost of revenue                                            |       | 40,437                                                                  |       | 7,750          |                                                                       | —          |   | 48,187 |   |   | 214,444 |   | 39,652 |   | — |   | 254,096 |   |
| Gross profit                                               |       | 9,912                                                                   |       | 734            |                                                                       | —          |   | 10,646 |   |   | 43,719 |   | 5,841 |   | — |   | 49,560 |   |
| General and  administrative expenses                       |       | 9,001                                                                   |       | 382            |                                                                       | —          |   | 9,383 |   |   | 28,003 |   | 1,979 |   | — |   | 29,982 |   |
| Selling and  marketing expenses                            |       | 1,590                                                                   |       | 350            |                                                                       | —          |   | 1,940 |   |   | 8,986 |   | 2,053 |   | — |   | 11,039 |   |
| Operating income  (loss)                                   |       | (679                                                                    | )          | 2              |                                                                       | —          |   | (677 | ) |   | 6,730 |   | 1,809 |   | — |   | 8,539 |   |
| Interest (income)  expense, net                            |       | (21                                                                     | )          | 11             |                                                                       | —          |   | (10 | ) |   | 24,144 |   | (54 | ) | — |   | 24,090 |   |
| Income (loss)  before income taxes                         |       | (658                                                                    | )          | (9             | )                                                                          | —          |   | (667 | ) |   | (17,414 | ) | 1,863 |   | — |   | (15,551 | ) |
| Provision  (benefit) for income taxes                      |       | (327                                                                    | )          | 35             |                                                                       | —          |   | (292 | ) |   | 3,780 |   | 722 |   | — |   | 4,502 |   |
| Equity in net  income (loss) of Non-Guarantor subsidiaries |       | (44                                                                     | )          | —         |                                                                       | 44              |   | — |   |   | 1,141 |   | — |   | (1,141 | ) | — |   |
| Net income (loss)                                          |       | $                                                                       | (375       | )              | $                                                                          | (44             | ) | $ | 44 |   | $ | (375 | ) |   | $ | (20,053 | ) | $ | 1,141 |   | $ | (1,141 | ) | $ | (20,053 | ) |

 
|                                                |   |   |   |   |   |   |   |   |   |   | **Nine Months Ended September 27, 2008** |       |
|-----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------------------------------------------------------------------|------------|
|                                                |   |   |   |   |   |   |   |   |   |   | ** **                                                        | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** |   |
|                                                |   |   |   |   |   |   |   |   |   |   | **Issuer**                                                        | ** ** | **Guarantors** | ** ** | **Elimnations** | ** ** | **Total** |   |
| Revenue                                             |   |   |   |   |   |   |   |   |   |   | $                                                                 | 342,991    |   | $ | 57,809 |   | $ | — |   | $ | 400,800 |   |
| Cost of revenue                                     |   |   |   |   |   |   |   |   |   |   | 280,042                                                           |       | 49,528 |   | — |   | 329,570 |   |
| Gross profit                                        |   |   |   |   |   |   |   |   |   |   | 62,949                                                            |       | 8,281 |   | — |   | 71,230 |   |
| General and  administrative expenses                |   |   |   |   |   |   |   |   |   |   | 35,581                                                            |       | 3,121 |   | — |   | 38,702 |   |
| Selling and  marketing expenses                     |   |   |   |   |   |   |   |   |   |   | 9,714                                                             |       | 2,249 |   | — |   | 11,963 |   |
| Operating income                                    |   |   |   |   |   |   |   |   |   |   | 17,654                                                            |       | 2,911 |   | — |   | 20,565 |   |
| Interest (income)  expense, net                     |   |   |   |   |   |   |   |   |   |   | 26,277                                                            |       | (16 | ) | — |   | 26,261 |   |
| Income (loss)  before income taxes                  |   |   |   |   |   |   |   |   |   |   | (8,623                                                            | )          | 2,927 |   | — |   | (5,696 | ) |
| Provision for  income taxes                         |   |   |   |   |   |   |   |   |   |   | 4,730                                                             |       | 998 |   | — |   | 5,728 |   |
| Equity in net  income of Non Guarantor subsidiaries |   |   |   |   |   |   |   |   | 1,929  |   | —                                                            |       | (1,929 | ) | — |   |
| Net income (loss)                                   |   |   |   |   |   |   |   |   |   |   | $                                                                 | (11,424    | ) | $ | 1,929 |   | $ | (1,929 | ) | $ | (11,424 | ) |

 

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*Issuerand Non-Guarantor Financial Information*

*CondensedCombining Statements of Cash Flows*

 

 
| ** **                                                    | ** ** | **Predecessor Entity**                                             | ** ** | ** **     | **Successor Entity**                                                  | ** **       |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------|----------------------------------------------------------------------------|------------------|
| ** **                                                    | ** ** | **Period January 1 to February 14, 2007** | ** ** | ** **     | **Period February 15 to September 29, 2007** | ** **       |
| ** **                                                    | ** ** | ** **                                                              | ** ** | **Non**        | ** **                                                                 | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Issuer**                                                              | ** ** | **Guarantors** | ** **                                                                 | **Eliminations** | ** ** | **Total** | ** ** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Net cash (used  in) provided by operating activities          |       | $                                                                       | (14,238    | )              | $                                                                          | (4,658           | ) | $ | — |   | $ | (18,896 | ) |   | $ | 16,352 |   | $ | (359 | ) | $ | — |   | $ | 15,993 |   |
| Net cash (used  in) provided by investing activities          |       | (3,669                                                                  | )          | (58            | )                                                                          | —           |   | (3,727 | ) |   | (625,346 | ) | 3,322 |   | 2,406 |   | (619,618 | ) |
| Net cash  provided by financing activities                    |       | 10,029                                                                  |       | 3,242          |                                                                       | —           |   | 13,271 |   |   | 618,122 |   | 2,406 |   | (2,406 | ) | 618,122 |   |
| Effect of  exchange rate changes on cash and cash equivalents |       | —                                                                  |       | (166           | )                                                                          | —           |   | (166 | ) |   | — |   | 499 |   | — |   | 499 |   |
| Net (decrease)  increase in cash and cash equivalents         |       | (7,878                                                                  | )          | (1,640         | )                                                                          | —           |   | (9,518 | ) |   | 9,128 |   | 5,868 |   | — |   | 14,996 |   |
| 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 |   |   | $ | 9,128 |   | $ | 5,868 |   | $ | — |   | $ | 14,996 |   |

