Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 
| **x**                                                       | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**        |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** ** | ** **                                                                                              |
| **For  the quarterly period ended September 25, 2009** |
| ** **                                                  |
| **OR**                                                      |
| ** **                                                  | ** ** | ** **                                                                                              |
| **o**                                                       | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile No. 001-33083**

 

**STANLEY,INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                               | ** ** | **11-3658790**       |
|--------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of           |       | (I.R.S. Employer     |
| incorporation or  organization)            |       | Identification  No.) |
|                                       |       |                 |
| **3101  Wilson Boulevard, Suite 700** | ** ** | ** **           |
| **Arlington,  VA**                         | ** ** | **22201**            |
| (Address of  principal executive offices)  |       | (Zip Code)           |

 

**(703)684-1125**

(Registrant’stelephone number,

including areacode)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x  No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files).  Yes  o   No  o

 

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

 

| o  Large accelerated filer           |   | x  Accelerated filer         |
|------------------------------------------------|--------|----------------------------------------|
|                                           |   |                                   |
| o  Non-accelerated filer             |   | o  Smaller reporting company |
| (do not check if  a smaller reporting company) |   |                                   |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o  No  x

 

As of October 26,2009, there were 24,046,144 shares of our Common Stock, par value $0.01 pershare, outstanding.

 

 

 

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**STANLEY,INC.**

**FORM 10-Q**

**FORTHE QUARTER ENDED SEPTEMBER 25, 2009**

**INDEX**

** **
| ** **                                    | ** ** | ** **                                                                                  | ** ** | **Page** |
|-----------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| **PART I —  FINANCIAL INFORMATION** |       | 2                                                                                           |
| ITEM 1.                                       |       | FINANCIAL STATEMENTS                                                                        |       | 2        |
| ITEM 2.                                       |       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |       | 16       |
| ITEM 3.                                       |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |       | 26       |
| ITEM 4.                                       |       | CONTROLS AND  PROCEDURES                                                                    |       | 26       |
| **PART II — OTHER  INFORMATION**    |       | 27                                                                                          |
| ITEM 1.                                       |       | LEGAL PROCEEDINGS                                                                           |       | 27       |
| ITEM 1A.                                      |       | RISK FACTORS                                                                                |       | 27       |
| ITEM 2.                                       |       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |       | 27       |
| ITEM 3.                                       |       | DEFAULTS UPON  SENIOR SECURITIES                                                            |       | 27       |
| ITEM 4.                                       |       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         |       | 28       |
| ITEM 5.                                       |       | OTHER INFORMATION                                                                           |       | 28       |
| ITEM 6.                                       |       | EXHIBITS                                                                                    |       | 28       |
|                                               |            |                                                                                             |            |          |  |

 

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**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Qcontains certain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such statements include, inparticular, statements about our plans, strategies and prospects.Forward-looking statements are generally identifiable by use of forward-lookingterminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,”“seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,”“project,” “predict,” “continue” or other similar words or expressions.References to “we,” “our” and the “Company” refer to Stanley, Inc., togetherin each case with our consolidated subsidiaries unless the context suggestsotherwise.

 

The forward-lookingstatements contained in this Quarterly Report on Form 10-Q are based oncurrent expectations, estimates, forecasts and projections about the industryin which we operate and management’s beliefs and assumptions. These statementsare not guarantees of future performance and involve risks, uncertainties andassumptions that are difficult to predict. Therefore, actual outcomes andresults may differ materially from what is expressed or forecasted in suchforward-looking statements, including as a result of risks discussed in “Part I,Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscalyear ended March 31, 2009. These forward-looking statements include, butare not limited to, statements relating to:

 

·                        our ability to retain customers andcontracts, as well as our ability to win new customers and engagements;

 

·                        our backlog;

 

·                        risks associated with the acquisition andintegration of new companies;

 

·                        our beliefs about trends in our market,available government contracts and outsourcing to companies like ours;

 

·                        expected spending on informationtechnology and other professional services by federal government agencies,including the Department of Defense; and

 

·                        other risks discussed in our AnnualReport on Form 10-K for the fiscal year ended March 31, 2009, in thesections entitled “Risk Factors” and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and in any other documents wefile with the Securities and Exchange Commission.

 

We are under no duty toupdate any of the forward-looking statements after the date of this QuarterlyReport on Form 10-Q to conform these statements to actual results, exceptas required by law.

 

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**PART I:  FINANCIALINFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**STANLEY, INC.AND SUBSIDIARIES**

**CondensedConsolidated Statements of Income**

**(unaudited)**

**(inthousands, except per share data)**

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **September 25,  2009**     | ** ** | **September 26,  2008**   | ** ** | **September 25,  2009** | ** ** | **September 26,  2008** | ** ** |
| Revenues                             |       | $                                | 217,089    |                           | $          | 191,078 |   | $ | 425,835 |   | $ | 363,645 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Operating  costs and expenses:       |       |                             |       |                           |       |   |   |   |   |
| Cost  of revenues                    |       | 180,518                          |       | 159,925                        |       | 353,607 |   | 305,684 |   |
| Selling,  general and administrative |       | 13,401                           |       | 12,224                         |       | 27,492 |   | 22,883 |   |
| Depreciation  and amortization       |       | 2,852                            |       | 2,586                          |       | 5,682 |   | 4,428 |   |
| Total  operating costs and expenses  |       | 196,771                          |       | 174,735                        |       | 386,781 |   | 332,995 |   |
| Operating  income                    |       | 20,318                           |       | 16,343                         |       | 39,054 |   | 30,650 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Other  income (expense):             |       |                             |       |                           |       |   |   |   |   |
| Other  income                        |       | —                           |       | 1                              |       | 3 |   | 3 |   |
| Interest  income                     |       | 21                               |       | 71                             |       | 59 |   | 196 |   |
| Interest  expense                    |       | (897                             | )          | (1,830                         | )          | (2,045 | ) | (2,367 | ) |
| Total  other expenses                |       | (876                             | )          | (1,758                         | )          | (1,983 | ) | (2,168 | ) |
| Income  before taxes                 |       | 19,442                           |       | 14,585                         |       | 37,071 |   | 28,482 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Provision  for income taxes          |       | (7,689                           | )          | (5,857                         | )          | (14,654 | ) | (11,437 | ) |
| Net  income                          |       | $                                | 11,753     |                           | $          | 8,728 |   | $ | 22,417 |   | $ | 17,045 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Earnings  per share:                 |       |                             |       |                           |       |   |   |   |   |
| Basic                                |       |                             | 0.50       |                           | $          | 0.38 |   | $ | 0.96 |   | $ | 0.75 |   |
| Diluted                              |       | $                                | 0.49       |                           | $          | 0.37 |   | $ | 0.93 |   | $ | 0.72 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Weighted-average  shares:            |       |                             |       |                           |       |   |   |   |   |
| Basic                                |       | 23,447                           |       | 22,793                         |       | 23,364 |   | 22,760 |   |
| Diluted                              |       | 24,058                           |       | 23,817                         |       | 24,018 |   | 23,763 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**STANLEY, INC.AND SUBSIDIARIES**

**CondensedConsolidated Balance Sheets**

**(unaudited)**

**(inthousands, except share data)**

** **
| ** **                                                                                                           | ** ** | **September 26,  2009** | ** ** | **March 31,  2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| **Assets**                                                                                                           | ** ** | ** **                   | ** ** | ** **               | ** ** |
|                                                                                                                 |       |                         |       |                     |       |
| Current  assets:                                                                                                     |       |                         |       |                     |       |
| Cash                                                                                                                 |       | $                            | 8,272      |                     | $          | 1,811 |   |
| Accounts  receivable - net                                                                                           |       | 179,167                      |       | 187,680                  |       |
| Prepaid  and other current assets                                                                                    |       | 8,040                        |       | 6,766                    |       |
| Total  current assets                                                                                                |       | 195,479                      |       | 196,257                  |       |
|                                                                                                                 |       |                         |       |                     |       |
| Property  and equipment - net                                                                                        |       | 19,506                       |       | 19,552                   |       |
| Goodwill                                                                                                             |       | 262,705                      |       | 262,705                  |       |
| Intangible  assets - net                                                                                             |       | 12,600                       |       | 15,557                   |       |
| Deferred  taxes                                                                                                      |       | 4,285                        |       | 4,212                    |       |
| Other  assets                                                                                                        |       | 4,246                        |       | 3,269                    |       |
| Total  assets                                                                                                        |       | $                            | 498,821    |                     | $          | 501,552 |   |
|                                                                                                                 |       |                         |       |                     |       |
| **Liabilities and Stockholders’ Equity**                                                                        | ** ** | ** **                   | ** ** | ** **               | ** ** |
|                                                                                                                 |       |                         |       |                     |       |
| Current  liabilities:                                                                                                |       |                         |       |                     |       |
| Accounts  payable                                                                                                    |       | $                            | 19,707     |                     | $          | 21,528 |   |
| Accrued  expenses and other liabilities                                                                              |       | 72,289                       |       | 79,841                   |       |
| Current  portion of long-term debt                                                                                   |       | 1,000                        |       | 1,000                    |       |
| Income  taxes payable                                                                                                |       | —                       |       | 2,034                    |       |
| Total  current liabilities                                                                                           |       | 92,996                       |       | 104,403                  |       |
|                                                                                                                 |       |                         |       |                     |       |
| Line  of credit                                                                                                      |       | 113,700                      |       | 135,030                  |       |
| Long-term  debt — net of current portion                                                                        |       | 34,250                       |       | 34,500                   |       |
| Other  long-term liabilities                                                                                         |       | 10,086                       |       | 10,396                   |       |
| Total  liabilities                                                                                                   |       | 251,032                      |       | 284,329                  |       |
|                                                                                                                 |       |                         |       |                     |       |
| Commitments  and contingencies                                                                                       |       |                         |       |                     |       |
| Stockholders’  equity:                                                                                          |       |                         |       |                     |       |
| Common  stock, $0.01 par value — 200,000,000 shares authorized; 24,025,689 and  23,813,334 issued, respectively |       | 240                          |       | 238                      |       |
| Additional  paid-in capital                                                                                          |       | 104,999                      |       | 96,957                   |       |
| Retained  earnings                                                                                                   |       | 143,851                      |       | 121,434                  |       |
| Accumulated  other comprehensive loss                                                                                |       | (906                         | )          | (886                     | )          |
| Deferred  compensation                                                                                               |       | (395                         | )          | (520                     | )          |
| Total  stockholders’ equity                                                                                     |       | 247,789                      |       | 217,223                  |       |
| Total  liabilities and stockholders’ equity                                                                     |       | $                            | 498,821    |                     | $          | 501,552 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**STANLEY, INC.AND SUBSIDIARIES**

