UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the three months ended July 2, 2011


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

Commission File Number 333-145355

VANGENT, INC.


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

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

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

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

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


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

There were 100 shares of common stock of Vangent, Inc. issued and outstanding at July 2, 2011.

VANGENT, INC.
Table of Contents


	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of July 2, 2011 and December 31, 2010 (Unaudited)		3

Condensed Consolidated Statements of Operations for the three and six months ended July 2, 2011 and July 3, 2010 (Unaudited)		4

Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) for the six months ended July 2, 2011 and July 3, 2010 (Unaudited)		5

Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2011 and July 3, 2010 (Unaudited)		6

Notes to Condensed Consolidated Financial Statements (Unaudited)		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3. Quantitative and Qualitative Disclosures about Market Risk		33

Item 4. Controls and Procedures		33

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		34

Item 1A. Risk Factors		34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 3. Defaults Upon Senior Securities		34

Item 5. Other Information		34

Item 6. Exhibits		35

Signature		35

Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Forward-Looking Statements

This quarterly report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as expectation or belief concerning future events. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “projects,” “likely,” “will,” “would,” “could” and similar expressions or phrases identify forward-looking statements. All forward-looking statements involve risks and uncertainties. The Company cautions that these statements are further qualified by important economic, competitive, governmental and technological factors that could cause our business, strategy or actual results of operations or events to differ materially from those in the forward-looking statements, including, without limitation, changes in the demand for services that the Company provides; completion of contracts with our customers; our ability to generate new business in the United States and abroad; activities of competitors; bid protests; changes in costs or operating expenses; our substantial debt; changes in the availability of and cost of capital; general economic and business conditions and the other factors set forth under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2010. Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances, and there can be no assurance that any forward-looking statement contained herein will prove to be accurate. The Company undertakes no obligation, and specifically declines any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I. FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

Vangent, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

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


	July 2,			December 31,
	2011			2010
Assets
Current assets:
Cash and cash equivalents	$	66,786		$	27,194
Trade receivables, net		107,729			122,940
Prepaid expenses and other assets		13,280			10,855
Deferred tax asset		2,437			1,717
Assets of discontinued operations		—			329

Total current assets		190,232			163,035

Property and equipment, net		25,169			28,031
Intangible assets, net		137,563			150,847
Goodwill		298,351			298,004
Deferred tax asset		19,493			21,923
Deferred debt financing costs and other		7,479			8,823

Total assets	$	678,287		$	670,663


Liabilities Equity
Current liabilities:
Current portion of long-term debt	$	—		$	1,401
Accounts payable and accrued liabilities		86,734			81,600
Accrued interest payable		7,376			7,781
Deferred revenue		4,617			7,964
Liabilities of discontinued operations		—			1,880

Total current liabilities		98,727			100,626

Long-term debt, net of current portion		405,353			405,353
Other long-term liabilities		4,714			5,453
Deferred tax liability		1,912			1,860

Total liabilities		510,706			513,292


Commitments and contingencies (Note 10)

Equity:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares issued and outstanding		—			—
Additional paid-in capital		208,743			208,272
Accumulated other comprehensive loss		(4,570	)		(8,917	)
Accumulated deficit		(37,092	)		(42,535	)

Total Vangent stockholder’s equity		167,081			156,820
Noncontrolling interest		500			551

Total equity		167,581			157,371

Total liabilities and equity	$	678,287		$	670,663

See notes to the condensed consolidated financial statements.

Vangent, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands)


	Three Months Ended						Six Months Ended
	July 2,			July 3,			July 2,			July 3,
	2011			2010			2011			2010
Revenue	$	184,362		$	214,846		$	360,211		$	409,043
Cost of revenue		156,013			182,459			301,205			340,685

Gross profit		28,349			32,387			59,006			68,358
General and administrative expenses		11,814			11,494			23,963			23,684
Selling and marketing expenses		5,188			5,447			10,326			11,122

Operating income		11,347			15,446			24,717			33,552
Interest expense and other, net		6,599			7,362			14,090			15,598

Income from continuing operations before income taxes		4,748			8,084			10,627			17,954
Provision for income taxes		1,493			1,851			5,223			3,685

Income from continuing operations		3,255			6,233			5,404			14,269
Loss from discontinued operations, net of tax		—			(14,348	)		(12	)		(16,785	)

Net income (loss)		3,255			(8,115	)		5,392			(2,516	)
Net loss attributed to noncontrolling interest		(43	)		—			(51	)		—

Net income (loss) attributable to Vangent	$	3,298		$	(8,115	)	$	5,443		$	(2,516	)

See notes to the condensed consolidated financial statements.

Vangent, Inc.

Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) (Unaudited)

(in thousands, except share amounts)


					Accum-
					ulated						Total
					Other						Vangent
	Common		Additional		Compre-			Accum-			Stock-			Non-
	Stock		Paid-in		hensive			ulated			holder’s			controlling			Total
	Shares		Capital		Loss			Deficit			Equity			Interest			Equity

Balance, December 31, 2009		100	$	207,376	$	(14,949	)	$	(82,564	)		109,863		$	—		$	109,863
Effect of hedging activities, net of tax		—		—		2,466			—			2,466			—			2,466
Foreign currency translation adjustment		—		—		(1,332	)		—			(1,332	)		—			(1,332	)
Net loss		—		—		—			(2,516	)		(2,516	)		—			(2,516	)

Total comprehensive loss												(1,382	)		—			(1,382	)
Equity-based compensation		—		499		—			—			499			—			499

Balance, July 3, 2010		100	$	207,875	$	(13,815	)	$	(85,080	)	$	108,980		$	—		$	108,980


Balance, December 31, 2010		100	$	208,272	$	(8,917	)	$	(42,535	)		156,820		$	551		$	157,371
Effect of hedging activities, net of tax		—		—		2,005			—			2,005			—			2,005
Foreign currency translation adjustment		—		—		2,388			—			2,388			—			2,388
Defined benefit plan overfunding (net of tax)						(46	)					(46	)		—			(46	)
Net income (loss)		—		—		—			5,443			5,443			(51	)		5,392

Total comprehensive income (loss)												9,790			(51	)		9,739
Equity-based compensation		—		471		—			—			471			—			471

Balance, July 2, 2011		100	$	208,743	$	(4,570	)	$	(37,092	)	$	167,081		$	500		$	167,581

See notes to the condensed consolidated financial statements.

Vangent, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Six Months Ended
	July 2,			July 3,
	2011			2010
Cash flows from operating activities
Net income (loss)	$	5,392		$	(2,516	)
Loss from discontinued operations, net of tax		(12	)		(16,785	)

Income from continuing operations		5,404			14,269
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Amortization of intangible assets		13,528			10,540
Depreciation and amortization of property and equipment		6,204			5,901
Amortization of deferred debt financing costs		1,420			1,126
Equity-based compensation expense		471			499
Deferred income taxes		3,121			3,360
Changes in operating assets and liabilities:
Trade receivables		15,559			(30,544	)
Prepaid expenses and other assets		(1,506	)		(4,339	)
Accounts payable and other liabilities		3,893			12,733
Deferred revenue		(3,347	)		312

Continuing operations, net		44,747			13,857
Discontinued operations, net		(87	)		(2,870	)

Net cash provided by operating activities		44,660			10,987


Cash flows from investing activities
Buccaneer acquisition		(242	)		—
Capital expenditures		(3,680	)		(3,526	)

Continuing operations, net		(3,922	)		(3,526	)
Discontinued operations, net		127			(811	)

Net cash used in investing activities		(3,795	)		(4,337	)


Cash flows from financing activities
Borrowing under revolving credit facility		10,000			—
Repayment of borrowing under revolving credit facility		(10,000	)		—
Repayment of senior secured term loan		(1,401	)		(13,612	)
Other		—			(53	)

Net cash used in financing activities		(1,401	)		(13,665	)
Effect of exchange rate changes on cash and cash equivalents		128			(170	)

Net increase (decrease) in cash and cash equivalents		39,592			(7,185	)
Cash and cash equivalents, beginning of period		27,194			45,584

Cash and cash equivalents, end of period	$	66,786		$	38,399


Supplemental cash flow information
Interest paid	$	12,935		$	15,226
Income taxes paid		430			434

See notes to the condensed consolidated financial statements.