 
| ** **                                                    | ** ** | **Nine Months Ended September 27, 2008** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Issuer**                                                        | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Net cash  provided by operating activities                    |       | $                                                                 | 10,044     |   | $ | 898 |   | $ | — |   | 10,942 |   |
| Net cash used in  investing activities                        |       | (7,720                                                            | )          | (562 | ) | (2,406 | ) | (10,688 | ) |
| Net cash used in  financing activities                        |       | (8,039                                                            | )          | (2,406 | ) | 2,406 |   | (8,039 | ) |
| Effect of  exchange rate changes on cash and cash equivalents |       | —                                                            |       | (217 | ) | — |   | (217 | ) |
| Net (decrease)  in cash and cash equivalents                  |       | (5,715                                                            | )          | (2,287 | ) | — |   | (8,002 | ) |
| Cash and cash  equivalents, beginning of period               |       | 19,022                                                            |       | 7,071 |   | — |   | 26,093 |   |
| Cash and cash  equivalents, end of period                     |       | $                                                                 | 13,307     |   | $ | 4,784 |   | $ | — |   | $ | 18,091 |   |
|                                                               |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

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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. public health care and othercivilian government agencies, as well as select U.S. defense and intelligenceagencies, foreign government organizations and private sector entities. Wedesign, build and operate mission-critical systems and processes to seamlesslydeliver vital information, services and programs to our customers and theirconstituents. Most of our revenue is generated from long-term contracts thattypically have a duration of four to six years, including option years. As of September 27,2008, our total contract backlog was $1,630.1 million, compared with $1,769.9million at December 31, 2007.

 

We manage our business through three segments: the Government Group,the International Group and the Commercial Group.  Our two largest customers are the Departmentof Health and Human Services (“HHS”) and the Department of Education (“DoED”).HHS and DoED represented 46% and 17% of revenue for the nine months ended September 27,2008, compared with 44% and 18% for the corresponding periods in 2007,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 represented80% of total revenue for the nine months ended September 27, 2008,compared with 78% for the corresponding period in 2007.

 

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 5% of totalrevenue for the nine months ended September 27, 2008, compared with 7% forthe corresponding period in 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 15% of total revenue for thenine months ended September 27, 2008, about the same as for thecorresponding period in 2007.

 

**VangentAcquisition Transaction (“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 and businessprocess outsourcing business operated by the Pearson Government Solutionsoperating unit of Pearson and the other seller entities, which is referred toas the “Acquisition.”  Pearson and theother seller entities are referred to as the “sellers” or Predecessor Entity.

 

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

 

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*Indemnification.*  The stock purchase agreement  provides that the sellers will indemnify us,the Buyer and its other affiliates without regard to any time limitation forany losses incurred by us, our parent and its other affiliates in connectionwith an investigation by the U.S. Government through the Department of Justiceand the Inspector General of the Department of Homeland Security to determinewhether we and NCS Pearson Inc. violated the Civil False Claims Act or otherfederal laws in connection with a contract awarded by the TransportationSecurity Administration to NCS Pearson Inc. in 2002, except that the first$20.0 million in losses resulting from such investigation will be sharedequally. Upon closing of the Acquisition, we entered into a joint defenseagreement with one of the sellers, NCS Pearson Inc., pursuant to which bothparties assumed joint defense with respect to such investigation.

 

**Acquisition of Aptiv Technology Partners**

 

In May 2008, Vangent purchased the government health integrationgroup assets of Aptiv Technology Partners for cash consideration of $3.9million, including acquisition fees.  Inaccordance with SFAS No. 141, *Business Combinations*,and the purchase method of accounting, the assets and liabilities acquired wererecorded at their estimated fair values at the date of the acquisition, and theresults of operations of the acquired business has been included in Vangent’sconsolidated financial statements from the date of the acquisition.

 

**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 nine months ended September 29, 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 September 29, 2007. Althoughthis approach is not consistent with generally accepted accounting principles,we believe it is the most meaningful way to review the statements of operationsdata for such periods.

 

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:

 

*Revenue and Dependence on FederalGovernment Contracts.* Contracts funded by U.S. government agencies represented 74% of totalrevenue for the nine months ended September 27, 2008, compared with 72%for the corresponding period in 2007. Revenue from contracts in which we actedas the prime contractor represented 89% of total revenue in the nine monthsended September 27,  2008, about thesame as for the corresponding period in 2007.

 

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Revenue from cost-plus contracts represented 48% oftotal revenue for the nine months ended September 27, 2008, compared with43% for the corresponding period in 2007. The shift to cost-plus reflects theincrease of $38.3 million, or 11%, in total revenue that was derived mainlyfrom new and existing cost-plus contracts. Revenue from cost-plus, fixed-priceand time and materials contracts was split as follows:

 
| ** **          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **September 29,  2007**     | ** ** | **September 27,  2008**    | ** ** | **September 29,  2007** | ** ** | **September 27,  2008** | ** ** |
|                |       |                             |       |                            |       |   |   |   |   |
| Cost-plus           |       | 48                               | %          | 49                              | %          | 43 | % | 48 | % |
| Fixed-price         |       | 49                               | %          | 45                              | %          | 52 | % | 46 | % |
| Time and  materials |       | 3                                | %          | 6                               | %          | 5 | % | 6 | % |
|                |       | 100                              | %          | 100                             | %          | 100 | % | 100 | % |

 

*Cost of Revenue.*Cost of revenue 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.

 

*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 (“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 (the 90%) by the Buyer wasrecorded at fair value. As a result, the assets and liabilities have beenassigned new values which include part carryover basis and part fair valuebasis. The excess of the purchase price over assets acquired and liabilitiesassumed amounted to $301.9 million and was allocated to goodwill.

 

The acquisition of Aptiv Technology Partners in 2008 resulted inintangible assets of $1.2 million scheduled to be amortized over a three-yearperiod and goodwill of $2.7 million.