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**

**(inthousands)**

** **
| ** **                                                                         | ** ** | **Six months ended** | ** **   |
|------------------------------------------------------------------------------------|------------|--------------------------------|--------------|
| ** **                                                                         | ** ** | **September 25,  2009**   | ** **   | **September 26,  2008** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          | ** ** | ** **                     | ** **   | ** ** | ** ** |
| Net  income                                                                        |       | $                              |  22,417 |   | $ |  17,045 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                           |         |   |   |
| Depreciation  and amortization                                                     |       | 5,682                          |         | 4,428 |   |
| Loss  on disposal of property and equipment                                        |       | 65                             |         | 137 |   |
| Deferred  taxes                                                                    |       | (389                           | )            | 98 |   |
| Stock  contributed to employee stock ownership plan                                |       | 812                            |         | — |   |
| Income  tax benefit from stock-based compensation                                  |       | 1,564                          |         | 2,201 |   |
| Stock  compensation expense                                                        |       | 3,486                          |         | 2,789 |   |
| Changes  in assets and liabilities — net of acquisition effects:              |       |                           |         |   |   |
| Accounts  receivable                                                               |       | 8,513                          |         | 18,474 |   |
| Prepaid  expenses and other current assets                                         |       | (1,274                         | )            | 612 |   |
| Other  assets                                                                      |       | (977                           | )            | (357 | ) |
| Accounts  payable                                                                  |       | (1,821                         | )            | (4,205 | ) |
| Accrued  expenses                                                                  |       | (7,718                         | )            | (6,301 | ) |
| Other  liabilities                                                                 |       | 282                            |         | 4,399 |   |
| Income  taxes payable                                                              |       | (2,035                         | )            | (6,102 | ) |
| Net  cash provided by operating activities                                         |       | 28,607                         |         | 33,218 |   |
|                                                                               |       |                           |         |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          | ** ** | ** **                     | ** **   | ** ** | ** ** |
| Purchase  of Oberon — net of cash acquired                                    |       | —                         |         | (167,824 | ) |
| Acquisition  of property and equipment                                             |       | (2,601                         | )            | (5,050 | ) |
| Net  cash used in investing activities                                             |       | (2,601                         | )            | (172,874 | ) |
|                                                                               |       |                           |         |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          | ** ** | ** **                     | ** **   | ** ** | ** ** |
| Net  (repayments) borrowings under line-of-credit agreements                       |       | (21,330                        | )            | 152,207 |   |
| Repayment  of long term debt                                                       |       | (250                           | )            | (250 | ) |
| Payments  under capital lease obligations                                          |       | (146                           | )            | (145 | ) |
| Purchase  of treasury stock                                                        |       | (84                            | )            | (196 | ) |
| Proceeds  from exercise of stock options                                           |       | 1,574                          |         | 795 |   |
| Excess  tax benefit from share-based compensation                                  |       | 410                            |         | 505 |   |
| Proceeds  from the sale of stock                                                   |       | 281                            |         | — |   |
| Net  cash (used in) provided by financing activities                               |       | (19,545                        | )            | 152,916 |   |
|                                                                               |       |                           |         |   |   |
| **NET INCREASE IN CASH**                                                           |       | 6,461                          |         | 13,260 |   |
| **CASH — Beginning of period**                                                |       | 1,811                          |         | 271 |   |
| **CASH — End of period**                                                      |       | $                              |  8,272  |   | $ |  13,531 |   |
|                                                                               |       |                           |         |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**                             | ** ** | ** **                     | ** **   | ** ** | ** ** |
| Cash  paid during the period for:                                                  |       |                           |         |   |   |
| Income  taxes                                                                      |       | $                              |  18,265 |   | $ |  13,328 |   |
| Interest                                                                           |       | $                              |  1,691  |   | $ |  1,736 |   |
| ** **                                                                         | ** ** | ** **                     | ** **   | ** ** | ** ** |
| **SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:**                       | ** ** | ** **                     | ** **   | ** ** | ** ** |
| Lease  incentive                                                                   |       | $                              |  — |   | $ |  942 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**STANLEY, INC.AND SUBSIDIARIES**

**CondensedConsolidated Statements of Comprehensive Income**

**(unaudited)**

**(inthousands)**

** **
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **September 25,**           | ** ** | **September 26,**         | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| ** **                                    | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                                   |       | $                                | 11,753     |                           | $          | 8,728 |   | $ | 22,417 |   | $ | 17,045 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Other  comprehensive income:                  |       |                             |       |                           |       |   |   |   |   |
| Unrealized  (loss) gain on interest rate swap |       | (12                              | )          | (44                            | )          | 120 |   | 358 |   |
| Translation  adjustments                      |       | (74                              | )          | (6                             | )          | (140 | ) | 154 |   |
| Total  other comprehensive income             |       | (86                              | )          | (50                            | )          | (20 | ) | 512 |   |
| Comprehensive  income                         |       | $                                | 11,667     |                           | $          | 8,678 |   | $ | 22,397 |   | $ | 17,557 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**STANLEY, INC.AND SUBSIDIARIES**

**Notesto Condensed Consolidated Financial Statements**

**(unaudited)**

**(inthousands, except share and per share data, or as otherwise noted)**

 

**1. DESCRIPTION OF BUSINESS**

 

Stanley, Inc.,together with its subsidiaries (“Stanley” or the “Company”), is a provider ofinformation technology services and solutions to U.S. defense, intelligence andfederal civilian government agencies. Stanley offers its customers solutions tosupport any stage of program, product development or business lifecycle throughfive service areas: systems engineering, enterprise integration, operationallogistics, business process outsourcing and advanced engineering andtechnology. The Company derives substantially all of its revenue from U.S. federalgovernment agencies.

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation***—The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles (“GAAP”) in the United States and pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). In the opinionof management, these statements reflect all adjustments necessary to fairlypresent the Company’s financial position as of September 25, 2009, and itsresults of operations and its cash flows for the six months ended September 25,2009 and September 26, 2008. Certain information and note disclosuresnormally included in the annual financial statements have been condensed oromitted. The results of operations for the interim periods are not necessarilyindicative of the results for the full year. For further information, refer tothe financial statements and footnotes presented in the Company’s Annual Reporton Form 10-K for the fiscal year ended March 31, 2009.

 

***Reporting Periods***—The Company’s fiscal year begins on April 1 andends on March 31. The Company’s first three fiscal quarters end on the13th Friday after the first day of the quarter and the fourth quarter ends on March 31.Fiscal quarters will typically be 13 weeks. The second quarter of fiscal year2010 ended on September 25, 2009. The Company does not believe that thereis a material impact to the comparability of the periods presented.

 

***Principles of Consolidation***—The accompanying condensed consolidatedfinancial statements include the accounts of Stanley’s wholly-ownedsubsidiaries. All intercompany balances and transactions have been eliminatedin consolidation.

 

***Revenue Recognition***—The Company recognizes revenue under its contractswhen a contract has been executed, the contract price is fixed anddeterminable, delivery of services or products has occurred, and collectibilityis considered probable and can be reasonably estimated. Revenue is earned undercost-plus-fee, fixed-price and time-and-materials contracts. The Company uses astandard management process to determine whether all required criteria forrevenue recognition have been met, which includes regular reviews of theCompany’s contract performance. This review covers, among other matters,progress against a schedule, outstanding action items, effort and staffing,quality, risks and issues, subcontract management, costs incurred, commitments,and customer satisfaction. During this review, the Company determines whetherthe overall progress on a contract is consistent with the effort expended.

 

Contract revenuerecognition inherently involves the use of estimates. Examples of estimatesinclude the contemplated level of effort to accomplish the tasks under the contract,the cost of the effort, and an ongoing assessment of the Company’s progresstoward completing the contract. From time to time, as part of the Company’sstandard management process, facts develop that require the Company to reviseits estimated total costs and revenues. To the extent that a revised estimateaffects contract profit or revenue previously recognized, the Company recordsthe cumulative effect of the revision in the period in which the factsrequiring the revision become known. The full amount of an anticipated loss onany type of contract is recognized in the period in which it becomes probableand can be reasonably estimated.

 

Under cost-plus-feecontracts, revenues are recognized as costs are incurred and include anestimate of applicable fees earned. For level of effort or term cost-plus-feecontracts, fixed fees are earned in proportion to the percentage of requiredeffort delivered. The Company considers fixed fees under cost-plus-feecontracts to be earned in proportion to the allowable costs actually incurredin performance of the contract for level of effort contracts. For completiontype cost-plus-fee contracts, fixed fees are earned in proportion to thepercentage of work completed. For time-and-materials contracts, revenues are computedby multiplying the number of direct labor-hours expended in performance of thecontract by the contractual billing rates and adding other billable direct andindirect costs. For fixed-price contracts, revenues are recognized as servicesare performed, using the percentage-of-completion method, applying thecost-to-cost or units of delivery method.

 

For cost-plus-award feetype contracts, the Company recognizes the expected fee to be awarded by thecustomer at the 

 

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time such fee can bereasonably estimated, based on factors such as prior award experience andcommunications with the customer regarding performance, including any interimperformance evaluations rendered by the customer. For cost-plus-incentive feetype contracts, the method of calculating the incentive fee is specified in thecontract and it is typically based on measuring actual costs to perform thecontract against a target cost to perform the contract. The Company preparesperiodic estimates to complete the contract and adjusts the incentive fee asrequired based on the contract incentive fee formula.

 

The Company’s contractswith agencies of the government are subject to periodic funding by therespective contracting agency. Funding for a contract may be provided in fullat inception of the contract or ratably throughout the contract as the servicesare provided. From time to time, the Company may proceed with work based oncustomer direction prior to the completion and signing of formal contractdocuments. The Company has a formal internal review process and managementapproval prior to commencement of work. Revenue associated with such work is recognizedwithout profit and only when it can be reliably estimated and realization isprobable. The Company bases its estimates on notices to proceed from itscustomers, previous experiences with the customer, communications with thecustomer regarding funding status, and its knowledge of available funding forthe contract or program. Pre-contract costs related to unsuccessful contractbids are expensed in the period in which we are notified that the contract willnot be issued.

 

Disputes occasionally arisein the normal course of the Company’s business due to events such as delays,changes in contract specifications, and questions of cost allowability orcollectibility. Such matters, whether claims or unapproved change orders in theprocess of being negotiated, are recorded at the lesser of their estimated netrealizable value or actual costs incurred, and only when realization isprobable and can be reliably estimated. Claims against us are recognized wherea loss is considered probable and can be reasonably estimated in amount.

 

The allowability ofcertain costs under government contracts is subject to audit by the government.Certain indirect costs are charged to contracts using provisional or estimatedindirect rates, which are subject to later revision based on government auditsof those costs. Management is of the opinion that costs subsequentlydisallowed, if any, would not be significant.

 

***Concentration of Risk***—Contracts funded by federal government agenciesaccount for substantially all of the Company’s revenues. For the three monthsended September 25, 2009 and September 26, 2008, the Company derivedapproximately 76% and 71% of its revenues, respectively, from the Department ofDefense, including agencies within the intelligence community, and approximately24% and 29% of its revenues, respectively, from federal civilian governmentagencies. The Company’s contract with the Department of the Navy for productionengineering and integration services under various Space and Naval WarfareSystems Command (SPAWAR) programs, which is its largest revenue-generatingcontract, accounted for approximately 11% of its revenues for the three monthsended September 25, 2009.

 

For the six months ended September 25,2009 and September 26, 2008, the Company derived approximately 75% and 67%of its revenues, respectively, from the Department of Defense, includingagencies within the intelligence community, and approximately 25% and 33% ofits revenues, respectively, from federal civilian government agencies. TheCompany’s contract with the Department of the Navy for production engineeringand integration services under various Space and Naval Warfare Systems Command(SPAWAR) programs, which is the largest revenue-generating contract, accountedfor approximately 10% of its revenues for the six months ended September 25,2009.

 

***Property and Equipment***—Property and equipment are carried at cost, lessaccumulated depreciation. Depreciation of property and equipment is calculatedusing the straight-line method over the useful lives. The estimated usefullives of computers, peripherals and software typically range from three to fiveyears. The estimated useful lives of furniture and equipment typically rangefrom five to ten years. Leasehold improvements are amortized over the lesser ofthe useful life or the term of the lease. Repairs and maintenance are expensedas incurred. Depreciation expense related to property and equipment was$1.3 million and $1.0 million for the three months ended September 25,2009 and September 26, 2008, respectively and $2.6 million and 1.9 millionfor the six months ended September 25, 2009 and September 26, 2008,respectively.