Vangent, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands)

1. Organization and Basis of Presentation

Basis of Presentation

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

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

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

Nature of Operations

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

Principles of Consolidation

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

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

Fiscal Year and Quarterly Periods

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

2. Buccaneer Acquisition in September 2010

In September 2010, Vangent completed the acquisition (“Buccaneer Acquisition”) of Buccaneer Computer Systems & Service, Inc. (“Buccaneer”). Buccaneer is a leading provider of IT services, infrastructure, secure data hosting and data analytics for the government healthcare market. Vangent acquired all outstanding shares of Buccaneer stock in exchange for total purchase consideration of $65,563.

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


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

	$	65,563

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


Allocation of Purchase Consideration
Cash	$	897
Accounts receivable		18,224
Property and equipment		2,055
Definite-life intangible assets		25,792
Goodwill		31,385
Other assets		2,009
Less: Liabilities assumed		(14,072	)

Net assets acquired		66,290
Less: Noncontrolling interest		(727	)

	$	65,563

Allocation of Definite-Life Intangible Assets Acquired
Customer relationships (eight-year life)	$	23,809
Non-compete agreements (three-year life)		1,983

	$	25,792

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

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

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

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

Unaudited Pro Forma Information

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


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

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

3. Discontinued Operations

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


	Three Months			Six Months Ended
	Ended			July 2,			July 3,
	July 3, 2010			2011			2010
Statements of Operations Data
Revenue	$	7,075		$	137		$	14,210
Costs and expenses		7,346			144			14,846
Expected loss on sale or disposal		15,277			—			17,895
Other (income) expense, net		7			5			(746	)

Loss from discontinued operations before income taxes		(15,555	)		(12	)		(17,785	)
Provision (benefit) from income taxes		(1,207	)		—			(1,000	)

Loss from discontinued operations, net of tax	$	(14,348	)	$	(12	)	$	(16,785	)

4. Recent Accounting Pronouncements

Pronouncements Not Yet Effective

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

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

Recently Adopted Pronouncements

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

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

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

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

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

5. Trade Receivables

A summary of trade receivables follows:


	July 2,			December 31,
	2011			2010
Billed trade receivables	$	65,744		$	91,126
Billable trade receivables		34,333			22,391
Unbilled trade receivables pending completion of milestones, contract authorizations, or retainage		7,215			8,794
Other		599			806

		107,891			123,117
Allowance for doubtful accounts		(162	)		(177	)

Trade receivables, net	$	107,729		$	122,940


Trade accounts receivable from major customers
Department of Health and Human Services		48	%		46	%
Department of Education		18	%		17	%
Department of Defense		*			11	%


*		Less than 10%

6. Long-Term Debt

A summary of long-term debt follows:


	July 2,		December 31,
	2011		2010
Term loan under senior secured credit facility with interest at variable rates (2.26% at July 2, 2011), maturing February 15, 2013	$	215,353	$	216,754
9 5/8% Senior subordinated fixed rate notes, due February 15, 2015		190,000		190,000

		405,353		406,754
Less: current portion of long-term debt		—		1,401

Long-term debt, net of current portion	$	405,353	$	405,353


Scheduled maturities of long-term debt
2011	$	—
2012		310
2013		215,043
2014		—
2015		190,000

	$	405,353

Senior Secured Credit Facility

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

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

Borrowings are secured by accounts receivable, cash, intellectual property and other assets and are guaranteed jointly and severally, by all existing and future domestic subsidiaries. Joint ventures and foreign subsidiaries do not guarantee the borrowings. The senior secured credit facility contains various customary affirmative and negative covenants and events of default, including, but not limited to: consolidating or merging with, or acquiring, another business, restrictions on selling or disposing of assets, incurring additional indebtedness or guaranteeing obligations, paying dividends, creating liens on assets, making investments, loans or advances, and compliance with a maximum consolidated leverage ratio. As of July 2, 2011, the Company was in compliance with all of the affirmative and negative covenants.

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

9 5/8% Senior Subordinated Notes

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

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

7. Accumulated Other Comprehensive Loss

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


	July 2,			December 31,
	2011			2010
Accumulated other comprehensive loss
Effect of hedging activities, net of tax:
Interest rate swap agreements, net of tax	$	—		$	(391	)
Additional deferred tax effect relating to interest rate swap agreement		—			(1,614	)

Continuing operations, net of tax		—			(2,005	)
Foreign currency cumulative translation adjustments:
Continuing operations		(4,700	)		(5,359	)
Discontinued operations		—			(1,729	)

		(4,700	)		(7,088	)

Defined benefit plan overfunding, net of tax		130			176

Total accumulated other comprehensive loss	$	(4,570	)	$	(8,917	)


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

Balance, July 2, 2011	$	—		$	(4,700	)	$	130		$	(4,570	)

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

8. Derivative Instruments, Hedging Activities and Financial Instruments

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

Derivative Instruments and Hedging Activities

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


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

Statements of Operations Data

Amount of Gain

Location of Gain

(Loss) Recognized

Amount of Gain

Location of Gain

Amount of Gain

(Loss) Recognized in

in Income on

(Loss)

Income on Derivative

Derivative

Recognized in

Reclassified from

(Ineffective

OCI on

Accumulated OCI

Portion and

Derivative

into Income

Amount Excluded

(Effective

from Effectiveness

Derivative Contracts

Portion)

Testing)

Three Months Ended July 3, 2010

Derivatives that qualify as cash flow hedges

Interest rate swap agreements

Interest expense

(1,108

)

Foreign currency forward contracts

Discontinued operations

(13

)

Six Months Ended July 2, 2011

Derivatives that qualify as cash flow hedges

Interest rate swap agreements

Interest expense

(646

)

Tax effect of interest rate swap agreements

Provision for income taxes

255

Additional deferred tax effect relating to interest rate swap agreements

Provision for income taxes

(1,614

)

Six Months Ended July 3, 2010

Derivatives that qualify as cash flow hedges

Interest rate swap agreements

(622

)

Interest expense

2,775

Interest expense

Foreign currency forward contracts

)

Discontinued operations

(321

)

Derivatives that do not qualify as cash flow hedges

Foreign currency forward contracts

Discontinued operations

(89

)

Fair Value of Financial Instruments

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


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

	$	405,353	$	407,728

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

9. Income Taxes

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

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

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

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

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

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

10. Commitments and Contingencies

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

11. Equity-Based Compensation

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

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

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


	Class B and B-1 Membership Interests
	Available for						Fair Value at Date
	Grant			Outstanding			of Grant
Balance, December 31, 2010		1.6	%		5.9	%	$	5,987
Granted		(0.9	)		0.9			850
Forfeited and redeemed		0.6			(0.6	)		(289	)

Balance, July 2, 2011		1.3	%		6.2	%	$	6,548


At July 2, 2011:
Vested					3.3	%
Not yet vested					2.9

					6.2	%

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


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

	$	2,128

12. Related Party Transactions

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

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

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

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

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

13. Business Segments and Major Customers

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

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

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

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

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


	Three Months Ended						Six Months Ended
	July 2,			July 3,			July 2,			July 3,
	2011			2010			2011			2010
Revenue by business segment
Government Group	$	142,607		$	198,677		$	294,655		$	375,914
International Group		28,164			11,148			47,173			22,973
Human Capital Group		13,696			5,834			18,618			11,969
Elimination		(105	)		(813	)		(235	)		(1,813	)

Total revenue	$	184,362		$	214,846		$	360,211		$	409,043


Operating income (loss) by business segment
Government Group	$	6,563		$	15,966		$	19,776		$	34,835
International Group		5,052			8			5,987			70
Human Capital Group		(266	)		(522	)		(1,016	)		(1,342	)
Other		(2	)		(6	)		(30	)		(11	)

Total operating income		11,347			15,446			24,717			33,552
Interest expense and other, net		6,599			7,362			14,090			15,598

Income from continuing operations before income taxes	$	4,748		$	8,084		$	10,627		$	17,954


Depreciation and amortization
Government Group	$	8,648		$	7,183		$	17,322		$	14,488
International Group		1,052			568			2,028			1,295
Human Capital Group		190			333			382			658

Total depreciation and amortization	$	9,890		$	8,084		$	19,732		$	16,441


Revenue from major customers as a percent of total revenue
Department of Health and Human Services		46	%		25	%		48	%		30	%
Department of Education		13	%		11	%		15	%		13	%
Department of Commerce		*			42	%		*			34	%
Department of Defense		11	%		*			10	%		*
United Kingdom Government		13	%		*			11	%		*


*		Less than 10%.