 

*Goodwilland Intangible Assets*. In accordance with FASB Statement No. 142,“*Goodwill and Other Intangible Assets*”(“SFAS 142”), Vangent performs an annual impairment review of goodwill andintangible assets not subject to amortization in the fourth quarter of eachyear.  Under SFAS 142, the impairment review of goodwill andintangible assets not subject to amortization is based on estimated fairvalues.  The valuation of intangible assets requires assumptions andestimates of many critical factors, including revenue and market growth,operating cash flows, market multiples, and discount rates.  TheCommercial Group has experienced declines in the revenue and operating incomefor the nine months ended September 27, 2008, compared with thecorresponding period in 2007, and revenue and operating results of theInternational Group are subject to changes in foreign currency exchange ratesvs. the U.S. dollar. Adverse changes in expected operating results and/orunfavorable changes in other economic factors used to estimate fair valuescould result in non-cash impairment charges in future periods under SFAS 142.

 

*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.

 

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**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. 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** | ** ** | **September 27, 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 |   | $ | 1,322.3 |   | $ | 339.3 |   | $ | 145.4 |   |
| International  Group |       | 335.4                           |       | 215.9                            |       | 215.9 |   | 289.1 |   | 162.1 |   | 162.1 |   |
| Commercial Group     |       | 11.8                            |       | 11.8                             |       | 11.8 |   | 18.7 |   | 16.7 |   | 16.7 |   |
|                 |       | $                               | 1,769.9    |                             | $          | 408.4 |   | $ | 363.6 |   | $ | 1,630.1 |   | $ | 518.1 |   | $ | 324.2 |   |

 

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(1) The U.S. dollar has strengthened since September 27,2008. As a result, the translation of foreign-currency backlog to U.S. dollarsfor the International Group has declined from $289.1 million to $246.8 millionat October 31, 2008.

 

**Critical Accounting Policies**

 

The criticalaccounting estimates used in the preparation of the condensed consolidatedfinancial statements are described in our annual report on Form 10-K forthe year ended December 31, 2007.  There has been no significantchange in the critical accounting estimates: revenue recognition and costestimation on long-term contracts, intangible assets, goodwill, litigation andcontingencies, equity-based compensation, and income taxes.

 

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 and assumptionsare based upon what we believe is the best information available at the time ofthe estimates or assumptions. The estimates and assumptions could changematerially as conditions within and beyond our control change. Accordingly,actual results could differ materially from those estimates.

 

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**Results of Operations**

 

Statements of operations data follow (dollars inthousands):

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 29,**           | ** ** | **September 27,**          | ** ** | **September 29,** | ** ** | **September 27,** | ** ** |
| ** **                                                            | ** ** | **2007**                         | ** ** | **2008**                        | ** ** | **2007 (1)** | ** ** | **2008** | ** ** |
| **Statements  of Operations Data**                                    |       |                             |       |                            |       |   |   |   |   |
| Revenue                                                               |       | $                                | 129,610    |                            | $          | 133,391 |   | $ | 362,489 |   | $ | 400,800 |   |
| Cost of revenue                                                       |       | 103,983                          |       | 106,470                         |       | 302,283 |   | 329,570 |   |
| Gross profit                                                          |       | 25,627                           |       | 26,921                          |       | 60,206 |   | 71,230 |   |
| General and  administrative expenses                                  |       | 11,544                           |       | 12,445                          |       | 39,365 |   | 38,702 |   |
| Selling and  marketing expenses                                       |       | 4,190                            |       | 3,757                           |       | 12,979 |   | 11,963 |   |
| Operating income                                                      |       | 9,893                            |       | 10,719                          |       | 7,862 |   | 20,565 |   |
| Interest  expense, net                                                |       | 9,731                            |       | 8,534                           |       | 24,080 |   | 26,261 |   |
| Income (loss)  before income taxes                                    |       | 162                              |       | 2,185                           |       | (16,218 | ) | (5,696 | ) |
| Provision for  income taxes                                           |       | 1,566                            |       | 2,632                           |       | 4,210 |   | 5,728 |   |
| Net loss                                                              |       | $                                | (1,404     | )                               | $          | (447 | ) | $ | (20,428 | ) | $ | (11,424 | ) |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| **Statements  of Operations Data**** as  a Percent of Revenue**  |       |                             |       |                            |       |   |   |   |   |
| Revenue                                                               |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of revenue                                                       |       | 80.2                             |       | 79.8                            |       | 83.4 |   | 82.2 |   |
| Gross profit  margin                                                  |       | 19.8                             |       | 20.2                            |       | 16.6 |   | 17.8 |   |
| General and  administrative expenses                                  |       | 8.9                              |       | 9.4                             |       | 10.8 |   | 9.7 |   |
| Selling and  marketing expenses                                       |       | 3.3                              |       | 2.8                             |       | 3.6 |   | 3.0 |   |
| Operating income                                                      |       | 7.6                              |       | 8.0                             |       | 2.2 |   | 5.1 |   |
| Interest  expense, net                                                |       | 7.5                              |       | 6.4                             |       | 6.7 |   | 6.5 |   |
| Income (loss)  before income taxes                                    |       | 0.1                              |       | 1.6                             |       | (4.5 | ) | (1.4 | ) |
| Provision for  income taxes                                           |       | 1.2                              |       | 2.0                             |       | 1.1 |   | 1.4 |   |
| Net loss                                                              |       | (1.1                             | )%         | (0.3                            | )%         | (5.6 | )% | (2.9 | )% |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| **Revenue  by Business Segment**                                      |       |                             |       |                            |       |   |   |   |   |
| Government Group                                                      |       | $                                | 102,896    |                            | $          | 107,949 |   | $ | 283,165 |   | $ | 320,845 |   |
| Commercial Group                                                      |       | 8,555                            |       | 7,161                           |       | 25,096 |   | 21,892 |   |
| International  Group                                                  |       | 18,159                           |       | 18,281                          |       | 54,228 |   | 58,063 |   |
|                                                                  |       | $                                | 129,610    |                            | $          | 133,391 |   | $ | 362,489 |   | $ | 400,800 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| **Business  Segment Revenue as a**** Percent  of Total Revenue** |       |                             |       |                            |       |   |   |   |   |
| Government Group                                                      |       | 79.4                             | %          | 80.9                            | %          | 78.1 | % | 80.0 | % |
| Commercial Group                                                      |       | 6.6                              | %          | 5.4                             |       | 6.9 |   | 5.5 |   |
| International  Group                                                  |       | 14.0                             |       | 13.7                            |       | 15.0 |   | 14.5 |   |
|                                                                  |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

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(1)Represents the mathematical additionof the Predecessor Entity for the period January 1 to February 14,2007, and the Successor Entity for the period February 15 to September 29,2007.