 

***Goodwill and Intangible Assets****—*Goodwill represents the excess of costover the fair value of net tangible and identifiable intangible assets ofacquired companies. The Company does not amortize goodwill; rather it testsgoodwill for impairment at least on an annual basis. Testing for impairment isa two-step process. The first step is a test for potential impairment, while thesecond step measures the amount of impairment, if any. The Company is requiredto perform an impairment test at least on an annual basis at any time duringthe fiscal year provided the test is performed at the same time every year. Animpairment loss would be recognized when the assets’ fair value is below theircarrying value. Stanley has elected the last day of its third fiscal quarter asits testing date. Based on the testing performed as of December 26, 2008,the Company determined that no impairments existed. Intangible assets areamortized over their estimated useful lives. Customer relationships areamortized on a straight-line basis over periods ranging from five to sevenyears. Non-competition agreements are amortized on a straight-line basis over threeyears. Backlog and contracts are amortized on a straight-line basis overperiods ranging from two to five years.

 

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***Impairment of Long-Lived Assets***—Whenever events or changes incircumstances indicate that the carrying amount of long-lived assets may not befully recoverable, Stanley evaluates the probability that future undiscountednet cash flows, without interest charges, will be less than the carrying amountof the assets. If any impairment were indicated as a result of this review,Stanley would recognize a loss based on the amount by which the carrying amountexceeds the estimated fair value. Management believes that no impairmentsexisted as of September 25, 2009.

 

***Earnings per share***—Basic earnings per share has been computed bydividing net income available to common stockholders by the weighted-averagenumber of shares of common stock outstanding during each period. Restrictedshares of common stock that vest based on the satisfaction of certainconditions are treated as contingently issuable shares until the conditions aresatisfied. These shares are included in the computation of basic earnings pershare only after the shares vest. Shares issued during the period and sharesreacquired during the period are weighted for the portion of the period thatthey were outstanding. Diluted earnings per share consider the potentialdilution that could occur if securities or other contracts to issue commonstock were exercised or converted into common stock. Shares that areanti-dilutive are not included in the computation of diluted earnings pershare. The diluted weighted-average common shares outstanding for the three andsix months ended September 25, 2009, exclude stock options to purchaseapproximately 0.1 million and 0.1 million shares, respectively, because suchoptions have exercise prices in excess of the average market price of theCompany’s stock for that period. The weighted-average number of common sharesoutstanding is computed as follows:

 
| ** **                                                    | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **September 25, 2009** | ** ** | **September 26, 2008** | ** ** | **September 25, 2009** | ** ** | **September 26, 2008** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**     | ** ** |
| Basic  weighted-average common shares outstanding             |       | 23,447                      |       | 22,793                      |       | 23,364 |   | 22,760 |   |
| Effect  of stock options and unvested restricted stock grants |       | 611                         |       | 1,024                       |       | 654 |   | 1,003 |   |
| Diluted  weighted-average common shares outstanding           |       | 24,058                      |       | 23,817                      |       | 24,018 |   | 23,763 |   |

 

***Derivative Instruments and Hedging Activities***—Stanley entered into an interest rateswap agreement on October 27, 2006 with a maturity date of January 31,2012, an annual fixed rate of 5.28% and a notional amount of$19.0 million. The Company designated this swap agreement, at itsinception, as a qualifying cash flow hedge. For qualifying cash flow hedges,the effective portion of derivative gains and losses are recorded as acomponent of other comprehensive income and are reclassified into earnings inthe same period in which the hedged transaction affects such earnings. Anyineffectiveness is reported currently in earnings. The fair value of the hedgearrangement is recorded as an asset or a liability in the accompanyingunaudited condensed consolidated balance sheets. The fair value of the swap at September 25,2009 of $1.5 million has been reported in “Accrued expenses and otherliabilities” with an offset, net of tax, included in “Accumulated othercomprehensive loss” in the accompanying unaudited condensed consolidatedbalance sheet. None of the $1.5 million unrealized loss was recognized inearnings during the six months ended September 25, 2009 based on hedgeineffectiveness and none of the swap’s unrealized loss was excluded from theassessment of hedge effectiveness. Amounts in accumulated other comprehensiveloss will be reclassified into earnings in the period in which variableinterest payments (the hedged transaction) are made under the Senior CreditFacility (defined in Note 6). Amounts paid or received on the swap are recordedas interest expense in the period incurred.

 

***Segment Reporting***—Operating segments are defined as components of anenterprise for which separate financial information is available and evaluatedregularly by the chief operating decision maker, or decision making group, indeciding how to allocate resources and assess performance. The Companycurrently has one reportable segment for financial reporting purposes, whichrepresents the Company’s core business of providing information technologysolutions and services for federal government customers. The Company does notreport revenue by product or service or groups of products or services becauseit is impracticable to do so.

 

***Use of Estimates***—The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Significant items subject to such estimatesand assumptions include revenue recognition, carrying amount and useful livesof long-lived assets, valuation allowances for accounts receivable and deferredtax assets, software development costs and loss contingencies such aslitigation, claims and assessments.

 

***Reclassifications***—Certain reclassifications have been made to priorperiod balances to conform to the current presentation.

 

***Subsequent Events***— The Company has evaluated subsequent events afterthe balance sheet date through the time of filing these financial statementswith the SEC on October 29, 2009, for appropriate accounting anddisclosure.

 

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***Fair Value of Financial Instruments***—The fair value of accounts receivable,accounts payable, accrued expenses, debt, and the swap contract approximatestheir respective carrying amounts.

 

The three level fairvalue hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1: Quoted pricesfor identical instruments in active markets.

 

Level 2: Quoted pricesfor similar instruments in active markets; quoted prices for identical orsimilar instruments in markets that are not active; and model-driven valuationswhose inputs are observable or whose significant value drivers are observable.

 

Level 3: Significantinputs to the valuation model are unobservable.

 

As of September 25,2009, the financial liability measured at fair value consisted of an interestrate swap agreement. The value is based on model-driven valuations whose inputsare observable. The following table summarizes the financial liability measuredat fair value on a recurring basis as of September 25, 2009 and the levelit falls within the fair value hierarchy:

 
| ** **          | ** ** | **Fair Value Measurement Using:**                                                | ** ** | ** **                                               | ** ** |
|---------------------|------------|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **          | ** ** | **Quoted Prices in********Active Markets for********Identical Assets** | ** ** | **Significant Other********Observable Inputs** | ** ** | **Significant********Unobservable********Inputs** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(Level 1)**                                                                              | ** ** | **(Level 2)**                                       | ** ** | **(Level 3)** | ** ** | **September 25,  2009** | ** ** |
| Liabilities:        |       |                                                                                            |       |                                                     |       |   |   |   |   |
| Interest rate  swap |       | $                                                                                               | —     |                                                     | $          | 1,506 |   | $ | — |   | $ | 1,506 |   |
|                     |            |                                                                                                 |            |                                                          |            |  |  |  |  |  |  |  |  |

 

***Recent Accounting Pronouncements***—In June 2009, the FASB issuedStatement of Financial Accounting Standards No. 168,*The FASB Accounting Standards Codification*(“Codification”)*and the Hierarchy ofGenerally Accepted Accounting Principles* (“GAAP”), *a replacement of FASB Statement No. 162*  (“SFAS 168”). SFAS 168 establishes theCodification as the single source of authoritative GAAP in the United States,other than rules and interpretive releases issued by the SEC. TheCodification is a reorganization of current GAAP into a topical format thateliminates the current GAAP hierarchy and establishes instead two levels ofguidance — authoritative and nonauthoritative. All non-grandfathered, non-SECaccounting literature that is not included in the Codification will becomenonauthoritative. The FASB’s primary goal in developing the Codification is tosimplify user access to all authoritative GAAP by providing all theauthoritative literature related to a particular accounting topic in one place.The Codification was effective for interim and annual periods ending after September 15,2009. Following SFAS 168, the Board will not issue new standards in the form ofStatements, FASB Staff Positions, or Emerging Issue Task Force Abstracts;instead, it will issue Accounting Standards Updates. The FASB will not considerAccounting Standards Updates as authoritative in their own right; these updateswill serve only to update the Codification, provide background informationabout the guidance, and provide the bases for conclusions on the change(s) inthe Codification. In the description of Accounting Standards Updates thatfollows, references in “italics” relate to Codification Topics and Subtopics,and their descriptive titles, as appropriate.

 

***Accounting Standards Updates***—In June 2009, an update was made to*“Consolidation — Consolidation of VariableInterest Entities.”*  Amongother things, the update replaces the calculation for determining whichentities, if any, have a controlling financial interest in a variable interestentity (VIE) from a quantitative based risks and rewards calculation, to aqualitative approach that focuses on identifying which entities have the powerto direct the activities that most significantly impact the VIE’s economicperformance and the obligation to absorb losses of the VIE or the right toreceive benefits from the VIE. The update also requires ongoing assessments asto whether an entity is the primary beneficiary of a VIE (previously,reconsideration was only required upon the occurrence of specific events),modifies the presentation of consolidated VIE assets and liabilities, andrequires additional disclosures about a company’s involvement in VIEs. Thisupdate will be effective for fiscal years beginning after November 15, 2009.The Company does not currently believe that the adoption of this update willhave any effect on its consolidated financial position and results ofoperations.

 

In September 2009,an update was made to*“Fair ValueMeasurements and Disclosures — Investments in Certain Entities thatCalculate Net Asset Value per Share (or Its Equivalent).”*  This update permits entities to measure thefair value of certain investments, including those with fair values that arenot readily determinable, on the basis of the net asset value per share of theinvestment (or its equivalent) if such net asset value is calculated in amanner consistent with the measurement principles in*“Financial Services-Investment Companies”* as of thereporting entity’s measurement date (measurement of all or substantially all ofthe underlying investments of the investee in accordance with the*“Fair Value Measurements and Disclosures”*guidance). The update also requires enhanced disclosures about the nature andrisks of investments within its scope that are measured at fair value on arecurring or nonrecurring basis. This update will be effective for interim andannual periods ending after December 15, 2009. The 

 

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Company is currently evaluating the effect that adoption of this updatewill have, if any, on its consolidated financial position and results ofoperations.

 

In October 2009, anupdate was made to*“RevenueRecognition — Multiple Deliverable Revenue Arrangements.”* This update removes the objective-and-reliable-evidence-of-fair-valuecriterion from the separation criteria used to determine whether an arrangementinvolving multiple deliverables contains more than one unit of accounting,replaces references to “fair value” with “selling price” to distinguish fromthe fair value measurements required under the “*Fair Value Measurements and Disclosures”* guidance, providesa hierarchy that entities must use to estimate the selling price, eliminatesthe use of the residual method for allocation, and expands the ongoingdisclosure requirements. This update is effective for fiscal years beginning onor after June 15, 2010, and can be applied prospectively orretrospectively. The Company is currently evaluating the effect that adoptionof this update will have, if any, on its consolidated financial position andresults of operations.

 

**3. ACCOUNTS RECEIVABLE**

 

Accounts receivableconsists of the following:

 
| ** **                                       | ** ** | **As of**               | ** ** | **As of**           | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                                       | ** ** | **September 25,  2009** | ** ** | **March 31,  2009** | ** ** |
| Billed  receivables                              |       | $                            | 125,916    |                     | $          | 122,322 |   |
| Unbilled  receivables:                           |       |                         |       |                     |       |
| Amounts billable                                 |       | 47,645                       |       | 57,912                   |       |
| Revenues  recorded in excess of contract funding |       | 6,586                        |       | 8,132                    |       |
| Retainage and  contract fee withholding          |       | 360                          |       | 451                      |       |
| Allowance for  doubtful accounts                 |       | (1,340                       | )          | (1,137                   | )          |
| Total                                            |       | $                            | 179,167    |                     | $          | 187,680 |   |

 

Amounts billable consistprimarily of amounts to be billed within a month. Revenues recorded in excessof contract funding are billable upon receipt of contractual amendments ormodifications adding additional funding. The retainage and fee withholding is billableupon completion of the contract performance and approval of final indirectexpense rates by the government. Consistent with industry practice, certainreceivables related to long-term contracts are classified as current, althougha portion of these amounts is not expected to be billed and collected withinone year. Unbilled accounts receivable at September 25, 2009 are expectedto be billed and collected within one year except for approximately$0.4 million.