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

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

Condensed Combining Balance Sheets (Unaudited)


			Guarantor			Non-Guarantor
	Issuer		Subsidiaries			Subsidiaries		Eliminations			Consolidated
	July 2, 2011
Current assets:
Cash and cash equivalents	$	44,471	$	180		$	22,135	$	—		$	66,786
Trade receivables, net		67,645		31,215			8,869		—			107,729
Prepaid expenses and other		11,587		1,472			2,658		—			15,717

Total current assets		123,703		32,867			33,662		—			190,232
Property and equipment, net		18,425		2,898			3,846		—			25,169
Goodwill and intangible assets		367,407		50,316			18,191		—			435,914
Deferred tax asset (liability)		20,836		(1,343	)		—		—			19,493
Deferred debt financing costs and other		6,340		864			275		—			7,479
Investment in and advances to subsidiaries		107,433		—			—		(107,433	)		—

Total assets	$	644,144	$	85,602		$	55,974	$	(107,433	)	$	678,287


Current liabilities	$	67,353	$	10,198		$	21,176	$	—		$	98,727
Long-term debt		405,353		—			—		—			405,353
Other long-term liabilities		3,857		817			1,952		—			6,626

Total liabilities		476,563		11,015			23,128		—			510,706
Total equity		167,581		74,587			32,846		(107,433	)		167,581

Total liabilities and equity	$	644,144	$	85,602		$	55,974	$	(107,433	)	$	678,287


	December 31, 2010
Current assets:
Cash and cash equivalents	$	20,477	$	—		$	6,717	$	—		$	27,194
Trade receivables, net		90,879		20,504			11,557		—			122,940
Prepaid expenses and other		9,140		1,227			2,534		—			12,901

Total current assets		120,496		21,731			20,808		—			163,035
Property and equipment, net		20,640		2,393			4,998		—			28,031
Goodwill and intangible assets, net		377,721		53,003			18,127		—			448,851
Deferred tax asset		21,923		—			—		—			21,923
Deferred debt financing costs and other		8,089		471			263		—			8,823
Investment in and advances to subsidiaries		95,666		—			—		(95,666	)		—

Total assets	$	644,535	$	77,598		$	44,196	$	(95,666	)	$	670,663


Current liabilities	$	77,116	$	12,572		$	16,039	$	(5,101	)	$	100,626
Long-term debt, net of current portion		405,353		—			—		—			405,353
Other long-term liabilities		4,695		711			1,907		—			7,313

Total liabilities		487,164		13,283			17,946		(5,101	)		513,292
Total equity		157,371		64,315			26,250		(90,565	)		157,371

Total liabilities and equity	$	644,535	$	77,598		$	44,196	$	(95,666	)	$	670,663

Condensed Combining Statements of Operations (Unaudited)


				Guarantor		Non-Guarantor
	Issuer			Subsidiaries		Subsidiaries			Eliminations			Consolidated
	Three Months Ended July 2, 2011
Revenue	$	114,756		$	39,396	$	30,330		$	(120	)	$	184,362
Cost of revenue		97,328			36,290		22,515			(120	)		156,013

Gross profit		17,428			3,106		7,815			—			28,349
General and administrative expenses		8,996			1,417		1,401			—			11,814
Selling and marketing expenses		4,166			343		679			—			5,188

Operating income		4,266			1,346		5,735			—			11,347
Interest expense and other, net		6,632			—		(33	)		—			6,599
Equity in net income of subsidiaries		5,098			—		—			(5,098	)		—

Income from continuing operations before income taxes		2,732			1,346		5,768			(5,098	)		4,748
Provision (benefit) for income taxes		(523	)		473		1,543			—			1,493

Income from continuing operations		3,255			873		4,225			(5,098	)		3,255
Net loss attributable to noncontrolling interest		—			—		(43	)		—			(43	)

Net income attributable to Vangent	$	3,255		$	873	$	4,268		$	(5,098	)	$	3,298


	Three Months Ended July 3, 2010
Revenue	$	203,765		$	—	$	11,081		$	—	$	214,846
Cost of revenue		172,792			—		9,667			—		182,459

Gross profit		30,973			—		1,414			—		32,387
General and administrative expenses		10,439			—		1,055			—		11,494
Selling and marketing expenses		4,972			—		475			—		5,447

Operating income (loss)		15,562			—		(116	)		—		15,446
Interest expense and other, net		7,483			—		(121	)		—		7,362
Equity in net loss of subsidiaries		(15,394	)		—		—			15,394		—

Income (loss) from continuing operations before income taxes		(7,315	)		—		5			15,394		8,084
Provision for income taxes		1,715			—		136			—		1,851

Loss from continuing operations		(9,030	)		—		(131	)		15,394		6,233
Income (loss) from discontinued operations, net of tax		915			—		(15,263	)		—		(14,348	)

Net loss	$	(8,115	)	$	—	$	(15,394	)	$	15,394	$	(8,115	)

Condensed Combining Statements of Operations (Unaudited)


			Guarantor		Non-Guarantor
	Issuer		Subsidiaries		Subsidiaries			Eliminations			Consolidated
	Six Months Ended July 2, 2011
Revenue	$	239,702	$	69,076	$	51,666		$	(233	)	$	360,211
Cost of revenue		198,353		62,906		40,179			(233	)		301,205

Gross profit		41,349		6,170		11,487			—			59,006
General and administrative expenses		17,850		2,854		3,259			—			23,963
Selling and marketing expenses		8,205		810		1,311			—			10,326

Operating income		15,294		2,506		6,917			—			24,717
Interest expense and other, net		14,069		—		21			—			14,090
Equity in net income of subsidiaries		6,677		—		—			(6,677	)		—

Income from continuing operations before income taxes		7,902		2,506		6,896			(6,677	)		10,627
Provision for income taxes		2,510		938		1,775			—			5,223

Income from continuing operations		5,392		1,568		5,121			(6,677	)		5,404
Loss from discontinued operations, net of tax		—		—		(12	)		—			(12	)

Net income		5,392		1,568		5,109			(6,677	)		5,392
Net loss attributable to noncontrolling interest		—		—		(51	)		—			(51	)

Net income attributable to Vangent	$	5,392	$	1,568	$	5,160		$	(6,677	)	$	5,443


	Six Months Ended July 3, 2010
Revenue	$	386,188		$	—	$	22,855		$	—	$	409,043
Cost of revenue		320,942			—		19,743			—		340,685

Gross profit		65,246			—		3,112			—		68,358
General and administrative expenses		22,027			—		1,657			—		23,684
Selling and marketing expenses		10,103			—		1,019			—		11,122