 

***Three and NineMonths Ended September 27, 2008 and September 29, 2007***

 

*Revenue*

 

The Department of Healthand Human Services (“HHS”), as a major customer, represented 46% of totalrevenue for the nine months ended September 27, 2008, compared with 44% for thecorresponding period in 2007. The Department of Education (“DoED”), as a majorcustomer, represented 17% of total revenue for the nine months ended September 27,2008, compared with 18% for the corresponding period in 2007.

 

The increases in totalrevenue of $3.8 million, or 3%, for the three months and $38.3 million, or11%, for the nine months ended September 27, 2008, reflect higher revenuefrom the Government Group.  GovernmentGroup revenue increased $5.1 million, or 5%, for the three months and $37.7million, or 13%, for the nine months ended September 27, 2008.

 

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The increase of $5.1million in Government Group revenue in the three-month period reflects $4.6million from new contract awards with the Department of Defense (“DoD”), $2.7million from new contract awards with the Department of Labor (“DoL”), and $0.9million of additional revenue from the Department of Commerce (“DOC”), partlyoffset by a reduction of $3.8 million from Medicare-related outsourcingcontracts.

 

The increase inGovernment Group revenue in the nine-month period reflects $21.0 million fromhigher prescription drug enrollment volume under continuing Medicare-relatedoutsourcing contracts, $11.5 million from new contract awards with DoD, $4.2million from new contract awards with DoL, $4.2 million in additional revenuefrom HHS contracts, and $1.8 million in additional revenue from DOCcontracts.  The increases were partlyoffset by reductions to revenue for contracts that were completed in 2007amounting to $1.2 million with the Veterans Administration and $2.5 millionwith the Equal Employment Opportunity Commission.

 

Commercial Group revenuedeclined $1.4 million, or 16%, for the three months and $3.2 million, or 13%,for the nine months ended September 27, 2008, reflecting lower commercialassessment product sales for various commercial customers and a reduction intraining services and assessment related services for several Fortune 500customers due in part to overall economic conditions and reductions in customerhiring patterns. The reductions were partly offset by increases of $0.2 millionfor the three months and $0.8 million for the nine months in training servicesperformed under a contract with the Air Force.

 

International Grouprevenue of $18.2 for the three months ended September 27, 2008, was aboutthe same as for the corresponding period in 2007. International Group revenueincreased $3.8 million, or 7%, for the nine months ended September 27,2008. The increase reflects two new contracts in Canada that increased revenueby $6.0 million and a contract in Venezuela where inflation-based priceincreases increased revenue by $1.5 million. The increase was partlyoffset by a reduction of $2.5 million from lower volume and price reductions ona United Kingdom government contract and a reduction of $1.2 million from lowervolume on a Mexican contract.

 

*Costof Revenue*

 

Cost of revenue increased $2.5 million, or 2%, for thethree months and $27.3 million, or 9%, for the nine months ended September 27,  2008, reflecting increased labor and servicesprovided under government contracts and an increase of $2.9 million for thenine-month period in amortization of intangible assets resulting from theAcquisition on February 14, 2007. Amortization of intangibles was recordedfor the nine months ended September 27, 2008, compared with 7.5 months forthe corresponding period of 2007. Costs for the nine months ended September 29,2007, included a charge of $4.1 million resulting from the termination of acontract with the University of California.

 

*GrossProfit*

 

Gross profit increased $1.3 million, or 5%, for thethree months and $11.0 million, or 18%, for the nine months ended September 27,2008. The gross profit margin was 20% of revenue in the three months ended September 27,2008, about the same as for the corresponding period in 2007. The gross profitmargin increased to 18% of revenue in the nine months ended September 27,2008, from 17% for the corresponding period in 2007. The increase in grossprofit and the improvement in the gross profit margin in the nine-month periodreflect an increase of $2.9 million in award fees earned based on multi-yearperformance under cost-plus government contracts.

 

*Generaland Administrative Expenses*

 

General and administrative expenses increased $0.9million, or 8%, for the three months ended September 27, 2008, comparedwith the corresponding period in 2007. Expenses were 9% of revenue, about thesame as for the corresponding period in 2007. Expenses for the three months ended September 27, 2008, reflecthigher accruals for incentive compensation. Expenses for the correspondingperiod in 2007 included transition-related expenses of $1.3 million, includingsales and retention bonuses of $0.6 million.

 

General and administrative expenses decreased $0.7million, or 2%, for the nine months ended September 27, 2008 compared withthe corresponding period in 2007. Expenses were 10% of revenue compared with 11% for the correspondingperiod in 2007. Expenses for the nine months ended September 27, 2008include $1.4 million in additional legal fees for litigation issues and relatedinsurance recoveries and $0.6 million for consulting fees for compliance withthe internal control requirements under Sarbanes Oxley that apply to Vangentbeginning in 2008. 

 

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Expenses for thenine months ended September 27, 2008 also include a net charge of $2.0million resulting from an expense of $4.0 million to increase the claimsettlement amount to $5.0 million for a contract dispute with the University ofCalifornia, partly offset by an expense reduction of $2.0 million resultingfrom an agreement with the Company’s insurance carrier under which the carriercontributed $2.0 million to fund the settlement with the University ofCalifornia under a mutual reservation of rights and reimbursement agreement.

 

General and administrative expenses for thecorresponding nine-month period in 2007 included transition-related expenses of$7.4 million, consisting of sales and retention bonuses of $3.5 million,transition costs of $2.8 million and equity-based compensation of $1.1 millionresulting from the accelerated vesting of Predecessor Entity equity-basedawards in connection with the Acquisition, and included a charge of $1.0million for an increase in expected settlement costs relating to a terminatedcontract with the Transportation Security Administration.