 

**4.  PROPERTY AND EQUIPMENT**

 

Property and equipmentconsists of the following:

 
| ** **                                                                               | ** ** | **As of**               | ** ** | **As of**           | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                                                                               | ** ** | **September 25,  2009** | ** ** | **March 31,  2009** | ** ** |
| Computers and  peripherals                                                               |       | $                            | 6,503      |                     | $          | 5,684 |   |
| Software                                                                                 |       | 4,420                        |       | 4,265                    |       |
| Furniture and  equipment                                                                 |       | 6,309                        |       | 5,669                    |       |
| Leasehold  improvements                                                                  |       | 15,162                       |       | 14,323                   |       |
|                                                                                     |       | 32,394                       |       | 29,941                   |       |
|                                                                                     |       |                         |       |                     |       |
| Less:  Accumulated depreciation and amortization                                         |       | (12,888                      | )          | (10,389                  | )          |
| Property and  equipment — net                                                       |       | $                            | 19,506     |                     | $          | 19,552 |   |
| Property and  equipment included above that are under capital lease obligations include: |       |                         |       |                     |       |
| Software                                                                                 |       | $                            | 947        |                     | $          | 947 |   |
| Furniture and  equipment                                                                 |       | 142                          |       | 161                      |       |
| Less:  Accumulated depreciation and amortization                                         |       | (879                         | )          | (766                     | )          |
| Total                                                                                    |       | $                            | 210        |                     | $          | 342 |   |

 

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**5.  ACCRUED EXPENSES AND OTHERLIABILITIES**

 

Accrued expenses andother liabilities consist of the following:

 
| ** **                     | ** ** | **As of**               | ** ** | **As of**           | ** ** |
|--------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **September 25,  2009** | ** ** | **March 31,  2009** | ** ** |
| Accrued  payroll-related costs |       | $                            | 21,425     |                     | $          | 28,089 |   |
| Accrued contract  costs        |       | 32,149                       |       | 34,848                   |       |
| Accrued indirect  costs        |       | 7,467                        |       | 7,405                    |       |
| Other payables                 |       | 11,248                       |       | 9,499                    |       |
| Total accrued  expenses        |       | $                            | 72,289     |                     | $          | 79,841 |   |

 

**6.  DEBT**

 

The Company is party tocredit agreement (“Senior Credit Facility” or “Amended Credit Agreement”) witha group of lenders for which SunTrust Robinson Humphrey, Inc. acted assole book manager and lead arranger, SunTrust Bank acted as administrativeagent and M&T Bank and BB&T Bank acted as co-documentation agents.

 

At September 25,2009, the lenders’ aggregate commitment under the Senior Credit Facility was$276.9 million, which consisted of a $241.6 million revolving line of credit (“Revolver”)and a $35.3 million term loan (“Term Loan”), and the Company had outstandingindebtedness of $35.3 million on the Term Loan and $113.7 million onthe Revolver, with a weighted-average interest rate of approximately 1.70% and3.75% for the six months ended September 25, 2009 and September 26,2008, respectively.  At September 25, 2009, the Company’s borrowingavailability under the Senior Credit Facility was $127.9 million, includingoutstanding letters of credit.

 

Under the terms of theAmended Credit Agreement, the Company may request an increase in the size ofthe Revolver by an aggregate amount not greater than $33.4 million. If anylender elects not to increase its commitment, the Company may designate anotherbank or other financial institution to become a party to the Amended CreditAgreement.

 

The Amended CreditAgreement also contains a number of affirmative and restrictive covenants,including limitations on mergers, consolidations and dissolutions; sales ofassets; investments and acquisitions; indebtedness and liens; repurchases ofshares of capital stock and options to purchase shares of capital stock;transactions with affiliates; sale and leaseback transactions; and restrictedpayments.

 

In addition, the AmendedCredit Agreement requires the Company to meet the following financialcovenants:

 

·   a fixed charge coverageratio as of the end of any fiscal quarter of not less than 1.35 to 1.00, basedupon the ratio of (i) consolidated EBITDA (as defined in the AmendedCredit Agreement) less the actual amount paid by the Company and itssubsidiaries in cash on account of capital expenditures and taxes to (ii) consolidatedinterest expense for such period, scheduled principal payments required to bemade on consolidated total debt during such period and certain restrictedpayments paid during such period, in each case measured for the fourconsecutive fiscal quarters ending on or immediately prior to such date; and

 

·   a maximum leverageratio not greater than 3.75 to 1.00, based upon the ratio of (i) consolidatedtotal debt to (ii) consolidated EBITDA (as defined in the Amended CreditAgreement).

 

At September 25,2009, the Company was in compliance with all covenants under its Senior CreditFacility. The obligations under the Senior Credit Facility are unconditionallyguaranteed by each of Stanley’s existing and subsequently acquired or organizedsubsidiaries and are secured on a first-priority basis by security interests(subject to permitted liens) in substantially all assets owned by the Companyand each of its subsidiaries, including the shares of capital stock of itssubsidiaries, subject to certain exceptions.

 

**7.  ACQUISITIONS**

 

***Oberon Associates, Inc.***

 

On July 15, 2008,Stanley acquired Oberon Associates, Inc. (“Oberon”), an engineering,intelligence operations and information technology services company forapproximately $167.8 million at closing, net of cash acquired, plus anadditional $3.0 million in post closing net working capital and otherpurchase price adjustments. Stanley financed the acquisition with 

 

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borrowings under its Senior Credit Facility.

 

Oberon providesengineering, operational intelligence and information technology support tomultiple elements of the U.S. Army, in addition to the U.S. Air Force, DefenseInformation Systems Agency, Transportation Security Administration and severalagencies throughout the intelligence community. Oberon’s areas of expertiseinclude biometrics systems engineering, integration and operational deployment;intelligence community support; communications engineering; and informationtechnology and enterprise data management. The acquisition of Oberon expandsthe range of solutions offered to the Company’s customers, bringing to Stanleybiometric applications experts, functional experts within the intelligencecommunity, and expertise in communications and information management systems.

 

The results of Oberonhave been included in the accompanying condensed consolidated financialstatements since the date of acquisition. The purchase price has been allocatedto the assets acquired and liabilities assumed based upon their estimated fairvalues. Of the purchase consideration, $149.1 million has been allocatedto goodwill, based upon the excess of the purchase price over the $8.6 millionestimated fair value of net tangible assets and $13.1 million has beenassigned to other identifiable intangible assets. The Company completed itsevaluation of the fair value of the assets and liabilities of Oberon andpurchase accounting entries relating to the acquisition in the three monthsended September 25, 2009. None of the amount allocated to goodwill isexpected to be deductible for tax purposes. Included in identifiableintangibles arising from the Oberon acquisition are $10.5 million, $1.9million and $0.7 million related to customer contracts andrelationships, order backlog and non-compete agreements, respectively. Theamortization period for customer contracts and relationships, order backlog andnon-compete agreements is five years, two years and three years, respectively.No residual value has been assumed at the end of their useful lives.

 

**8. STOCKHOLDERS’ EQUITY**

 

***Common Stock***

 

Stanley has one class ofcommon stock, with each share of common stock having one vote per share.Holders of common stock share in dividends declared, if any, by the board ofdirectors.

 

Stanley repurchased 3,254shares of stock from its employees for $0.1 million during the six monthsended September 25, 2009. The repurchases were made to satisfy certainemployees’ tax obligations upon the vesting of restricted stock. The shareswere recorded at market price using the cost method of accounting.

 

***Equity Compensation***

 

Under the Amended andRestated 2006 Omnibus Incentive Compensation Plan (the “Omnibus Plan”), Stanleyis authorized to provide awards for a maximum of 4,500,000 shares of commonstock to directors, officers, employees or consultants. The Omnibus Plan allowsfor cash awards, restricted stock awards, restricted stock units, stockappreciation rights, performance units, fully vested shares, option awards andother equity-related awards. Vesting periods of these awards vary. Except asotherwise determined by the board of directors, the option awards may not havean exercise price less than the fair market value of the common stock on thedate the option is granted.

 

Prior to July 2006,under the Executive Deferred Compensation and Equity Incentive Plan (the “ExecutivePlan”), Stanley was authorized to provide awards for a maximum of 15,000,000shares of common stock to key employees and non-employee directors. TheExecutive Plan allowed for cash awards, restricted stock awards, restrictedstock trust awards and option awards. Vesting periods of these awards varied. Holders of restricted stockawards have voting rights with respect to the awards. The trustee of restrictedstock trust awards has voting rights with respect to the trust awards. Theoption awards granted under the Executive Plan have exercise prices that rangefrom 85% to 110% of the fair market value of the common stock on the date theoption was granted. No further grants under the Executive Plan will be made.

 

Effective April 1,2006, the Company adopted the provisions of “*Compensation— Stock Compensation*” using the prospective-transition method.Under that transition method, compensation cost recognized in the six monthsended September 25, 2009 includes compensation cost for all share-basedpayments granted on or after April 1, 2006, based on the grant-date fairvalue. The Company is required to account for any portion of awards outstandingat the date of adoption of “*Compensation — StockCompensation*” using the accounting principles originallyapplied to those awards.

 

The Company has presentedall tax benefits resulting from stock-based compensation awarded prior to theadoption of “*Compensation — Stock Compensation*” asoperating cash flows in the accompanying unaudited condensed consolidatedstatements of cash flows. The tax benefits associated with share-basedcompensation in effect prior to the adoption of “*Compensation— Stock Compensation*” were $1.6 million and $2.2 million forthe six months ended September 25, 2009 and September 26, 2008, 

 

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respectively. For share-based payment transactions awarded subsequentto the adoption of SFAS No. 123(R), the tax benefits in excess of thecompensation cost recognized are classified as financing cash flows. The excesstax benefits associated with share-based payment transactions accounted forafter the adoption of “*Compensation — StockCompensation*” were $0.4 million and $0.5 million for the sixmonths ended September 25, 2009 and September 26, 2008, respectively,and are disclosed within financing activities in the accompanying CondensedConsolidated Statements of Cash Flows.

 

The fair value of eachoption award is estimated on the date of grant using the Black-Scholes-Mertonclosed-form option-pricing model that uses the assumptions noted in thefollowing table. Expected volatility for the six months ended September 25,2009 was based on historical volatility of the Company’s stock price. Expectedvolatility for the six months ended September 26, 2008 was based on aweighted-average of the historical volatilities of similar public entities. Theexpected term of options granted is derived using the simplified method andrepresents the period of time that options granted are expected to beoutstanding. Options granted meet the criteria of “plain vanilla” for purposesof applying the simplified method. This method was used as the Company did nothave sufficient historical exercise data to provide a reasonable basis uponwhich to estimate expected term due to the limited period of time the shareshave been publicly traded. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant. The Company has not issued dividends in the pastnor does it currently intend to issue dividends in the near future.

 

A summary of the weightedaverage assumptions is presented below.

 
| ** **                | ** ** | **Six Months Ended** | ** ** |
|---------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **September 25,  2009**   | ** ** | **September 26,  2008** | ** ** |
| Expected  volatility      |       | 38.8                           | %          | 32.3 | % |
| Expected  dividends       |       | 0.0                            | %          | 0.0 | % |
| Expected term  (in years) |       | 3.5                            |       | 3.5 |   |
| Risk-free rate            |       | 1.6                            | %          | 2.6 | % |

 

During the six months ended September 25, 2009,the Company granted 457,976 stock option awards at a weighted-average exerciseprice of $25.23, which reflects the fair value of the shares on the date ofgrant. These options vest ratably over three years and have a contractual termof five years. The weighted-average fair value of stock option awards grantedduring the six months ended September 25, 2009 and September 26,2008, as determined by the Black-Scholes-Merton closed-form option-pricingmodel, was $7.66 and $7.22, respectively. The stock option awards that vestedduring the six months ended September 25, 2009 and September 26, 2008had a combined fair value of $2.1 million and $1.2 million, respectively.