Operating income		33,116			—		436			—		33,552
Interest expense and other, net		15,768			—		(170	)		—		15,598
Equity in net loss of subsidiaries		(17,070	)		—		—			17,070		—

Income from continuing operations before income taxes		278			—		606			17,070		17,954
Provision for income taxes		3,430			—		255			—		3,685

Income (loss) from continuing operations		(3,152	)		—		351			17,070		14,269
Income (loss) from discontinued operations, net of tax		636			—		(17,421	)		—		(16,785	)

Net loss	$	(2,516	)	$	—	$	(17,070	)	$	17,070	$	(2,516	)

Condensed Combining Statements of Cash Flows (Unaudited)


				Guarantor			Non-Guarantor
	Issuer			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	Six Months Ended July 2, 2011
Cash flows from operating activities
Continuing operations, net	$	27,476		$	1,569		$	15,702		$	—		44,747
Discontinued operations, net		—			—			(87	)		—		(87	)

Net cash provided by operating activities		27,476			1,569			15,615			—		44,660


Cash flows from investing activities
Buccaneer acquisition		(242	)					—			—		(242	)
Capital expenditures		(1,847	)		(1,389	)		(444	)		—		(3,680	)

Continuing operations, net		(2,089	)		(1,389	)		(444	)		—		(3,922	)
Discontinued operations, net		—			—			127			—		127

Net cash used in investing activities		(2,089	)		(1,389	)		(317	)		—		(3,795	)


Cash flows from financing activities
Borrowing under revolving credit facility		10,000			—			—			—		10,000
Repayment of borrowing under revolving credit facility		(10,000	)		—			—			—		10,000
Repayment of senior secured loan		(1,401	)		—			—			—		(1,401	)

Net cash used in financing activities		(1,401	)		—			—			—		(1,401	)
Effect of exchange rate changes on cash and cash equivalents		8			—			120			—		128

Net increase in cash and cash equivalents		23,994			180			15,418			—		39,592
Cash and cash equivalents, beginning of period		20,477			—			6,717			—		27,194

Cash and cash equivalents, end of period	$	44,471		$	180		$	22,135		$	—	$	66,786


	Six Months Ended July 3, 2010
Cash flows from operating activities
Continuing operations, net	$	10,960		$	—	$	2,897		$	—		$	13,857
Discontinued operations, net		—			—		(2,870	)		—			(2,870	)

Net cash provided in operating activities		10,960			—		27			—			10,987


Cash flows from investing activities
Loans to Non-Guarantor Subsidiary, net		(850	)		—		—			850			—
Capital expenditures		(2,933	)		—		(593	)		—			(3,526	)

Continuing operations, net		(3,783	)		—		(593	)		850			(3,526	)
Discontinued operations, net		—			—		(811	)		—			(811	)

Net cash used in investing activities		(3,783	)		—		(1,404	)		850			(4,337	)


Cash flows from financing activities
Repayment of senior secured loan		(13,612	)		—		—			—			(13,612	)
Other		(53	)				—						(53	)

Continuing operations, net		(13,665	)		—		—			—			(13,665	)
Discontinued operations, net		—			—		850			(850	)		—

Net cash provided by (used in) financing activities		(13,665	)		—		850			(850	)		(13,665	)
Effect of exchange rate changes on cash and cash equivalents		51			—		(221	)		—			(170	)

Net decrease in cash and cash equivalents		(6,437	)		—		(748	)		—			(7,185	)
Cash and cash equivalents, beginning of period		41,099			—		4,485			—			45,584

Cash and cash equivalents, end of period	$	34,662		$	—	$	3,737		$	—		$	38,399

15. Subsequent Event

Effective August 15, 2011, Vangent Holding LLC signed a stock purchase agreement to sell 100% of the issued and outstanding Common Shares of Vangent Holding Corp. to a subsidiary of General Dynamics Corporation at a purchase price of $960 million including the repayment of outstanding debt obligations as of the closing date and the seller’s transaction-related expenses. The closing of the sale is subject to standard regulatory approval and waiting period requirements.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our consolidated financial condition and results of operations and cash flows should be read in conjunction with the unaudited condensed consolidated financial statements contained elsewhere in this quarterly report on Form 10-Q and the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and notes thereto, included in our annual report on Form 10-K for the year ended December 31, 2010.

Overview

We are a leading provider of information management and business process outsourcing services to several U.S. public health care and other civilian government agencies, as well as selected U.S. defense and intelligence agencies, foreign governments and private sector entities. We design, build and operate mission-critical systems and processes to seamlessly deliver vital information, services and programs to our customers and their constituents. Most of our revenue is generated from long-term contracts that typically have duration of approximately five years, including option years. As of July 2, 2011, our total contract backlog was $1.8 billion, compared with $1.9 billion at the end of 2010.

Certain customers represented more than 10% of total revenue for the six months ended July 2, 2011, as follows: Department of Health and Human Services (“HHS”) 48%, Department of Education (“DoED”) 15%, Department of Defense (“DOD”)10%, and United Kingdom Government 11%.

We manage our business through three segments: the Government Group; the International Group; and the Human Capital Group. The Government Group is our largest segment and has many years of experience in providing information management and business process outsourcing to several civilian and defense agencies of the federal government, including the Department of Education and the Centers for Medicare and Medicaid Services (“CMS”). The Government Group is responsible for the development, management, analysis and dissemination of healthcare information to the public sector and is one of the largest non-government providers of health information in the United States. The Government Group is also responsible for managing and disseminating information for the application process of DoED’s federal student aid program. The operations of Buccaneer acquired in September 2010 are part of the Government Group. The Government Group represented 82% of total revenue for the six months ended July 2, 2011.

The International Group serves government customers in the United Kingdom and Canada and provides consulting, systems integration, and business process outsourcing solutions. The International Group represented 13% of total revenue for the six months ended July 2, 2011.

Buccaneer Acquisition in September 2010

In September 2010, Vangent acquired Buccaneer Computer Systems & Service, Inc. (“Buccaneer Acquisition”). Buccaneer is a leading provider of IT services, infrastructure, secure data hosting and data analytics for the government healthcare market. Vangent acquired all outstanding shares of Buccaneer stock in exchange for purchase consideration of $65.6 million.

Discontinued Operations

Nature of Our Contracts

Contracts funded by U.S. government agencies represented 82% of total revenue for the six months ended July 2, 2011, compared with 89% for the corresponding period in 2010. Revenue from contracts in which we acted as the prime contractor represented 81% of total revenue, an increase from 59% for the corresponding period in 2010 that included subcontract work performed on the U.S. 2010 Census contract that was completed at the end of 2010. The continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for the various federal government agencies with which we do business. Refer to our annual report on Form 10-K for the year ended December 31, 2010, for additional information concerning our business and the factors that could impact federal government spending and our federal government contracting business.

We have cost-plus, fixed-price and time and materials contracts. Fixed-priced contracts generally offer a higher profit margin opportunity but involve higher risks associated with potential cost overruns. Revenue from each type of contract as a percent of total revenue follows:


	Three Months Ended						Six Months Ended
	July 2,			July 3,			July 2,			July 3,
	2011			2010			2011			2010

Cost-plus		52	%		72	%		54	%		69	%
Fixed-price		42	%		24	%		40	%		27	%
Time and materials		6	%		4	%		6	%		4	%

		100	%		100	%		100	%		100	%

The reductions in the percentages of revenue from cost-plus contracts for the three and six months ended July 2, 2011, is primarily due to the completion of the U.S. 2010 Census contract at the end of 2010.