 

*OperatingIncome (Loss)*

 

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

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 29,**           | ** ** | **September 27,**          | ** ** | **September 29,** | ** ** | **September 27,** | ** ** |
| ** **                                                                      | ** ** | **2007**                         | ** ** | **2008**                        | ** ** | **2007** | ** ** | **2008** | ** ** |
| **Operating  income (loss)**                                                    |       |                             |       |                            |       |   |   |   |   |
| Government Group                                                                |       | $                                | 8,996      |                            | $          | 10,273 |   | $ | 6,795 |   | $ | 20,263 |   |
| Commercial Group                                                                |       | 915                              |       | 244                             |       | 1,475 |   | (58 | ) |
| International  Group                                                            |       | (38                              | )          | 450                             |       | 139 |   | 1,199 |   |
|                                                                            |       | 9,873                            |       | 10,967                          |       | 8,409 |   | 21,404 |   |
| Corporate                                                                       |       | 20                               |       | (248                            | )          | (547 | ) | (839 | ) |
|                                                                            |       | $                                | 9,893      |                            | $          | 10,719 |   | $ | 7,862 |   | $ | 20,565 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Operating  income (loss) as a percent of business segment and total revenue** |       |                             |       |                            |       |   |   |   |   |
| Government Group                                                                |       | 8.7                              | %          | 9.5                             | %          | 2.4 | % | 6.3 | % |
| Commercial Group                                                                |       | 10.7                             | %          | 3.4                             | %          | 5.9 | % | (0.3 | )% |
| International  Group                                                            |       | (0.2                             | )%         | 2.5                             | %          | 0.3 | % | 2.1 | % |
| Total Operating  Income                                                         |       | 7.6                              | %          | 8.0                             | %          | 2.2 | % | 5.1 | % |

 

The total operating income margin, or the ratio of operating income torevenue, increased for the three and the nine months ended September 27,2008, compared with the corresponding periods in 2007. Total operating income increased $0.8million, or 8%, for the three months and increased $12.7 million, or 162%, forthe nine months ended September 27, 2008. The increase in operating incomeand the operating income margin for the nine-month period primarily reflectsthe higher operating income margin for the Government Group, including anincrease of $2.9 million in award fees earned based on multi-year performanceunder cost-plus government contracts. Total operating income of $7.9 millionfor the corresponding period in 2007 had been reduced by transition-relatedexpenses of $7.4 million for retention bonuses, transition costs, andPredecessor Entity equity-based compensation.

 

Government Groupoperating income increased $1.3 million, or 14%, for the three months ended September 27,2008, reflecting an increase of $2.7 million from DoD contracts. Operatingincome for the corresponding period in 2007 had been reduced by a loss of $0.7million in connection with the disputed contract with the University ofCalifornia.

 

Government Groupoperating income increased $13.5 million, or 198%, for the nine months ended September 27,  2008, and reflects increases of $6.3 millionfrom Medicare-related outsourcing contracts including award fees earned, $4.5million from DoD contracts, $1.2 million from DoED contracts, and $0.8 millionfrom HHS contracts.  The increases were partially offset by an increase of$2.6 million in amortization of intangibles resulting from the Acquisition on February 14,2007.  Amortization of intangibles was recorded for the nine months ended September 27,2008, compared with 7.5 months for the corresponding period in 2007. Operatingincome for the nine months ended September 27, 2008, reflects a net chargeof $2.0 million from the settlement of claims with the 

 

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University of California,compared with a loss of $4.1 million on the disputed contract for thecorresponding period in 2007.

 

Commercial group operating income declined $0.7 million for the threemonths and $1.5 million for the nine months ended September 27, 2008. Thereductions reflect lower revenue of $1.4 million for the three months and $3.2million for the nine months. In the corresponding periods in 2007, general andadministrative expenses had included transition-related expenses of $0.7million for the three months and $1.1 million for the nine months.

 

International Groupoperating income increased $0.5 million for the three months and $1.1 millionfor the nine months ended September 27, 2008. The increases reflect twonew contracts in Canada, higher margins from contracts in Venezuela, and lowerbid and proposal expenses. The increases were partly offset by foreign currencytransaction losses and higher general and administrative expenses.

 

*InterestExpense, Net*

 

Interest expenseis accrued on borrowings in connection with the Acquisition on February 14,2007.  Debt at September 27, 2008,consisted of a variable-rate term loan of $230.4 million under the seniorsecured credit facility of which $195.0 million was hedged under interest rateswaps agreements, and $190.0 million of 9 5/8% senior subordinated notes due2015.

 

Thereduction of $1.2 million, or 12%, in net interest expense for the three monthsended September 27, 2008, reflects the decline in variable interest rates.Interest rates declined an average of 370 basis points on the notional amountof $75.0 million that was hedged in April 2008 under an interest rate swapagreement and rates declined 290 basis points on the $35.4 million unhedgedportion of the term loan.

 

Theincrease of $2.2 million, or 9%, in net interest expense for the nine monthsended September 27, 2008, reflects interest accrued on an averageoutstanding debt level of $423 million for the nine-month period, compared withan average debt level of $432 million for 7.5 months for the correspondingperiod in 2007. The increase was partly offset by the decline in variableinterest rates.

 

*Provisionfor Income Taxes*

 

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

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **September 29,**           | ** ** | **September 27,**          | ** ** | **September 29,** | ** ** | **September 27,** | ** ** |
| ** **                                                              | ** ** | **2007**                         | ** ** | **2008**                        | ** ** | **2007** | ** ** | **2008** | ** ** |
| Provision  (benefit) for income taxes excluding tax valuation allowance | ** ** | $                                | (4,212     | )                               | $          | 231 |   | $ | (5,432 | ) | $ | (1,391 | ) |
| Tax valuation  allowance                                                |       | 5,778                            |       | 2,401                           |       | 9,642 |   | 7,119 |   |
| Total provision  for income taxes                                       |       | $                                | 1,566      |                            | $          | 2,632 |   | $ | 4,210 |   | $ | 5,728 |   |

 

Accounting for incometaxes 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.  The provisionfor income taxes of $2.6 million for the three months and $5.7 million for thenine months ended September 27, 2008, is composed of U.S. federal, stateand local and foreign income taxes and reflects a tax valuation allowanceagainst U.S. deferred tax assets. The valuation allowance results primarilyfrom the effect on U.S. net operating losses from the tax amortization ofgoodwill. Goodwill is an indefinite lived asset that is amortized for taxpurposes, but is not amortized under U.S. generally accepted accountingprinciples. The Company has concluded, based upon available evidence, it ismore likely than not that the U.S. federal, state, and local deferred taxassets at September 27, 2008, will not be realizable. Therefore, avaluation allowance has been provided against U.S. deferred tax assets.

 

*Net Loss*

 

The reduction of $1.0 million, or 68%, in the netloss for the three months ended September 27, 2008, reflects the increasein the operating income and reduction in interest expense. The reduction of$9.0 million, or

 

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44%, in the net loss for the nine months ended September 27, 2008,reflects the increase of $12.7 million in operating income partially offset bythe increase in interest expense with Acquisition-related debt outstanding forthe full nine months in 2008.