 

A summary of optionactivity for the year ended March 31, 2009, and the six months ended September 25,2009 is presented below.

 
| **Options**                             | ** ** | **Number of********Underlying Shares** | ** ** | **Weighted-Average******** Exercise Price** | ** ** | **Aggregate Intrinsic********Value (in thousands)** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Outstanding at  April 1, 2008      |       | 1,609,475                                        |       | $                                                     | 9.15       |                                                               |       |   |
| Granted                                 |       | 445,210                                          |       | $                                                     | 26.43      |                                                               |       |   |
| Exercised                               |       | (338,834                                         | )          | $                                                     | 5.17       |                                                               | $          | 7,762 |   |
| Forfeited                               |       | (111,452                                         | )          | $                                                     | 14.90      |                                                               |       |   |
| Outstanding at  April 1, 2009      |       | 1,604,399                                        |       | $                                                     | 14.38      |                                                               |       |   |
| Granted                                 |       | 457,976                                          |       | $                                                     | 25.23      |                                                               |       |   |
| Exercised                               |       | (172,428                                         | )          | $                                                     | 9.13       |                                                               | $          | 3,492 |   |
| Forfeited                               |       | (56,480                                          | )          | $                                                     | 16.52      |                                                               |       |   |
| Outstanding at  September 25, 2009 |       | 1,833,467                                        |       | $                                                     | 17.52      |                                                               | $          | 16,538 |   |

 

A summary of nonvestedstock option activity for the six months ended September 25, 2009 ispresented below.

 
| **Nonvested Options**              | ** ** | **Number of********Underlying Shares** | ** ** | **Weighted-Average********Fair Value** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  April 1, 2009      |       | 1,051,141                                        |       | $                                           | 5.46       |   |
| Granted                                 |       | 457,976                                          |       | $                                           | 7.66       |   |
| Vested                                  |       | (388,610                                         | )          | $                                           | 5.29       |   |
| Forfeited                               |       | (56,250                                          | )          | $                                           | 5.33       |   |
| Outstanding at  September 25, 2009 |       | 1,064,257                                        |       | $                                           | 6.48       |   |

 

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A summary of vested stockoptions at September 25, 2009, and stock options expected to vest infuture periods is presented below.

 
| **Options**                       | ** ** | **Number of********Underlying********Shares** | ** ** | **Weighted-********Average********Exercise********Price** | ** ** | **Weighted-Average  Remaining********Contractual Term********(years)** | ** ** | **Aggregate********Intrinsic********Value (in********thousands)** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Exercisable                       |       | 769,210                                            |       | $                                                         | 12.29      |                                                                        | 3.9        |                                                                   | $          | 10,963 |   |
| Expected to vest                  |       | 984,438                                            |       | $                                                         | 21.30      |                                                                        | 4.2        |                                                                   | $          | 5,157 |   |
| Exercisable and  expected to vest |       | 1,753,648                                          |       |                                                      |       |                                                                        |       |                                                                   |       |

 

During the six monthsended September 25, 2009, the Company granted 61,121 restricted stockawards at a weighted-average fair value of $26.01 per share that vest ratablyover a period of three years. The weighted-average fair value of restrictedstock awards granted during the six months ended September 25, 2009 and September 26,2008 was $26.01 and $25.38, respectively. The restricted stock awards thatvested during the six months ended September 25, 2009 and September 26,2008 had a combined fair value of $1.3 million and $0.9 million, respectively.

 

A summary of restrictedstock activity for the six months ended September 25, 2009 is presentedbelow.

 
| **Restricted Stock**               | ** ** | **Number of Shares** | ** ** | **Weighted-Average********Fair Value** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  April 1, 2009      |       | 676,437                        |       | $                                           | 24.25      |   |
| Granted                                 |       | 61,121                         |       | $                                           | 26.01      |   |
| Vested                                  |       | (62,337                        | )          | $                                           | 20.98      |   |
| Forfeited                               |       | (56,940                        | )          | $                                           | 24.58      |   |
| Outstanding at  September 25, 2009 |       | 618,281                        |       | $                                           | 24.72      |   |

 

During the six monthsended September 25, 2009 and September 26, 2008, the Companyrecognized $3.5 million and $2.8 million of share-based compensation costs,respectively. As of September 25, 2009, there was $15.9 million of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Omnibus Plan. That cost is expected to berecognized over a weighted-average period of 2 years.

 

Prior to the adoption of “*Compensation — Stock Compensation*”, the fair market value ofeach issuance and grant was determined by the Company on a contemporaneousbasis. The Company recorded stock-based deferred compensation in aggregate ofapproximately $1.4 million in connection with compensatory grants of stockoptions and shares of restricted stock awarded during fiscal 2006 and 2007.Approximately $0.1 million of compensation expense was recognized during thesix months ended September 25, 2009. The remaining deferred compensationof $0.4 million will be amortized over the final 2 years of the vesting periodof the awards.

 

**9.  COMMITMENTS ANDCONTINGENCIES**

 

***Contract Cost Audits***— Substantially all payments to Stanley undercost-reimbursable contracts and subcontracts with the U.S. Government areprovisional payments, which are subject to potential adjustments upon audit bythe Defense Contract Audit Agency (“DCAA”). Audits through March 31,2006 have been completed. In the opinion of management, adjustmentsresulting from the audits of all subsequent years are not expected to have amaterial effect on the Company’s financial position, results of operations, orcash flows.

 

****Litigation—****

 

****S.C. DiamondLitigation, Virginia Beach Circuit****************Court***** —* OnApril 2, 2009, SC Diamond Associates, L.P. (“S.C. Diamond”) filed alawsuit in Virginia Beach Circuit Court against the Company and AlliedTechnology Group, Inc. (“Allied”). S.C. Diamond is the owner of awarehouse property in Virginia Beach, Virginia in which the Company subleased aportion of the facility. In March 2008, the warehouse caught fire, allegedlyas a result of an exploded high-intensity metal halide bulb, which is allegedto have been manufactured by Philips Electronics N.A. Corporation, d/b/aPhilips Lighting Company (“Philips”). S.C. Diamond has sued Allied, as itstenant, and the Company, as sub-lessee, alleging breach of contract andnegligence against Allied, and negligence against the Company. S.C. Diamondseeks to recover approximately $12 million in damages from Allied and theCompany. Travelers Indemnity Company, which insured S.C. Diamond, intervened inthe lawsuit on September 15, 2009, making subrogation claims againstStanley and Philips, seeking to recover approximately $8 million in insuranceproceeds previously paid to S.C. Diamond.

 

The Company disputes allthe allegations against it, and have joined Allied and Travelers in athird-party action against 

 

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Philips, alleging that Philips is liable for the warehouse fire. TheCompany is being defended in this action by its general liability insurer,which has issued a reservation of rights. In management’s opinion, thedisposition of this litigation is not expected to have a material adverseeffect on the Company’s financial position, results of operations or liquidity.

 

****Other Litigation**** — Other than as set forthabove, neither the Company, nor any of its subsidiaries, are currently subjectto any material legal proceedings, nor, to its knowledge, is any material legalproceeding currently threatened against the Company.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

*Youshould read the following discussion in conjunction with the unaudited andaudited consolidated financial statements and the accompanying notes includedin this Form 10-Q and in our Annual Report on Form 10-K for thefiscal year ended March 31, 2009, filed by us with the Securities andExchange Commission on May 21, 2009. This discussion containsforward-looking statements that involve risks and uncertainties. Our actualresults may differ materially from those discussed in or implied by any of theforward-looking statements as a result of various factors, including but notlimited to, those listed in the “Risk Factors” section of this Report, as wellas in our Annual Report on Form 10-K for the fiscal year ended March 31,2009. We caution readers not to place undue reliance on any suchforward-looking statements, which speak only as of the date made. We are underno duty to update any of the forward-looking statements after the date of thisQuarterly Report on Form 10-Q to conform these statements to actualresults, except as required by law.*

 

**Overview**

 

We provide informationtechnology services and solutions to U.S. defense, intelligence and federalcivilian government agencies. We offer our customers solutions and expertise tosupport their mission-essential needs at any stage of program, productdevelopment or business lifecycle through five service areas: systemsengineering, enterprise integration, operational logistics, business processoutsourcing and advanced engineering and technology. As a systems integrator,we apply these five service areas to enable our customers to achieveinteroperability between different business processes and informationtechnology systems.

 

Contracts funded byfederal government agencies account for substantially all of our revenues. Asof September 25, 2009, we had approximately 300 active contractualengagements across more than 50 federal government agencies. Our customersinclude all major agencies of the Department of Defense, the Department ofState, the Department of Homeland Security, the Department of Transportation,the Department of the Treasury, NASA, the Department of Justice and theDepartment of Health and Human Services.

 

**KeyMetrics Evaluated By Management**

 

We manage and assess theperformance of our business by evaluating a variety of financial andnon-financial metrics derived from and in addition to our United Statesgenerally accepted accounting principles, or GAAP, results. The mostsignificant of these metrics are discussed below.

 

***Revenue Growth***

 

We closely monitorrevenue growth in order to assess the performance of our business. Inmonitoring this growth, we focus on both internal revenue growth and revenuegrowth through acquisitions. Our internal revenue growth is driven primarily bytwo factors. First, internal revenue growth is driven by adding new customers.For example, over the past several years we have added the Department ofHomeland Security’s Citizenship and Immigration Services, the Department of theTreasury’s Office of the Comptroller of the Currency, the National GuardBureau, the Department of Transportation and agencies in the intelligencecommunity as new customers. Second, internal revenue growth is driven byincreasing revenues with existing customers by adding new contracts orexpanding existing contracts. For example, since the initial award of ourcontract with the Department of State for the provision of passport processingand support services, the scope of services provided by us, and the revenuesgenerated by those services, have grown significantly.

 

Our revenue growthstrategy also includes the pursuit of strategic acquisitions. We have completedthe following six acquisitions since 2000:

 
| **Acquired Company**                | ** ** | **Date  of Acquisition** | ** ** |
|-------------------------------------|------------|--------------------------|------------|
| GCI Information Services, Inc. |       | January 2000        |       |
| CCI, Incorporated                   |       | September 2002      |       |
| Fuentez Systems Concepts, Inc. |       | December 2003       |       |
| Morgan Research Corporation         |       | February 2006       |       |
| Techrizon, LLC                      |       | April 2007          |       |
| Oberon Associates, Inc.        |       | July 2008           |       |

 

For further informationon our acquisition of Oberon Associates, Inc. (“Oberon”), please see Note7 to the Condensed Consolidated Financial Statements, included elsewhere inthis report.

 

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***Backlog***

 

We monitor backlog, whichprovides us with visibility of our future revenues, as a reflection of ourcompetitive success in our target markets and our ability to retain existingcontracts and win new contracts. The following table summarizes our backlog asof the dates indicated:

 
| ** **     | ** ** | **As  of**                   | ** ** |
|----------------|------------|------------------------------|------------|
| ** **     | ** ** | **September 25,  2009** | ** ** | **September 26,  2008** | ** ** |
| ** **     | ** ** | **(in  millions)**           | ** ** |
| Backlog:       |       |                         |       |   |   |
| Funded         |       | $                            | 360.0      |   | $ | 354.6 |   |
| Unfunded       |       | 1,626.4                      |       | 1,729.5 |   |
| Total  Backlog |       | $                            | 1,986.4    |   | $ | 2,084.1 |   |

 

Each year, a significantportion of our revenues is derived from our backlog, and a significant portionof our backlog represents work related to the continuation of services andsolutions under contracts or projects where we are the incumbent provider.