Contract Backlog

Total contract backlog is the amount of revenue we expect to realize over the remaining term of the contracts. We include in backlog task orders awarded, but not contract ceiling values, under government-wide acquisition contracts or indefinite delivery, indefinite quantity contracts. Funded backlog is the portion for which funding has been authorized. Most of our federal government contracts allow the customer the option of extending the period of performance for a period of one or more years. A summary of contract backlog by business segment follows (in millions):


	July 2, 2011				December 31, 2010
	Total		Funded		Total		Funded
Government Group	$	1,529.4	$	270.3	$	1,629.2	$	241.3
International Group		217.2		144.5		251.9		161.8
Human Capital Group		96.5		45.7		13.2		13.2

	$	1,843.1	$	460.5	$	1,894.3	$	416.3

Critical Accounting Policies

A number of our accounting policies require the application of significant judgment by management, and such judgments are reflected in the amounts reported in the condensed consolidated financial statements. In applying these policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Estimates and assumptions are based upon what we believe is the best information available, historical experience, the terms of existing contracts, observations of trends in the industry, information provided by our customers, and information available from other outside sources. Estimates and assumptions could change materially as conditions within and beyond our control change. We evaluate the estimates and judgments relating to critical accounting policies on an ongoing basis. Actual results may differ significantly from the estimates reflected in the consolidated financial statements. There have been no significant changes in the critical accounting estimates and judgments used in the preparation of the condensed consolidated financial statements that are described in our annual report on Form 10-K for the year ended December 31, 2010, and include revenue recognition and cost estimation on long-term contracts, definite-life intangible assets, goodwill and an indefinite-life intangible asset, equity-based compensation, income taxes and tax valuation allowance, and discontinued operations.

There have been no impairment charges for the Government Group and we do not expect the Government Group to be at risk for impairment charges. Based on our most recent goodwill evaluation, we have determined under step one of the goodwill impairment test that the estimated fair value amount for the Government Group significantly exceeded the carrying value of the reporting unit.

The International Group recorded goodwill impairment charges in 2009 and 2008, and the Human Capital Group recorded impairment charges in 2010, 2009 and 2008. Any adverse changes in expected operating results and/or unfavorable changes in economic factors used to estimate fair values could result in non-cash impairment charges in a future period.

Results of Operations

Statements of operations data follow (dollars in thousands):


	Three Months Ended									Six Months Ended
	July 2,			July 3,			Increase			July 2,			July 3,			Increase
	2011			2010			(Decrease)			2011			2010			(Decrease)
Statements of Operations Data
Revenue	$	184,362		$	214,846		$	(30,484	)	$	360,211		$	409,043		$	(48,832	)
Cost of revenue		156,013			182,459			(26,446	)		301,205			340,685			(39,480	)

Gross profit		28,349			32,387			(4,038	)		59,006			68,358			(9,352	)
General and administrative expenses		11,814			11,494			320			23,963			23,684			279
Selling and marketing expenses		5,188			5,447			(259	)		10,326			11,122			(796	)

Operating income		11,347			15,446			(4,099	)		24,717			33,552			(8,835	)
Interest expense and other, net		6,599			7,362			(763	)		14,090			15,598			(1,508	)

Income from continuing operations before income taxes		4,748			8,084			(3,336	)		10,627			17,954			(7,327	)
Provision for income taxes		1,493			1,851			(358	)		5,223			3,685			1,538

Income from continuing operations		3,255			6,233			(2,978	)		5,404			14,269			(8,865	)
Loss from discontinued operations, net of tax		—			(14,348	)		14,348			(12	)		(16,785	)		16,773

Net income (loss)		3,255			(8,115	)		11,370			5,392			(2,516	)		7,908
Net loss attributed to noncontrolling interest		(43	)		—			(43	)		(51	)		—			(51	)

Net income (loss) attributable to Vangent	$	3,298		$	(8,115	)	$	11,413		$	5,443		$	(2,516	)	$	7,959


Statements of Operations Data as a Percent of Revenue
Revenue		100.0	%		100.0	%					100.0	%		100.0	%
Cost of revenue		84.6			84.9						83.6			83.3

Gross profit margin		15.4			15.1						16.4			16.7
General and administrative expenses		6.4			5.4						6.7			5.8
Selling and marketing expenses		2.8			2.5						2.8			2.7

Operating income margin		6.2			7.2						6.9			8.2
Interest expense and other, net		3.6			3.4						3.9			3.8

Income from continuing operations before income taxes		2.6			3.8						3.0			4.4
Provision for income taxes		0.8			0.9						1.5			0.9

Income from continuing operations		1.8			2.9						1.5			3.5
Loss from discontinued operations, net of tax		—			(6.7	)					—			(4.1	)

Net income (loss)		1.8			(3.8	)					1.5			(0.6	)
Net loss attributed to noncontrolling interest		—			—						—			—

Net income (loss)attributable to Vangent		1.8	%		(3.8	)%					1.5	%		(0.6	)%

Three and Six Months Ended July 2, 2011 and July 3, 2010

Buccaneer Acquisition in September 2010

In September 2010, Vangent completed the Buccaneer Acquisition. The results of operations of Buccaneer are included in the consolidated statements of operations and cash flows for the three and six months ended July 2, 2011.

Revenue

A summary of revenue by business segment follows (dollars in thousands):


	Three Months Ended												Six Months Ended
	July 2,			July 3,			Increase (Decrease)						July 2,			July 3,			Increase (Decrease)
	2011			2010			Amount			Percent			2011			2010			Amount			Percent
Revenue by business segment
Government Group	$	142,607		$	198,677		$	(56,070	)		(28	)%	$	294,655		$	375,914		$	(81,259	)		(22	)%
International Group		28,164			11,148			17,016			153	%		47,173			22,973			24,200			105	%

Human Capital Group		13,696			5,834			7,862			135	%		18,618			11,969			6,649			56	%
Elimination		(105	)		(813	)		708			87	%		(235	)		(1,813	)		1,578			87	%

	$	184,362		$	214,846		$	(30,484	)		(14	)%	$	360,211		$	409,043		$	(48,832	)		(12	)%


Business segment revenue as a percent of total revenue
Government Group		77.4	%		92.5	%								81.8	%		91.9	%
International Group		15.3			5.2									13.1			5.6

Human Capital Group		7.4			2.7									5.2			2.9
Elimination		(0.1	)		(0.4	)								(0.1	)		(0.4	)

		100.0	%		100.0	%								100.0	%		100.0	%

Government Group Revenue

Government Group revenue declined $56.1 million, or 28%, for the three months and $81.3 million, or 22%, for the six months ended July 2, 2011. Revenue from the Census contract with the Department of Commerce (“DoC”) declined $89.2 million for the three months and $139.2 million for the six months ended July 2, 2011, as a result of the completion of the U.S. 2010 Census contract at the end of 2010. Revenue from the U.S. Census contract totaled $166.8 million for the full year 2010, and, as a result of the completion of the contract, revenue from DoC contracts for the remainder of 2011 will continue to be lower than 2010.

The Buccaneer Acquisition completed in September 2010 contributed revenue of $41.6 million for the three months and $73.8 million for the six months ended July 2, 2011. For comparative purposes, on a pro forma basis, Buccaneer revenue for the corresponding periods in 2010 was $32.8 million for the three months and $55.4 million for the six months.

Revenue from HHS contracts, primarily the Centers for Medicare and Medicaid services (“CMS”), represented 85% of Buccaneer’s revenue for the six months ended July 2, 2011. Revenue from HHS contracts increased $30.9 million for the three months and $51.1 million for the six months primarily reflecting the Buccaneer Acquisition, partially offset by lower revenue on cost-plus contracts from reduced staffing and improved efficiencies at call centers.

Revenue from contracts with the Department of Labor declined $2.2 million for the three months and $4.1 million for the six months as the EFAST contract completed the transition to operating status.

International Group Revenue

International Group revenue increased $17.0 million, or 153%, for the three months and $24.2 million, or 105%, for the six months ended July 2, 2011. The increases reflect revenue from the ramp up of a significant contract. Revenue from this contract is expected to continue to be accretive for the remainder of 2011 with contract completion expected in 2012. Changes in foreign currency exchange rates increased revenue by $1.2 million for the six months ended July 2, 2011, compared with the corresponding period in 2010.