 

**Liquidity and Capital Resources**

 

Our primary source ofliquidity has been available cash and cash equivalents, cash flows fromoperating activities, and a line of credit available under a revolving creditfacility.  Cash and cash equivalentsamounted to $18.1 million at September 27, 2008, cash flow from operatingactivities was $10.9 million for the nine months ended September 27, 2008,and a line of credit of $49.6 million was available under the revolving creditfacility.  Based on our current level ofoperations, we believe our cash and cash equivalents, cash flow fromoperations, and line of credit available under the revolving credit facilitywill be adequate to meet our liquidity needs for at least the next twelvemonths.

 

Cash and cash equivalents of $18.1 million is composed of highly liquidinstruments with original maturities of 90 days or less.  Vangent does not invest in auction-ratesecurities or high yield, high risk securities. Cash in bank accounts at times may exceed federally insured limits.  Cash equivalents or marketable securities arecomprised of repurchase agreements with major commercial banks under which cashis invested in U.S. Treasury and U.S. government agency securities.

 

The $49.6 millionline of credit available under the revolving credit facility is based on thesenior secured credit facility between Vangent and a syndicate of banks led byWachovia Bank, N.A. Wachovia Bank, N. A. provides $16.0 million of theavailable line of credit and is the counterparty to interest rate swapagreements for the notional amount of $190.0 million at September 27,2008. Vangent is continuing to monitor recent market events and evaluatecounterparty creditworthiness and considers the likelihood of counterpartydefault to be remote.

 

Our long-term debtmatures in the years 2013 and 2015. In view of current credit market conditionsand our credit ratings and in the event we were to refinance the senior securedcredit facility or the senior subordinated notes, we wouldlikely encounter higher interest rates and limited availability of debtfinancing capacity.

 

A summary of workingcapital follows (in thousands):

 
| ** **                             | ** ** | **December 31,  2007** | ** ** | **September 27,  2008** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Cash and cash  equivalents             |       | $                           | 26,093     |                         | $          | 18,091 |   |
| Trade  receivables, net                |       | 112,292                     |       | 111,718                      |       |
| Other  receivables and prepaid items   |       | 15,470                      |       | 14,958                       |       |
| Current portion  of long-term debt     |       | (7,325                      | )          | —                       |       |
| Accounts payable  and accrued expenses |       | (63,248                     | )          | (59,888                      | )          |
| Accrued interest  payable              |       | (8,547                      | )          | (3,395                       | )          |
| Deferred tax  liability                |       | (852                        | )          | (4,098                       | )          |
| Advance payments  on contracts         |       | (4,444                      | )          | (2,537                       | )          |
| Working capital                        |       | $                           | 69,439     |                         | $          | 74,849 |   |

 

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

 
| ** **                         | ** ** | **Predecessor  Entity**                               | ** ** | ** ** | **Successor Entity**                                | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|------------|----------------------------------------------------------|------------|
| ** **                         | ** ** | **Period  January 1 to  February 14,** | ** ** | ** ** | **Period  February 15 to  September 29,** | ** ** | **Nine Months  Ended  September 27,** | ** ** |
| ** **                         | ** ** | **2007**                                              | ** ** | ** ** | **2007**                                                 | ** ** | **2008** | ** ** |
| Cash flows (used  in) provided by: |       |                                                  |       |       |                                                     |       |   |   |
| Operating  activities              |       | $                                                     | (18,896    | )          |                                                     | $          | 15,993 |   | $ | 10,942 |   |
| Investing  activities              |       | (3,727                                                | )          |       | (619,618                                                 | )          | (10,688 | ) |
| Financing  activities              |       | 13,271                                                |       |       | 618,122                                                  |       | (8,039 | ) |
|                                    |            |                                                       |            |            |                                                          |            |  |  |  |  |  |

 

*Operating Activities*

 

Net cash flow provided by operating activities of $10.9 million for thenine months ended September 27, 2008, reflects the net loss of $11.4million adjusted by noncash charges of $26.4 million ($15.9 million foramortization of intangible assets and $10.5 million for depreciation andamortization of property and equipment) and a net reduction of $6.2 million inaccounts payable and accrued expenses.

 

Net cash flow provided by operating activities of $16.0 millionfor the period February 15 to September 29, 2007, reflects a netincrease of $21.4 million in accounts payable and accrued liabilities and a netincrease of $4.7 million in accrued interest payable on long-term debt, partlyoffset by a net increase of $14.5 in other receivables and prepaid and otherassets. The net loss of $20.1 million was offset by noncash charges of $20.8million ($13.0 million for amortization of intangible assets and $7.8 millionfor depreciation and amortization of property and equipment).

 

Net cash flow used in operating activities of $18.9 million by thePredecessor Entity for the period January 1 to February 14, 2007,reflects an increase of $16.4 million in accounts receivable from the timing ofcustomer collections.

 

*InvestingActivities*

 

Cash paid to purchase the government health integration group of AptivTechnology Partners in May 2008 amounted to $3.9 million, includingacquisition fees.

 

Capital expenditures funded in cash amounted to $6.8 million for thenine months ended September 27, 2008, and are expected to total up to $14.5 million for 2008 primarilyfor anticipated contractual and general infrastructure requirements and newbusiness growth. Noncash investing and financing activities included leaseholdimprovements of $2.5 million recorded under an operating lease for officespace. Other liabilities increased for the corresponding deferred rentobligation under the operating lease.

 

Net cash flow of $619.6 million used in investing activities forthe period February 15 to September 29, 2007, reflects $615.2 millionresulting from the Acquisition.

 

Net cash flow of $3.7 million used in investing activities by thePredecessor Entity for the period January 1 to February 14, 2007,represents capital expenditures.

 

*FinancingActivities*

 

Net cash used in financing activities of $8.0 million for the ninemonths ended September 27, 2008 reflects debt repayments of $7.8 million,primarily a mandatory prepayment under the senior secured credit facility basedon a percentage of annual excess cash flow, as defined.

 

Net cash of $618.1 million provided by financing activities for theperiod February 15 to September 29 , 2007, reflects debt of $430.0million and equity of $203.5 million issued in connection with theAcquisition.  Debt financing costs of$14.0 million were paid in connection with financing for the Acquisition.