 

We define backlog as theamount of revenues we expect to realize (i) over the remaining basecontract performance period and (ii) from the exercise by the customer ofoption periods that we reasonably believe will be exercised, in each case fromsigned contracts in existence as of the measurement date. We do not includecontract ceiling values, which represent the maximum amount of contract awardsthat could be awarded to all contractors under government-wide acquisitioncontracts or agency-specific indefinite delivery/indefinite quantity contractsin our backlog calculation.

 

We also do not include inbacklog (i) the expected amount of revenues that would be realized if, andwhen, we were successful in the re-compete of signed contracts in existence asof the measurement date, or (ii) the expected amount of revenues thatwould be realized from future unidentified growth on signed contracts and taskorders in existence as of the measurement date.

 

We define funded backlogas the portion of our backlog for which funding currently is appropriated andobligated to us under a signed contract or task order by the purchasing agency,or otherwise authorized for payment to us by a customer upon completion of aspecified portion of work, less the amount of revenue we have previouslyrecognized under the contract. Our funded backlog does not include the fullpotential value of our contracts because Congress often appropriates funds tobe used by an agency for a particular program or contract on a yearly orquarterly basis, even though the contract may call for performance over anumber of years. As a result, contracts typically are only partially funded atany point during their term, and all or some of the work to be performed underthe contracts may remain unfunded unless and until Congress makes subsequentappropriations and the procuring agency allocates funding to the contract.

 

***Contract Mix***

 

We work with the federalgovernment under contracts employing one of three types of price structures:cost-plus-fee, time-and-materials and fixed-price. Cost-plus-fee contracts aretypically lower risk arrangements and thus yield lower profit margins thantime-and-materials and fixed-price arrangements. Because the customer usuallyspecifies the type of contract for a particular contractual engagement, wegenerally do not influence the choice of contract type. However, where we dohave the opportunity to influence the contract type, and where customerrequirements are clear, we prefer time-and-materials and fixed-pricearrangements rather than cost-plus-fee arrangements because time-and-materialsand fixed-price contracts, as compared with cost-plus-fee contracts, generallyprovides us with a greater opportunity to generate higher margins and providesthe customer with a fixed value for services provided.

 

The following tablesummarizes our historical contract mix, measured as a percentage of totalrevenues, for the periods indicated:

 
| ** **         | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**   | ** ** |
|--------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **         | ** ** | **September 25, 2009** | ** ** | **September 26, 2008** | ** ** | **September 25, 2009** | ** ** | **September 26, 2008** | ** ** |
| Cost-plus-fee      |       | 29                          | %          | 30                          | %          | 29 | % | 32 | % |
| Time-and-materials |       | 50                          | %          | 55                          | %          | 50 | % | 51 | % |
| Fixed-price        |       | 21                          | %          | 15                          | %          | 21 | % | 17 | % |

 

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***Headcount and Labor Utilization***

 

We generate revenuesprimarily from services provided by our employees and subcontractors, withservices provided by our employees generally yielding higher profits thanservices provided by our subcontractors. Our ability to hire and deployadditional qualified employees is a key driver of our ability to generateadditional revenues, and our successful deployment of existing employees ondirect-billable jobs is a key driver of our profitability.

 

***Indirect Costs***

 

Indirect costs constitutea substantial portion of the costs associated with our performance ofcontracts. We carefully monitor the amount by which our actual indirect costsunder our contracts vary from those expected to be incurred, which we refer toas indirect expense variance. Increased indirect rates can adversely affect ourability to achieve attractive contract pricing, our profitability, and ourcompetitive position, by resulting in unexpected increased costs to ourcustomers.

 

***Days Sales Outstanding***

 

Days sales outstanding,or DSO, is a measure of how efficiently we manage the billing and collection ofour accounts receivable, our most significant working capital requirement. Forthe three months ended September 25, 2009, we reported DSO of 79 days, adecrease from 84 days for the three months ended June 26, 2009. Thedecrease in DSO was primarily the result of the timing of receipts fromcustomers and a lower average accounts receivable balance during the quarter.

 

***Unbilled Receivables***

 

Unbilled receivables arecomprised of work-in-process that will be billed in accordance with contractterms and delivery schedules, as well as amounts billable upon final executionof contracts, contract completion, milestones or completion of ratenegotiations. Because the billing of unbilled receivables is contingent onthose events, changes in the relative amount of unbilled receivables have animpact on our working capital and liquidity.

 

Payments to us forperformance on certain of our federal government contracts are subject to auditby the DCAA and are also subject to government funding. We provide a reserveagainst our receivables for estimated losses that may result from ratenegotiations, audit adjustments and/or government funding availability. To theextent that actual adjustments due to rate negotiations, audit adjustments orgovernment funding availability differ from our estimates, our revenue may beimpacted. Because substantially all of our receivables come from contractsfunded by the federal government, we believe that the likelihood of a materialloss on an uncollectible account from this activity is low.

 

**CriticalAccounting Policies**

 

The discussion andanalysis of our financial condition and results of operations is based on ourcondensed consolidated financial statements, which have been prepared inaccordance with GAAP. The preparation of our condensed consolidated financialstatements requires management to make estimates and assumptions that affectreported amounts, and actual results may differ from the estimates. Oursignificant accounting policies are described in Note 2 to our unauditedcondensed consolidated financial statements included elsewhere in this report.

 

We consider the followingaccounting policies to be critical to the understanding of our financialcondition and results of operations because these policies require the mostdifficult, subjective or complex judgments on the part of our management intheir application, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain, and are the most important toour financial condition and operating results.

 

***Revenue Recognition***

 

We recognize revenueunder our contracts when a contract has been executed, the contract price isfixed and determinable, delivery of services or products has occurred andcollectibility is considered probable and can be reasonably estimated. Revenueis earned under cost-plus-fee, fixed-price and time-and-materials contracts. Weuse a standard management process to determine whether all required criteriafor revenue recognition have been met, which includes regular reviews of ourcontract performance. This review covers, among other matters, progress againsta schedule, outstanding action items, effort and staffing, quality, risks andissues, subcontract management, costs incurred, commitments and customersatisfaction. During this review, we determine whether the overall progress ona contract is consistent with the effort expended.

 

Contract revenuerecognition inherently involves the use of estimates. Examples of estimatesinclude the contemplated level of 

 

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effort to accomplish thetasks under the contract, the cost of the effort and an ongoing assessment ofour progress toward completing the contract. From time to time, as part of ourstandard management process, facts develop that require us to revise ourestimated total costs and revenues. To the extent that a revised estimateaffects contract profit or revenue previously recognized, we record thecumulative effect of the revision in the period in which the facts requiringthe revision become known. The full amount of an anticipated loss on any typeof contract is recognized in the period in which it becomes probable and can bereasonably estimated.

 

Under cost-plus-feecontracts, revenues are recognized as costs are incurred and include anestimate of applicable fees earned. For level of effort or term cost-plus-feecontracts, fixed fees are earned in proportion to the percentage of requiredeffort delivered. We consider fixed fees under cost-plus-fee contracts to beearned in proportion to the allowable costs actually incurred in performance ofthe contract for level of effort contracts. For completion type cost-plus-feecontracts, fixed fees are earned in proportion to the percentage of workcompleted. For time-and-materials contracts, revenues are computed bymultiplying the number of direct labor-hours expended in performance of thecontract by the contractual billing rates and adding other billable direct andindirect costs. For fixed-price contracts, revenues are recognized as servicesare performed, using the percentage-of-completion method, applying thecost-to-cost or units of delivery method.

 

For cost-plus-award feetype contracts, we recognize the expected fee to be awarded by the customer atthe time such fee can be reasonably estimated, based on factors such as prioraward experience and communication with the customer regarding performance,including any interim performance evaluations rendered by the customer. Forcost-plus-incentive fee type contracts, the method of calculating the incentivefee is specified in the contract and it is typically based on measuring actualcosts to perform the contract against a target cost to perform the contract. Weprepare periodic estimates to complete the contract and adjust the incentivefee as required based on the contract incentive fee formula.

 

Our contracts withagencies of the government are subject to periodic funding by the respectivecontracting agency. Funding for a contract may be provided in full at inceptionof the contract or ratably throughout the contract as the services areprovided. From time to time, we may proceed with work based on customerdirection prior to the completion and signing of formal contract documents.Such situations require completion of a formal internal review process andmanagement approval prior to commencement of work. Additionally, revenueassociated with such work is recognized without profit and only when it can bereliably estimated and realization is probable. We base our estimates onnotices to proceed from our customers, previous experience with customers,communications with customers regarding funding status, and our knowledge ofavailable funding for the contract or program. Pre-contract costs related tounsuccessful contract bids are expensed in the period in which we are notifiedthat the contract will not be issued.

 

Disputes occasionallyarise in the normal course of our business due to events such as delays,changes in contract specifications, and questions of cost allowability orcollectibility. Such matters, whether claims or unapproved change orders in theprocess of negotiation, are recorded at the lesser of their estimated netrealizable value or actual costs incurred, and only when the realization isprobable and can be reliably estimated. Claims against us are recognized wherea loss is considered probable and can be reasonably estimated in amount.

 

The allowability ofcertain costs under government contracts is subject to audit by the government.Certain indirect costs are charged to contracts using provisional or estimatedindirect rates, which are subject to later revision based on government auditsof those costs. Management is of the opinion that costs subsequentlydisallowed, if any, would not be significant.

 

***Contract Cost Accounting***

 

As a contractor providingservices primarily to the federal government, we must categorize our costs aseither direct or indirect and allowable or unallowable. Direct costs are thosecosts that are identified with specific contracts. These costs include labor,travel, subcontractor and consultant services, third party materials wepurchase under a contract and other non-labor costs incurred in support of acontract. Indirect costs are those costs not identified with specificcontracts. Rather, indirect costs are allocated to contracts in accordance withfederal government rules and regulations. These costs typically includecertain of our selling, general and administrative expenses, fringe benefitexpenses, overhead expenses and depreciation and amortization costs. Direct andindirect costs that are not allowable under the Federal Acquisition Regulationor specific contract provisions cannot be considered for reimbursement underour federal government contracts. We must specifically identify these costs toensure we comply with these requirements. Our unallowable costs include aportion of our executive compensation, certain employee morale activities,certain types of legal and consulting costs, interest expense and theamortization of identified intangible assets, among others.

 

***Goodwill and Intangible Assets***

 

Goodwill represents theexcess of cost over the fair value of net tangible and identifiable intangibleassets of acquired companies. We do not amortize goodwill. We test goodwill forimpairment at least on an annual basis. Testing for impairment is a 

 

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two-step process. Thefirst step is a test for potential impairment, while the second step measuresthe amount of impairment, if any. We are required to perform an impairment testat least on an annual basis at any time during the fiscal year, provided thatthe test is performed at the same time every year. An impairment loss would berecognized when the asset’s fair value is below its carrying value. We haveelected the last day of our third fiscal quarter as our testing date. Based onthe testing performed as of December 26, 2008, we determined that noimpairments existed. Customer relationships are amortized on a straight-linebasis over periods ranging from five to seven years. Non-competition agreementsare amortized on a straight-line basis over three years. Backlog and contractsare amortized on a straight-line basis over periods ranging from two to fiveyears.