Human Capital Group Revenue

Human Capital Group revenue increased $7.9 million, or 135%, for the three months and $6.6 million, or 56%, for the six months ended July 2, 2011. The increases resulted from the start up of the Enterprise Classroom Programs technology modernization contract with the U.S. Army. Compared with 2010, the U. S. Army contract is expected to continue to increase revenue for the remainder of 2011. The increases were partly offset by reductions of $1.4 million for the three months and $2.7 million for the six months from lower assessment and training services for commercial customers resulting from continued high unemployment levels.

Cost of Revenue

The reductions in total cost of revenue of $26.4 million, or 14%, for the three months and $39.5 million, or 12%, for the six months ended July 2, 2011, primarily reflect work performed by the Government Group under the U.S. 2010 Census contract with DoC that was completed at the end of 2010. Government Group costs for salaries and wages declined 13%, employee benefits declined 22%, and subcontractors and agencies declined 57% for the six-month period primarily reflecting the completion of the 2010 Census contract. The reductions were partially offset by the Buccaneer costs of $38.6 million for the three months and $67.7 million for the six months ended July 2, 2011. The Buccaneer Acquisition was completed in September 2010. Buccaneer costs include amortization for acquired intangible assets for customer relationships of $3.0 million for the six-month period.

Costs for the International Group increased for the three and six-month periods due to the ramp up of a significant contract. Changes in foreign exchange rates increased costs of the International Group by $1.0 million for the six months ended July 2, 2011, compared with the corresponding period in 2010.

Costs for the Human Capital Group increased for the three and six-month periods due to the start up of a contract with the U. S Army.

The gross profit margin was 15.4% for the three months, compared with 15.1% for the corresponding period in 2010. The gross profit margin was 16.4% for the six months ended July 2, 2011, slightly lower than the corresponding period in 2010. The reductions reflect changes in the mix of contract revenue.

General and Administrative Expenses

General and administrative expenses increased $0.3 million for the three and six months ended July 2, 2011, compared with the corresponding periods in 2010. The Buccaneer Acquisition completed in September 2010 increased expenses by $1.5 million for the three months and $2.9 million for the six months. Expenses for the three and six months ended July 2, 2011, include a charge of $0.4 million relating to a loss on an uncollected note receivable from the sale of discontinued operations in Latin America. The increases were offset by the effects of cost reduction initiatives.

General and administrative expenses were 6.4% of revenue for the three months, compared with 5.4% for the corresponding period in 2010, and 6.7% of revenue for the six months, compared with 5.8% for the corresponding period in 2010. The increases primarily reflect the reduction in revenue from the U.S. 2010 Census contract that was completed in 2010 for which there was minimal incremental general and administrative expense.

Selling and Marketing Expenses

The reductions in selling and marketing expenses of $0.3 million, or 5%, for the three months and $0.8 million, or 7%, for the six months ended July 2, 2011, resulted from staff reorganization in the corporate development group, partially offset by additional expenses of $0.8 million from the Buccaneer Acquisition completed in September in 2010.

Operating Income

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


	Three Months Ended												Six Months Ended
	July 2,			July 3,			Increase (Decrease)						July 2,			July 3,			Increase (Decrease)
	2011			2010			Amount			Percent			2011			2010			Amount			Percent
Operating income (loss) by business segment
Government Group	$	6,563		$	15,966		$	(9,403	)		(59	)%	$	19,776		$	34,835		$	(15,059	)		(43	)%
International Group		5,052			8			5,044			—			5,987			70			5,917			—
Human Capital Group		(266	)		(522	)		256			49			(1,016	)		(1,342	)		326			24
Corporate		(2	)		(6	)		4			—			(30	)		(11	)		(19	)		—

	$	11,347		$	15,446		$	(4,099	)		(27	)%	$	24,717		$	33,552		$	(8,835	)		(26	)%


Operating margin by business segment
Government Group		4.6	%		8.0	%								6.7	%		9.3	%
International Group		17.9	%		0.1	%								12.7	%		0.3	%
Human Capital Group		(1.9	)%		(9.0	)%								(5.5	)%		(11.2	)%

The reductions in Government Group operating income of $9.4 million, or 59%, for the three months and $15.1 million, or 43%, for the six months ended July 2, 2011, and the corresponding reductions in the operating margins of 3% for the three and six months primarily reflect the U.S. 2010 Census contract with DoC that was completed at the end of 2010. As a result of the completion of the contract, operating income from DoC contracts for the remainder of 2011 will continue to be lower than 2010. Award fees earned under cost-plus contracts, including the U.S. 2010 Census contract, declined by $8.8 million for the three months and $14.7 million for the six months ended July 2, 2011, compared with the corresponding periods in 2010. The Buccaneer Acquisition in September 2010 contributed operating income of $1.2 million for the three months and $2.3 million for the six months. Buccaneer results reflect charges for the amortization of acquired intangible assets for customer relationships based on an accelerated method.

The increases in International Group operating income of $5.0 million for the three months and $6.0 million for the six months ended July 2, 2011, and the corresponding increases in the operating margin to 17.9% for the three months and 12.7% for the six months resulted from the ramp up of a significant contract that is expected to continue to be accretive for the remainder of 2011 with contract completion expected in 2012.

Although Human Capital Group revenue increased by $7.9 million for the three months and $6.6 million for the six months ended July 2, 2011, primarily from the start up of the U.S. Army contract, high development and implementation costs under the contract resulted in a minimal contribution to operating results. The Human Capital Group operating losses of $0.3 million for the three months and $1.0 million for the six months ended July 2, 2011, reflect the adverse impact of reductions in training needs and customer hiring patterns from continued high unemployment levels.

Interest Expense and Other, Net

The reductions in interest expense, net of other income and expense, amounted to $0.8 million, or 10%, for the three months and $1.5 million, or 10%, for the six months ended July 2, 2011, and resulted from the lower variable rates that replaced the higher fixed rates on the hedged portion of the term loan under the interest rate swap agreements that matured in February 2010 and February 2011. The interest rate swap agreement with a notional amount of $150.0 million and a fixed rate of 3.28% matured in February 2011, and the full amount of the term loan became subject to variable interest rate risk. Variable rates under the term loan, including the applicable margin, averaged 2.30% for the three and six months ended July 2, 2011, a decline of 21 basis points from the corresponding periods in 2010.

Amortization of deferred debt financing costs increased interest expense by $0.3 million for the six months ended July 2, 2011, as a result of costs incurred in connection with an amendment to the senior secured credit facility in July 2010.

Provision for Income Taxes

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


	Three Months Ended									Six Months Ended
	July 2,						Increase			July 3,						Increase
	2011			2010			(Decrease)			2011			2010			(Decrease)
Provision for income taxes
Before effects of adjustment and tax valuation allowance	$	1,395		$	2,961		$	(1,566	)	$	3,511		$	5,865		$	(2,354	)
Deferred tax effect of interest rate swap agreement		—			—			—			1,614			—			1,614
Tax valuation allowance		98			(1,110	)		1,208			98			(2,180	)		2,278

Total provision for income taxes	$	1,493		$	1,851		$	(358	)	$	5,223		$	3,685		$	1,538


Effective tax rate
Before effects of adjustment and tax valuation allowance		29	%		37	%		(8	)%		33	%		33	%		—	%
Deferred tax effect of interest rate swap agreement		—			—			—			15			—			15
Tax valuation allowance		2			(14	)		16			1			(12	)		13

Total provision for income taxes		31	%		23	%		8	%		49	%		21	%		28	%

The provision for income taxes is composed of U.S. federal, state and local and foreign income taxes. The provision for income taxes for the six months ended July 2, 2011, includes an additional charge of $1.6 million resulting from the deferred tax effect relating to the interest rate swap agreement that matured in the first quarter of 2011. The effective tax rate of 49% for the six months ended July 2, 2011, is higher than the U.S. federal statutory tax rate of 35% and includes 15% for the deferred tax charge of $1.6 million relating to the interest rate swap agreement. The deferred tax effect was associated with the amount that remained in Other Comprehensive Income/Loss (“OCI”) at December 31, 2010, as a result of the release of the tax valuation allowance in 2010 on the beginning deferred tax asset balance as a credit to the provision for income taxes for 2010 and subsequent activity during 2010 classified in OCI. The maturity of the swap agreement in the first quarter of 2011 allows for the clearing of the disproportionate tax effect in OCI as an additional charge to the provision for income taxes for the six months ended July 2, 2011.