 

Net cash of $13.3 million provided by financing activities for theperiod January 1 to February 14, 2007, reflects a net investment byPredecessor Entity.

 

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*SeniorSecured Credit Facility*

 

At September 27, 2008, the senior secured creditfacility consisted of a term loan of $230.4 million due February 14, 2013,an available revolving credit facility of up to $49.6 million that expires February 14,2012 and a letter of credit of $0.4 million. There were no borrowings outstanding under the revolving credit facilityat September 27, 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 bearinterest at a rate equal to, at the Company’s option, either: (i) the baserate, as defined, plus an applicable margin of 1.00-1.50%, or (ii) theadjusted LIBOR rate, as defined, plus an applicable margin of 2.00-2.50%. Theterm loan is scheduled to be repaid in 11 quarterly installments of $0.6million beginning June 2010 with the balance due February 14,2013.  Borrowings are subject tomandatory prepayment with (i) 100% of the net cash proceeds of certainasset sales; (ii) 50% of the net cash proceeds of equity offerings orcapital contributions subject to certain exceptions; (iii) 100% of the netcash proceeds of additional debt; and (iv) a percentage of annual excesscash flow, as defined. Payments resulting from the annual excess cash flowrequirement are due 90 days following the year end.  Because the excess cash flow requirement isbased on annual cash flow, it is not possible to estimate the amount, if any,that would become payable in March 2009 or subsequent years.

 

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. The senior 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 September 27, 2008, theCompany was in compliance with the covenants.

 

*9 5/8%Senior Subordinated Notes*

 

In February 2007, the Company completed an offering of $190.0million principal amount of 9 5/8 % senior subordinated notes due February 15,2015. Interest accrues at the fixed rate of 9 5/8% and is paid semi-annually.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.

 

In the event of an equity offering on or prior to February 15, 2010,the Company may redeem the notes with the net cash proceeds of one or moreequity offerings at 109.625% of the principal amount, provided that at least65% of the principal amount of the notes originally issued remains outstandingimmediately following such redemption.

 

With respect to a redemption not related to an equity offering at anytime prior to February 15, 2011, the Company may redeem all or part of thenotes at a redemption price of 100% of the principal amount plus an applicablepremium, as defined, and additional interest, as defined. The notes areredeemable at the option of the Company at the redemption price of 104.8125% ofthe principal amount on or after February 15, 2011, 102.4063% on or after February 15,2012, and 100% on or after February 15, 2013.

* *

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

 

The Company has entered into interest rate swapagreements with Wachovia Bank N.A., the counterparty, to hedge fluctuations inLIBOR interest rates on a portion of the term-loan borrowing under the seniorsecured credit facility.  The Companyexchanged its floating LIBOR interest rate for a fixed interest rate, asfollows (dollars in millions):

 
| ** **            | ** ** | ** **   | ** ** | **Fixed**                | ** ** | **Variable**                 | ** ** | ** **                               | ** **                               |
|-----------------------|------------|--------------|------------|--------------------------|------------|------------------------------|------------|------------------------------------------|------------------------------------------|
| ** **            | ** ** | **Notional** | ** ** | **Interest Rate**   | ** ** | **Interest Rate**       | ** ** | ** **                               | ** **                               |
| **Date Entered** | ** ** | **Amount**   | ** ** | **to be Paid** | ** ** | **to be Received** | ** ** | **Period Covered**                  | ** **                               |
| February 2007    |       | $            | 140.0      |                     | 5.215      | %                            | LIBOR      |                                     | February 2007 to February 2008 |   |
|                  |       | 120.0        |       | 5.215                    | %          | LIBOR                        |       | February 2008 to February 2009 |                                     |
|                  |       | 110.0        |       | 5.215                    | %          | LIBOR                        |       | February 2009 to February 2010 |                                     |
|                  |       |         |       |                     |       |                         |       |                                     |                                     |
| April 2008       |       | $            | 75.0       |                     | 3.280      | %                            | LIBOR      |                                     | April 2008 to February 2010    |   |
|                  |       | 150.0        |       | 3.280                    | %          | LIBOR                        |       | February 2010 to February 2011 |                                     |

 

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The Companydocumented its risk management objective and nature of the risks being hedgedand has designated the interest rate swaps as cash flow hedges at inception ofthe agreements.  The Company performs aquarterly analysis of the effectiveness of the hedge and has concluded that thehedging relationship is highly effective due to the consistency ofcritical terms of the interest rate swap and related term loan under the seniorsecured credit facility. The fair value of the net interest rate swapliability was $2.7 million at September 27, 2008, resulting in anunrealized loss of $2.5 million reported in accumulated other comprehensiveloss in the consolidated statement of stockholder’s equity and a realized lossof $0.2 million for the ineffective portion reported as interest expense.

 

In the unlikelyevent that the counterparty fails to meet the terms, the Company’s exposure islimited to the interest rate differential on the notional amount at each quarterlysettlement period over the life of the agreement. We do not anticipatenon-performance by the counterparty. The use of derivative financialinstruments is limited to interest rate swaps, the purpose of which is to hedgeinterest expense on a portion of the variable-rate term loan. The Company doesnot hold or issue derivative financial instruments for speculative purposes.

 

*CreditRatings*

 

The debt-to-equity ratio was 248% at September 27, 2008, comparedwith 238% at December 31, 2007. The most recent ratings were assigned byStandard and Poor’s in April 2007 and by Moody’s in January 2007, asfollows:

 
| ** **                          | ** ** | **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 make future cash payments under long-termdebt agreements, contracts and contingent commitments at September 27,2008, follow (in millions):

 
| ** **                                          | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **Total**  | ** ** | **Remainder of  2008**               | ** ** | **2009** | ** ** | **2010 and  2011** | ** ** | **2012 and  2013** | ** ** | **Thereafter** | ** ** |
| Long-term debt:                                     |       |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Term loan under  senior secured credit facility (1) |       | 230.4      |       | $                                         | —     |   | $ | — |   | $ | 4.2 |   | $ | 226.2 |   | $ | — |   |
| Senior  subordinated notes due 2015                 |       | 190.0      |       | —                                    |       | — |   | — |   | — |   | 190.0 |   |
| Interest  relating to long-term debt (2)            |       | 172.4      |       | 3.7                                       |       | 32.3 |   | 58.9 |   | 50.1 |   | 27.4 |   |
| Operating and  capital leases                       |       | 72.8       |       | 4.5                                       |       | 16.6 |   | 22.2 |   | 13.9 |   | 15.6 |   |
| Purchase  commitments (3)                           |       | 20.1       |       | 2.7                                       |       | 17.4 |   | — |   | — |   | — |   |
|                                                |       | $          | 685.7      |                                      | $          | 10.9 |   | $ | 66.3 |   | $ | 85.3 |   | $ | 290.2 |   | $ | 233.0 |   |
|                                                     |            |            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1) |   | There were no  borrowings under the revolving credit facility at September 27, 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 4.82% at  September 27, 2008, the related interest rate swap, and the fixed rate  of 9 5/8% for the senior subordinated notes. |
| (3) |   | Purchase commitments  represent the minimum noncancelable obligations under service agreements,  primarily information technology and telecommunications services.                                                                                                                         |