 

**Resultsof Operations**

 

Our historical financial statementsreflect the operating results of Oberon from July 15, 2008, the date ofacquisition. The following unaudited tables set forth the results of operationsexpressed in thousands of dollars and as a percentage of revenues, for theperiods below:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **September 25,**           | ** ** | **September 26,**         | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| **Consolidated Statements of Income Data** | ** ** | **2009**                         | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                       |       | $                                | 217,089    |                           | $          | 191,078 |   | $ | 425,835 |   | $ | 363,645 |   |
| Operating  costs and expenses:                                 |       |                             |       |                           |       |   |   |   |   |
| Cost  of revenues                                              |       | 180,518                          |       | 159,925                        |       | 353,607 |   | 305,684 |   |
| Selling,  general and administrative                           |       | 13,401                           |       | 12,224                         |       | 27,492 |   | 22,883 |   |
| Depreciation  and amortization                                 |       | 2,852                            |       | 2,586                          |       | 5,682 |   | 4,428 |   |
| Total  operating costs and expenses                            |       | 196,771                          |       | 174,735                        |       | 386,781 |   | 332,995 |   |
| Operating  income                                              |       | 20,318                           |       | 16,343                         |       | 39,054 |   | 30,650 |   |
| Other  income (expense):                                       |       |                             |       |                           |       |   |   |   |   |
| Other  income                                                  |       | —                           |       | 1                              |       | 3 |   | 3 |   |
| Interest  income                                               |       | 21                               |       | 71                             |       | 59 |   | 196 |   |
| Interest  expense                                              |       | (897                             | )          | (1,830                         | )          | (2,045 | ) | (2,367 | ) |
| Total  other expenses                                          |       | (876                             | )          | (1,758                         | )          | (1,983 | ) | (2,168 | ) |
| Income  before taxes                                           |       | 19,442                           |       | 14,585                         |       | 37,071 |   | 28,482 |   |
| Provision  for income taxes                                    |       | (7,689                           | )          | (5,857                         | )          | (14,654 | ) | (11,437 | ) |
| Net  income                                                    |       | $                                | 11,753     |                           | $          | 8,728 |   | $ | 22,417 |   | $ | 17,045 |   |

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **September 25,** | ** ** | **September 26,**         | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| **As a Percentage of Revenues** | ** ** | **2009**               | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                            |       | 100.0                  | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Operating  costs and expenses:                      |       |                   |       |                           |       |   |   |   |   |
| Cost  of revenues                                   |       | 83.2                   |       | 83.7                           |       | 83.0 |   | 84.1 |   |
| Selling,  general and administrative                |       | 6.2                    |       | 6.4                            |       | 6.5 |   | 6.3 |   |
| Depreciation  and amortization                      |       | 1.3                    |       | 1.4                            |       | 1.3 |   | 1.2 |   |
| Total  operating costs and expenses                 |       | 90.6                   |       | 91.4                           |       | 90.8 |   | 91.6 |   |
| Operating  income                                   |       | 9.4                    |       | 8.6                            |       | 9.2 |   | 8.4 |   |
| Other  income (expense):                            |       |                   |       |                           |       |   |   |   |   |
| Other  income                                       |       | —                 |       | —                         |       | — |   | — |   |
| Interest  income                                    |       | —                 |       | —                         |       | — |   | 0.1 |   |
| Interest  expense—net                          |       | (0.4                   | )          | (0.9                           | )          | (0.5 | ) | (0.7 | ) |
| Total  other expenses                               |       | (0.4                   | )          | (0.9                           | )          | (0.5 | ) | (0.6 | ) |
| Income  before taxes                                |       | 9.0                    |       | 7.7                            |       | 8.7 |   | 7.8 |   |
| Provision  for income taxes                         |       | (3.6                   | )          | (3.1                           | )          | (3.4 | ) | (3.1 | ) |
| Net  income                                         |       | 5.4                    | %          | 4.6                            | %          | 5.3 | % | 4.7 | % |

 

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We generate revenuesprimarily from services provided by our employees and subcontractors, withservices provided by our employees generally yielding higher profits thanservices provided by our subcontractors. To a lesser degree, we earn revenuesthrough reimbursable travel and other reimbursable direct and indirect costs tosupport the contractual effort and third-party hardware and software that wepurchase and integrate for customers as part of the solutions we provide.

 

Our most significantexpense is cost of revenues, which includes the costs of direct labor,subcontractors, materials, equipment, non-reimbursable travel and an allocationof indirect costs (other than selling, general and administrative expenses anddepreciation). Indirect costs consist primarily of fringe benefits, humanresources, recruiting, training, other overhead and certain other non-directcosts that are necessary to support direct labor. The number and types ofpersonnel, their salaries and other costs, can have a significant impact on ourcost of revenues.

 

Our selling, general andadministrative expenses include costs not directly associated with performingwork for our customers. These costs include wages plus associated fringebenefits, stock-based compensation charges, rent, travel, insurance andprofessional fees. Among the functions covered by these expenses are sales,business development, contract administration, legal, finance, accounting,human resources, information technology and general management. Most of thesecosts are allowable costs under the cost accounting standards for contractingwith the federal government and are recoverable under cost-plus-fee contracts.

 

Our depreciation andamortization expenses include the amortization of purchased intangibles inconnection with acquisitions, the amortization of leasehold improvements andthe depreciation of property and equipment purchased in the ordinary course ofbusiness.

 

Certain revenues andpayments we receive are based on provisional billings and payments that aresubject to adjustment after audit. Federal government agencies have the rightto challenge our cost estimates and allocation methodologies with respect togovernment contracts. In addition, contracts with these agencies are subject toaudit and possible adjustment to give effect to unallowable costs undercost-plus-fee contracts or to other regulatory requirements affecting bothcost-plus-fee and fixed-price contracts.

 

***Comparison of Results of Operations for the Three MonthsEnded September 25, 2009 and September 26, 2008***

 

***Revenues.***  Our consolidated revenues increased $26.0million, or 13.6%, from $191.1 million for the three months ended September 26,2008, to $217.1 million for the three months ended September 25, 2009. Theincrease was primarily due to $10.4 million of increased revenues attributableto military intelligence training and operations support for the U.S. Army,$5.4 million of increased revenues attributable to procurement, production andengineering services under various SPAWAR contracts, $5.2 million of increasedrevenues attributable to information technology and systems support for theU.S. Marine Corps, $2.7 million of increased revenues attributable toengineering, technical, and program management services to provide full lifecycle engineering services for the Naval Sea Logistics Center, and $2.2 millionof increased revenues attributable to biometric software development, trainingand support for certain agencies in the Department of Defense, offset by $4.4million of decreased revenues due to reduced demand for passport services forthe Department of State. The balance of increased revenues was primarily aresult of engineering and technical support services for the U.S. Air Force andthe Defense Information Systems Agency and information technology life cyclesupport and logistics management services for the U.S. Army.

 

***Cost of Revenues.***  Our cost of revenues increased $20.6 million,or 12.9%, from $159.9 million for the three months ended September 26,2008, to $180.5 million for the three months ended September 25, 2009.This increase was primarily the result of additional costs attributable torevenues associated with the increased services referred to above. Cost ofrevenues represented 83.2% of revenues for the three months ended September 25,2009, as compared to 83.7% of revenues for the three months ended September 26,2008. This decrease was primarily the result of a greater percentage of moreprofitable fixed price contracts.

 

***Selling, General and Administrative.***  Our selling, general andadministrative expense increased $1.2 million, or 9.6%, from $12.2 million forthe three months ended September 26, 2008, to $13.4 million for the threemonths ended September 25, 2009. This increase was primarily due to anincrease in costs to support our growing revenue base and an increase inbusiness development costs. Selling, general and administrative expenserepresented 6.2% of revenues for the three months ended September 25,2009, as compared to 6.4% of revenues for the three months ended September 26,2008. This decrease was primarily a result of efficiencies realized in ourcorporate infrastructure.

 

***Depreciation and Amortization.***  Our depreciation and amortizationexpense increased $0.3 million, or 10.3.%, from $2.6 million for the threemonths ended September 26, 2008, to $2.9 million for the three monthsended September 25, 2009. The increase in depreciation and amortizationwas primarily due to depreciation expense associated with additional propertyand equipment to support our growth.

 

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***Interest Expense.***  Our interest expense decreased $0.9 million, or51.0%, from $1.8 million for the three months ended September 26, 2008, to$0.9 million for the three months ended September 25, 2009. The decreasein interest expense was primarily due to a lower overall borrowing rate,coupled with a lower overall outstanding debt balance.

 

***Provision for Income Taxes.  ***Our effective tax rate decreased 0.7%from 40.2% for the three months ended September 26, 2008, to 39.5% for thethree months ended September 25, 2009. The decrease was primarilyattributable to a lower consolidated effective state income tax rate.

 

***Net Income.***  Our net income increased $3.1 million, or34.7%, from $8.7 million for the three months ended September 26, 2008, to$11.8 million for the three months ended September 25, 2009. The primaryreasons for the increase in net income were higher revenues and increasedoperating income as well as improved margins primarily due to a largerpercentage of more profitable fixed-price contracts.

 

***Comparison of Results of Operations for the Six Months EndedSeptember 25, 2009 and September 26, 2008***

 

***Revenues.***  Our consolidated revenues increased $62.2million, or 17.1%, from $363.6 million for the six months ended September 26,2008, to $425.8 million for the six months ended September 25, 2009. Theincrease was primarily due to $25.8 million of increased revenues attributableto military intelligence training and operations support for the U.S. Army, $11.6million of increased revenues attributable to biometric software development,training and support for certain agencies in the Department of Defense, $11.4million of increased revenues attributable to engineering and technical supportservices, primarily for the U.S. Air Force and the Defense Information SystemsAgency, $8.6 million of increased revenues attributable to informationtechnology and systems support for the U.S. Marine Corps, $7.2 million ofincreased revenues attributable to procurement, production and engineeringservices under various SPAWAR programs, and $4.6 million of increased revenuesattributable to engineering, technical, and program management services toprovide full life cycle engineering services for the Naval Sea LogisticsCenter, offset by $15.9 million of decreased revenues due to reduced demand forpassport services for the Department of State. The balance of increasedrevenues was primarily a result of information technology life cycle supportand logistics management services for the U.S. Army. A significant portion ofthis growth was due to the impact of the contracts obtained as part of theOberon acquisition.

 

***Cost of Revenues.***  Our cost of revenues increased $47.9 million,or 15.7%, from $305.7 million for the six months ended September 26, 2008,to $353.6 million for the six months ended September 25, 2009. Thisincrease was primarily the result of additional costs attributable to revenuesassociated with the increased services referred to above. Cost of revenuesrepresented 83.0% of revenues for the six months ended September 25, 2009,as compared to 84.1% of revenues for the six months ended September 26,2008. This decrease was primarily the result of a greater percentage of moreprofitable fixed price contracts.

 

***Selling, General and Administrative.***  Our selling, general andadministrative expense increased $4.6 million, or 20.1%, from $22.9 million forthe six months ended September 26, 2008, to $27.5 million for the sixmonths ended September 25, 2009. This increase was primarily due to highershare-based payment expenses, an increase in business development costs andhigher selling, general and administrative expenses attributable to theacquisition of Oberon. Selling, general and administrative expense represented6.5% of revenues for the six months ended September 25, 2009, as comparedto 6.3% of revenues for the six months ended September 26, 2008. Thisincrease was primarily a result of higher selling, general and administrativeexpense as a percentage of revenues associated with supporting contracts andoperations that were obtained as part of the Oberon acquisition.

 

***Depreciation and Amortization.***  Our depreciation and amortizationexpense increased $1.3 million, or 28.3%, from $4.4 million for the six monthsended September 26, 2008, to $5.7 million for the six months ended September 25,2009. The increase in depreciation and amortization was primarily due to theamortization of intangible assets associated with the acquisition of Oberon aswell as depreciation expense associated with capital expenditures and leaseholdimprovements.