The provision for income taxes for the three and six months ended July 3, 2010, reflects reductions in the tax valuation allowance for deferred tax assets from the utilization of a portion of the net operating loss carryforward. The effective tax rate of 21% for the six months ended July 3, 2010, is lower than the U.S. federal statutory tax rate of 35% and reflects a reduction of 12% from the utilization of a portion of the net operating loss carryforward amounting to $2.2 million.

Discontinued Operations

At the end of 2009, Vangent completed an evaluation of its international business and made the determination to sell its business operations in Latin America that are reported as discontinued operations in the consolidated financial statements. The sale of business operations in Argentina was completed in the third quarter of 2010, and the sale of operations in Mexico was completed in the fourth quarter of 2010. The sale of operations in Venezuela was completed in February 2011 to complete the disposal of discontinued operations. There are no business operations classified as discontinued operations subsequent to the first quarter of 2011. Summarized results of operations data for discontinued operations follow (in thousands):


	Three Months			Six Months Ended
	Ended			July 2,			July 3,
	July 3, 2010			2011			2010
Statements of Operations Data
Revenue	$	7,075		$	137		$	14,210
Costs and expenses		7,346			144			14,846
Expected loss on sale or disposal		15,277			—			17,895
Other (income) expense, net		7			5			(746	)

Loss from discontinued operations before income taxes		(15,555	)		(12	)		(17,785	)
Provision (benefit) from income taxes		(1,207	)		—			(1,000	)

Loss from discontinued operations, net of tax	$	(14,348	)	$	(12	)	$	(16,785	)

The charges for expected loss on sale or disposal of $15.3 million for the three months and $17.9 million for the six months ended July 3, 2010, resulted from revisions to fair value estimates based on letters of intent from market participants that were potential buyers of the operations in Latin America.

Liquidity and Capital Resources

Our primary sources of liquidity are available cash and cash equivalents, a line of credit under the revolving credit facility, and cash flows from operating activities. Based on our current planned level of operations, we believe our cash and cash equivalents, cash flow from operations, and available line of credit will be adequate to meet our liquidity needs for at least the next twelve months, including scheduled interest payments, scheduled lease payments, noncancelable purchase and other contractual commitments, and planned capital expenditures.

Subject to certain limitations, the amount available under the revolving credit facility was $49.8 million at July 2, 2011. The revolving credit facility is scheduled to expire in February 2012.

Cash and cash equivalents amounted to $66.8 million at July 2, 2011, of which 67% was held by Vangent in the United States and the remaining portion was held by foreign subsidiaries or joint ventures. Cash held by foreign subsidiaries would be subject to U.S. federal income taxes in the event the funds were repatriated to the United States. The Company has accrued a provision for income taxes of $0.7 million on a specific portion of the current year’s undistributed earnings of one of its foreign operations that is not considered to be reinvested indefinitely.

Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of 90 days or less. Cash equivalents or marketable securities in the United States are comprised of institutional money market funds with major commercial banks under which cash is primarily invested in U.S. Treasury bills, notes and other obligations issued or guaranteed by the U.S. government or its agencies, and repurchase agreements secured by such obligations. The Company does not invest in high yield or high risk securities. Cash in bank accounts at times may exceed federally insured limits.

Long-Term Debt

Long-term debt amounted to $405.4 million at July 2, 2011, and consists of a term loan of $215.4 million and senior subordinated notes of $190.0 million. Long-term debt is scheduled to mature as follows: (i) term loan under the senior secured credit facility is scheduled to mature in February 2013, and (ii) the senior subordinated fixed rate notes are scheduled to mature in February 2015. Our ability to generate sufficient cash flow from operations to repay long-term debt when it matures, or to refinance debt when it matures, depends on numerous factors beyond our control, including those discussed under Risk Factors reported in our annual report on Form 10-K for the year ended December 31, 2010. In view of current credit market conditions and the credit ratings assigned to our outstanding debt and corporate credit by credit rating agencies, in the event we were to refinance the senior secured credit facility or the senior subordinated notes, we would likely encounter higher interest rates.

The more restrictive debt covenants relate to compliance with a maximum allowable consolidated leverage ratio. The consolidated leverage ratio, as defined in the senior secured credit facility, is based on consolidated indebtedness, as defined, reduced by unrestricted cash and cash equivalents in excess of $5.0 million, divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, and adjusted for certain unusual and non-recurring items, as defined) for a twelve-month period. At July 2, 2011, the consolidated leverage ratio was 3.74 to 1, compared with the maximum allowable ratio of 5.25 to 1 applicable to the period. The maximum allowable consolidated leverage ratio steps down to 5.00 at March 31, 2012.

Working Capital

A summary of working capital follows (in thousands):


	July 2,			December 31,			Increase
	2011			2010			(Decrease)
Cash and cash equivalents	$	66,786		$	27,194		$	39,592
Trade receivables, net		107,729			122,940			(15,211	)
Prepaid expenses and other		15,717			12,572			3,145
Current portion of long-term debt		—			(1,401	)		1,401
Accounts payable and accrued liabilities		(86,734	)		(81,600	)		(5,134	)
Accrued interest payable		(7,376	)		(7,781	)		405
Deferred revenue		(4,617	)		(7,964	)		3,347
Discontinued operations, net		—			(1,551	)		1,551

Net working capital	$	91,505		$	62,409		$	29,096

The increase in cash and cash equivalents of $39.6 million resulted from operating cash flow including a reduction in trade receivables. Trade receivables at July 2, 2011, reflect DSO (days sales outstanding) of 53 days, compared with 62 days at December 31, 2010.

Cash Flows

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


	Six Months Ended
	July 2,			July 3,			Increase
	2011			2010			(Decrease)
Net cash provided by (used in)
Operating activities	$	44,660		$	10,987		$	33,673
Investing activities		(3,795	)		(4,337	)		542
Financing activities		(1,401	)		(13,665	)		12,264

Net Cash Provided by (Used in) Operating Activities

In assessing cash flows from operating activities, we consider several principal factors: (i) income from continuing operations, (ii) adjustments for non-cash charges including amortization of intangible assets, depreciation and amortization of property and equipment, and deferred income taxes, and (iii) the extent to which trade receivables, accounts payable and other liabilities, or other working capital components increase or decrease.

Net cash provided by operating activities was $44.7 million for the six months ended July 2, 2011, compared with $11.0 million for the corresponding period in 2010. Income from continuing operations adjusted for non-cash charges generated operating cash flows of $30.1 million, compared with $35.7 million for the corresponding period in 2010.

A net decrease in trade receivables of $15.6 million contributed to cash flow from operating activities for the six months ended July 2, 2011. The decrease primarily reflects an acceleration in the customer invoicing process and subsequent collections from customers. A net increase in trade receivables of $30.5 million for the corresponding period in 2010 reduced cash flow from operating activities for the period. The increase resulted from higher revenue, primarily on the U.S. Census contract, and the timing of collections from customers.

A net increase in accounts payable and other liabilities of $3.9 million contributed to cash flow from operating activities for the six months ended July 2, 2011, compared with $12.7 million for the corresponding period in 2010. The increases in accounts payable and other liabilities primarily reflect the timing of payments to vendors.