 

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* *

*Off-Balance Sheet Arrangements*

 

As of September 27, 2008, there were no off-balance sheetarrangements other than operating leases for office facilities for which futureminimum lease payments aggregated $72.8 million and a letter of credit of $0.4million issued under the senior secured credit facility.

 

**Recent Accounting Pronouncements**

 

Reference is made to thenotes to the condensed consolidated financial statements for information onrecent accounting pronouncements.

 

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

 

*Financial Instruments*

 

The fair value of financialinstruments at September 27, 2008, follows (in millions):

 
| ** **                                                    | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|
| Long-term debt:                                               |       |                 |       |                |       |
| Variable-rate  term loan under senior secured credit facility |       | $                    | 230.4      |                | $          | 230.4 |   |
| 9 5/8% senior  subordinated notes, due February 15, 2015 |       | $                    | 190.0      |                | $          | 154.9 |   |
| Net liabilitiy:                                               |       |                 |       |                |       |
| Interest rate  swaps                                          |       | $                    | 2.7        |                | $          | 2.7 |   |

 

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 cash and cashequivalents and the unhedged portion of the variable-rate term loan and theavailable revolving variable-rate credit facility under the senior securedcredit facility.  At September 27,2008, cash and cash equivalents amounted to $18.1 million, the unhedged portionof the outstanding term loan was $35.4 million, and $49.6 million was availableunder the revolving credit facility.  Aone percent change in variable interest rates would result is anincrease/decrease of $0.4 million in annual interest expense for the unhedgedportion of the term loan.

 

*Foreign Currency Risk*

 

Changes in foreign currency exchange rates affect the reported operatingresults of the International Group. Foreign operations use their local currencyas their functional currency. Changes in exchange rates vs. the U.S. dollarresulted in a revenue reduction of $0.2 million in the three months and anincrease of $1.1 million in the nine months ended September 27, 2008,compared with average rates prevailing in the corresponding periods in 2007.

 

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*Inflation Risk*

 

We have generally been able to anticipate increases in costs whenpricing our contracts. Bids for longer-term fixed-unit price and time andmaterials contracts typically include sufficient labor and other costescalations in amounts expected to cover cost increases over the period ofperformance. Consequently, since costs and revenue include an inflationaryincrease commensurate with the general economy where we operate, our grossmargin expressed as a percentage of revenue has not been significantly impactedby inflation.

 

**ITEM4T.  CONTROLS AND PROCEDURES**

 

**Evaluationof 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.

 

**Changesin Internal Control over Financial Reporting**

 

During the three months ended September 27, 2008,there have been no changes in the internal control over financial reportingthat have materially affected, or are reasonably likely to materially affect,internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

*Transportation SecurityAdministration*

 

Our contracts with the federal government are subject to various legaland regulatory requirements and, from time to time, agencies of the federalgovernment may investigate the conduct of our operations in accordance withthese requirements. The United States government, through the Department ofJustice (“DOJ”) and the Inspector General of the Department of HomelandSecurity, conducted an investigation to determine whether we and NCS Pearsonviolated the Civil False Claims Act and other federal laws in connection with acontract awarded by the Transportation Security Administration to us in 2002.Vangent and NCS Pearson have consistently denied that the United States has anyvalid claim against either of them in connection with the TSA contract.

 

In October 2008, NCSPearson and Vangent, without admitting any liability, executed a settlement andrelease agreement which Vangent expects DOJ will sign within 60 days. Under thesettlement and release agreement, NCS Pearson will pay $5.6 million to theUnited States and Vangent will pay $2.8 million to NCS Pearson. Vangent’sobligation of $2.8 million under the settlement and release agreement isreflected as an accrued liability on the consolidated balance sheet as of September 27,2008.

 

**ITEM 1A.RISK FACTORS**

 

As a result ofcurrent market conditions and recent economic events, the information relatingto risk factors reported in our annual report on Form 10-K for the yearended December 31, 2007, is updated to include the following:

 

*OurSubstantial Debt Obligations.* Our long-term debt matures inthe years 2013 and 2015. In view of current credit market conditions and ourcredit ratings and in the event we were to refinance the senior secured creditfacility or the senior subordinated notes, we would likely encounterhigher interest rates and limited availability of debt financing capacity.

 

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*Subcontractors’ Failure to Perform TheirContractual Obligations.* As a prime contractor, we often relysignificantly upon other companies as subcontractors to perform work we areobligated to perform for our customers. In view of current market conditions,if one or more of our subcontractors fails to perform satisfactorily the agreedupon services on a timely basis, our ability to perform our obligations or meetour customers’ expectations as a prime contractor may be compromised. In somecases, we have limited involvement in the work performed by the subcontractorsbut are nevertheless responsible for the work performed. In extreme cases,performance or other deficiencies on the part of our subcontractors couldresult in a customer terminating our contract for default. A defaulttermination could expose us to liability for a federal government agency’scosts of re-procurement, damage our reputation and could hurt our ability tocompete for future federal government contracts.

 

**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 of the Section 13 or 15 (d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| ** **                   |   | **Vangent, Inc.**                                                                                     |
|------------------------------|--------|------------------------------------------------------------------------------------------------------------|
|                         |   |                                                                                                       |
|                         |   |                                                                                                       |
|  November 10, 2008 |   | /s/ James C.  Reagan                                                                                       |
|                         |   | James C. Reagan                                                                                            |
|                         |   | Senior Vice  President and Chief Financial Officer  (Principal Financial and Principal Accounting Officer) |

 

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