A net decrease in deferred revenue of $3.3 million reduced cash flow from operating activities for the six months ended July 2, 2011, compared with a net increase of $0.3 million for the corresponding period in 2010. Deferred revenue results from payments from customers in advance of revenue recognition.

Discontinued operations resulted in breakeven cash flow from operating activities for the six months ended July 2, 2011, compared with net cash outflow of $2.9 million for the corresponding period in 2010.

Net Cash Used in Investing Activities

Cash payments relating to the Buccaneer Acquisition were $0.2 million for the six months ended July 2, 2011. Additional cash payments of $4.3 million are expected later in 2011 to complete the working capital adjustment and other provisions of the Buccaneer Acquisition agreement.

Capital expenditures were $3.7 million for the six months ended July 2, 2011, compared with $3.5 million for the corresponding period in 2010. Capital expenditures of $8.5 million are expected for 2011.

Net Cash Used in Financing Activities

Net cash used in financing activities for the six months ended July 2, 2011, reflects a term loan repayment of $1.4 million under the senior secured credit facility resulting from excess cash flow for the year ended December 31, 2010, compared with a repayment of $13.6 million for the corresponding period in 2010.

Contractual Obligations

Contractual commitments to make future cash payments under long-term debt agreements, lease contracts, and other commitments as of July 2, 2011, follow (in millions):


			Payments Due by Year
	Total		2011*		2012		2013		2014		2015		Thereafter
Long-term debt:
Term loan under senior secured credit facility due February 2013 (1)	$	215.4	$	—	$	0.3	$	215.1	$	—	$	—	$	—
Senior subordinated notes due February 2015		190.0		—		—		—		—		190.0		—
Interest relating to long-term debt (2)		81.9		11.8		23.3		19.4		18.3		9.1		—
Operating leases (3)		72.6		10.2		19.9		14.5		7.4		5.8		14.8
Purchase and other contractual commitments (4)		27.0		12.4		11.2		2.5		0.6		0.3		—

	$	586.9	$	34.4	$	54.7	$	251.5	$	26.3	$	205.2	$	14.8


*		Remaining six months.

(1)		Scheduled payments for the term loan under the senior secured credit facility do not give effect to a possible future mandatory prepayment in March 2012 that could result from excess cash flow, if any, for the year ended December 31, 2011.

(2)		Future interest payments consist of interest on the variable-rate term-loan borrowing under the senior secured credit facility and interest based on the fixed rate of 9 5/8% for the senior subordinated notes.

(3)		Future contractual obligations for leases represent future minimum payments under noncancelable operating leases primarily for office space, reduced by sublease income under contract.

(4)		Purchase and other contractual commitments include minimum noncancelable obligations under purchase orders, information technology and telecommunications service contracts, the Buccaneer Acquisition agreement, and other contracts.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements other than operating leases for office facilities and equipment for which future minimum lease payments aggregated $72.6 million as reported above for Contractual Obligations.

Transactions with Related Parties

Reference is made to the notes to the condensed consolidated financial statements for information on transactions with related parties.

Recent Accounting Pronouncements

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


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided under Quantitative and Qualitative Disclosures about Market Risk in our annual report on Form 10-K for the year ended December 31, 2010.


ITEM 4.		CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in 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’s rules and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the three months ended July 2, 2011, there have been no changes in the internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS

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


ITEM 1A.		RISK FACTORS

There have been no material changes in risk factors from the information provided under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2010.


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

None


ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

None


ITEM 5.		OTHER INFORMATION

On April 20, 2011, the Company entered into a bonus agreement with John M. Curtis, President and Chief Executive Officer. Under the bonus agreement, Mr. Curtis is eligible to receive a bonus in cash equal to $2,500,000 in the event of a closing of a transaction on or before April 20, 2012, which results in a change-in-control of the Company. The bonus agreement also provides that for a period of 12 months following the closing of the transaction, Mr. Curtis will be subject to non-competition and non-solicitation provisions.

The Company entered into retention letter agreements, dated April 13, 2011, with: James C. Reagan, Senior Vice President and Chief Financial Officer; Kevin T. Boyle, Senior Vice President, General Counsel and Secretary and Kerry Weems, Senior Vice President and General Manager. Under the agreements for Messrs. Boyle and Weems, if there is a change-in-control of the Company and, within 12 months after such change-in-control, either (a) the Company terminates the executive’s employment without cause or (b) the executive terminates his employment with the Company for good reason, the executive will be entitled to (i) continued payments of his annual base salary for a period of 12 months following such termination or resignation and (ii) an amount equal to the pro rata portion of his bonus that would have been payable under the Company’s incentive compensation plan based on the Company’s projected performance as of the date of termination or resignation. The retention letter agreements also provide that for a period of 12 months following such termination or resignation, the executives will be subject to non-competition and non-solicitation provisions. The retention letter agreement for Mr. Reagan contains similar provisions, except that he is entitled to continued payments of salary for 18 months after termination without cause or resignation for good reason after a change-in-control and he is subject to the non-competition and non-solicitation provisions for 18 months after any such termination or resignation.

The foregoing description of the bonus and retention letter agreements is qualified in its entirety by reference to the agreements, copies of which are attached hereto as Exhibits 10.4 through 10.7.

As discussed in Note 15 to the accompanying condensed consolidated financial statements, effective August 15, 2011, Vangent Holding LLC signed a stock purchase agreement to sell 100% of the issued and outstanding Common Shares of Vangent Holding Corp. to a subsidiary of General Dynamics Corporation. Upon and subject to the closing of the transaction, Vangent, Inc. intends to effect a satisfaction and discharge of the senior subordinated notes by providing for the deposit with The Bank of New York Mellon, the trustee with respect to the senior subordinated notes, of an amount sufficient to redeem the senior subordinated notes at a price equal to 104.8125% of the principal amount thereof plus accrued and unpaid interest thereon in accordance with the terms of the indenture governing such notes, pursuant to a notice of optional redemption that would be given concurrently with the closing of the transaction. The foregoing is not a notice of optional redemption.


ITEM 6.		EXHIBITS


Exhibit
Number			Description
10.4*			Bonus Agreement, dated April 20, 2011, by and between Vangent, Inc. John M. Curtis.
10.5*			Retention Letter Agreement, dated April 13, 2011, by and between Vangent, Inc. and James Reagan.
10.6*			Retention Letter Agreement, dated April 13, 2011, by and between Vangent, Inc. and Kevin Boyle.
10.7*			Retention Letter Agreement, dated April 13, 2011, by and between Vangent, Inc. and Kerry Weems.
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.
101.INS†			XBRL Instance Document
101.SCH†			XBRL Extension Schema
101.CAL†			XBRL Extension Calculation Linkbase
101.DEF†			XBRL Extension Definition Linkbase
101.LAB†			XBRL Extension Label Linkbase
101.PRE†			XBRL Extension Presentation Linkbase


*		Filed herewith.

†		Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or deemed filed for purpose of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Vangent, Inc.
August 16, 2011	/s/ James C. Reagan
	James C. Reagan
	Senior Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit
Number				Description
10.4				Bonus Agreement, dated April 20, 2011, by and between Vangent, Inc. John M. Curtis.
10.5				Retention Letter Agreement, dated April 13, 2011, by and between Vangent, Inc. and James Reagan.
10.6				Retention Letter Agreement, dated April 13, 2011, by and between Vangent, Inc. and Kevin Boyle.
10.7				Retention Letter Agreement, dated April 13, 2011, by and between Vangent, Inc. and Kerry Weems.
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.
101.INS				XBRL Instance Document
101.SCH				XBRL Extension Schema
101.CAL				XBRL Extension Calculation Linkbase
101.DEF				XBRL Extension Definition Linkbase
101.LAB				XBRL Extension Label Linkbase
101.PRE				XBRL Extension Presentation Linkbase

Vangent, Inc. 10-Q