 

***Interest Income.***  Our interest income decreased $0.1 million from$0.2 million for the six months ended September 26, 2008, to $0.1 millionfor the six months ended September 25, 2009. The decrease in interestincome was primarily due to a decrease in the number of delayed paymentsreceived from customers.

 

***Interest Expense.***  Our interest expense decreased $0.4 million, or13.6%, from $2.4 million for the six months ended September 26, 2008, to$2.0 million for the six months ended September 25, 2009. The decrease ininterest expense was primarily due to a lower overall borrowing rate, partiallyoffset by borrowings under our Senior Credit Facility relating to the Oberonacquisition.

 

***Provision for Income Taxes.  ***Our effective tax rate decreased 0.7%from 40.2% for the six months ended September 26, 2008, to 39.5% for thesix months ended September 25, 2009. The decrease was primarilyattributable to a lower consolidated effective state income tax rate.

 

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***Net Income.***  Our net income increased $5.4 million, or31.5%, from $17 million for the six months ended September 26, 2008, to$22.4 million for the six months ended September 25, 2009. The primaryreasons for the increase in net income were higher revenues and increasedoperating income as well as improved margins primarily due to a largerpercentage of more profitable fixed-price contracts.

 

**Liquidityand Capital Resources**

 

***Short-Term Liquidity Requirements.***  We generally consider ourshort-term liquidity requirements to consist primarily of funds necessary tofinance the costs of operations pending the billing and collection of accountsreceivable. We expect to meet our short-term liquidity needs through existingcash balances and cash provided by our operations and, if necessary, fromborrowings under our Senior Credit Facility (defined below).

 

***Long-Term Liquidity Requirements.***  We generally consider our long-termliquidity requirements to consist primarily of funds necessary to pay scheduleddebt maturities, non-recurring capital expenditures and the costs associatedwith acquisitions that we may pursue. Historically, we have satisfied ourlong-term liquidity requirements through various sources of capital, includingcash provided by operations, equity offerings and borrowings under our SeniorCredit Facility.

 

We believe that thesesources of capital will continue to be available to us in the future to fundour long-term liquidity requirements. However, our ability to incur additionaldebt is dependent upon a number of factors, including our degree of leverage,the value of our unencumbered assets, borrowing restrictions imposed byexisting lenders and general market conditions. In addition, our ability toraise funds through the issuance of equity securities is dependent upon, amongother things, general market conditions and market perceptions about us. Wewill continue to analyze which source of capital is most advantageous to us atany particular point in time, but the equity markets may not be consistentlyavailable on terms that are attractive, or at all.

 

We expect we will requireadditional borrowings, including borrowings under our Senior Credit Facility, tosatisfy our long-term liquidity requirements. Other sources of liquidity may besales of common or preferred stock.

 

***Cash Flows***

 

Accounts receivablerepresents our largest working capital requirement. We bill most of ourcustomers monthly after services are rendered. Our operating cash flow isprimarily affected by the overall profitability of our contracts, our abilityto invoice and collect from our customers in a timely manner, and our abilityto manage our vendor payments.

 
| ** **                                           | ** ** | **Six  Months Ended**        | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **September 25,  2009** | ** ** | **September 26,  2008** | ** ** |
| ** **                                           | ** ** | **(in  millions)**           | ** ** |
| Net  cash provided by operating activities           |       | $                            | 28.6       |   | $ | 33.2 |   |
| Net  cash used in investing activities               |       | $                            | (2.6       | ) | $ | (172.9 | ) |
| Net  cash (used in) provided by financing activities |       | $                            | (19.5      | ) | $ | 152.9 |   |

 

Net cash provided byoperating activities of $28.6 million for the six months ended September 25,2009 primarily reflected the increased earnings as a result of the improvedprofitability of our contracts and decrease in accounts receivable due to thetiming of collections, partially offset by an increase in prepaid income taxes.Net cash provided by operating activities of $33.2 million for the six monthsended September 26, 2008 primarily reflected our net income plus depreciationand amortization expenses, $2.8 million of share-based payment expenses forthat period, $2.2 million of income tax benefits from stock compensation and asignificant decrease in accounts receivable due to the receipt of delayedpayments from several key customers.

 

Net cash used in investingactivities of $2.6 million for the six months ended September 25, 2009consisted primarily of purchases of office equipment and leasehold improvementsto support our continued growth in operations. Net cash used in investing activities of $172.9 million for the sixmonths ended September 26, 2008 consisted primarily of $167.8 million forthe purchase of Oberon and the purchase of property, equipment and leaseholdimprovements associated with new facilities.

 

Net cash used infinancing activities of $19.5 million for the six months ended September 25,2009 consisted primarily of $21.3 million in payments on our revolving portionof our Senior Credit Facility, partially offset by $1.6 million in proceedsfrom the exercise of stock options. Net cash provided by financing activitiesfor the six months ended September 26, 2008 consisted primarily ofborrowings under our revolving portion of our Senior Credit Facility to supportthe acquisition of Oberon.

 

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As of September 25,2009, we had $8.3 million in available cash.

 

***Credit Facility and Borrowing Capacity***

 

We are party to a creditagreement (“Senior Credit Facility” or “Amended Credit Agreement”) with a groupof lenders for which SunTrust Robinson Humphrey, Inc. acted as sole bookmanager and lead arranger, SunTrust Bank acted as administrative agent andM&T Bank and BB&T Bank acted as co-documentation agents.

 

At September 25,2009, the lenders’ aggregate commitment under the Senior Credit Facility was$276.9 million, which consisted of a $241.6 million revolving line of credit (“Revolver”)and a $35.3 million term loan (“Term Loan”), and we had outstanding indebtednessof $35.3 million on the Term Loan and $113.7 million on the Revolver, with aweighted-average interest rate of approximately 1.70% and 3.75% for the sixmonths ended September 25, 2009 and September 26, 2008,respectively.  At September 25, 2009, our borrowing availabilityunder the Senior Credit Facility was $127.9 million, including outstandingletters of credit.  Under the terms ofthe Amended Credit Agreement, we may request an increase in the size of theRevolver by an aggregate amount not greater than $33.4 million. If any lenderelects not to increase its commitment, we may designate another bank or otherfinancial institution to become a party to the Amended Credit Agreement.

 

The Amended CreditAgreement also contains a number of affirmative and restrictive covenants,including limitations on mergers, consolidations and dissolutions; sales ofassets; investments and acquisitions; indebtedness and liens; repurchases ofshares of capital stock and options to purchase shares of capital stock;transactions with affiliates; sale and leaseback transactions; and restrictedpayments.

 

In addition, the AmendedCredit Agreement requires us to meet the following financial covenants:

 

·                         a fixed charge coverage ratio as of theend of any fiscal quarter of not less than 1.35 to 1.00, based upon the ratioof (i) consolidated EBITDA (as defined in the Amended Credit Agreement)less the actual amount paid by us and our subsidiaries in cash on account ofcapital expenditures and taxes to (ii) consolidated interest expense forsuch period, scheduled principal payments required to be made on consolidatedtotal debt during such period and certain restricted payments paid during suchperiod, in each case measured for the four consecutive fiscal quarters ending onor immediately prior to such date; and

 

·                         a maximum leverage ratio not greater than3.75 to 1.00, based upon the ratio of (i) consolidated total debt to (ii) consolidatedEBITDA (as defined in the Amended Credit Agreement).

 

At September 25,2009, we were in compliance with all covenants under our Senior CreditFacility. The obligations under the Senior Credit Facility are unconditionallyguaranteed by each of our existing and subsequently acquired or organizedsubsidiaries and are secured on a first-priority basis by security interests(subject to permitted liens) in substantially all assets owned by us and eachof our subsidiaries, including the shares of capital stock of our subsidiaries,subject to certain exceptions.

 

**CapitalExpenditures**

 

Our capital expenditureswere $2.6 million and $5.1 million for the six months ended September 25,2009 and September 26, 2008, respectively. Substantially all of theseexpenditures consisted of leasehold improvements and purchases of officeequipment.

 

**Off-BalanceSheet Arrangements**

 

We do not have anyoff-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SECRegulation S-K as of September 25, 2009.

 

**RecentAccounting Pronouncements**

 

In June 2009, theFASB issued Statement of Financial Accounting Standards No. 168,*The FASB Accounting Standards Codification*(“Codification”)*and the Hierarchy ofGenerally Accepted Accounting Principles* (“GAAP”),*a replacement of FASB Statement No. 162*(“SFAS 168”). SFAS 168 establishes the Codification as the single source ofauthoritative GAAP in the United States, other than rules and interpretivereleases issued by the SEC. The Codification is a reorganization of currentGAAP into a topical format that eliminates the current GAAP hierarchy andestablishes instead two levels of guidance — authoritative and 

 

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nonauthoritative. Allnon-grandfathered, non-SEC accounting literature that is not included in theCodification will become nonauthoritative. The FASB’s primary goal indeveloping the Codification is to simplify user access to all authoritativeGAAP by providing all the authoritative literature related to a particularaccounting topic in one place. The Codification was effective for interim andannual periods ending after September 15, 2009. Following SFAS 168, theBoard will not issue new standards in the form of Statements, FASB StaffPositions, or Emerging Issue Task Force Abstracts; instead, it will issueAccounting Standards Updates. The FASB will not consider Accounting StandardsUpdates as authoritative in their own right; these updates will serve only toupdate the Codification, provide background information about the guidance, andprovide the bases for conclusions on the change(s) in the Codification. Inthe description of Accounting Standards Updates that follows, references in “italics”relate to Codification Topics and Subtopics, and their descriptive titles, asappropriate.

 

***Accounting Standards Updates***—In June 2009, an update was made to*“Consolidation — Consolidation of VariableInterest Entities.”*  Amongother things, the update replaces the calculation for determining whichentities, if any, have a controlling financial interest in a variable interestentity (VIE) from a quantitative based risks and rewards calculation, to aqualitative approach that focuses on identifying which entities have the powerto direct the activities that most significantly impact the VIE’s economicperformance and the obligation to absorb losses of the VIE or the right toreceive benefits from the VIE. The update also requires ongoing assessments asto whether an entity is the primary beneficiary of a VIE (previously,reconsideration was only required upon the occurrence of specific events),modifies the presentation of consolidated VIE assets and liabilities, andrequires additional disclosures about a company’s involvement in VIEs. Thisupdate will be effective for fiscal years beginning after November 15,2009. We do not currently believe that the adoption of this update will haveany effect on our consolidated financial position and results of operations.

 

In September 2009,an update was made to*“Fair ValueMeasurements and Disclosures — Investments in Certain Entities thatCalculate Net Asset Value per Share (or Its Equivalent).”*  This update permits entities to measure thefair value of certain investments, including those with fair values that arenot readily determinable, on the basis of the net asset value per share of theinvestment (or its equivalent) if such net asset value is calculated in amanner consistent with the measurement principles in*“Financial Services-Investment Companies”* as of thereporting entity’s measurement date (measurement of all or substantially all ofthe underlying investments of the investee in accordance with the*“Fair Value Measurements and Disclosures”*guidance). The update also requires enhanced disclosures about the nature andrisks of investments within its scope that are measured at fair value on arecurring or nonrecurring basis. This update will be effective for interim andannual periods ending after December 15, 2009. We are currently evaluatingthe effect that adoption of this update will have, if any, on our consolidatedfinancial position and results of operations.

 

In October 2009, anupdate was made to*“RevenueRecognition — Multiple Deliverable Revenue Arrangements.”* This update removes theobjective-and-reliable-evidence-of-fair-value criterion from the separationcriteria used to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting, replaces references to “fairvalue” with “selling price” to distinguish from the fair value measurements requiredunder the “*Fair Value Measurements andDisclosures”* guidance, provides a hierarchy that entities must useto estimate the selling price, eliminates the use of the residual method forallocation, and expands the ongoing disclosure requirements. This update iseffective for fiscal years beginning on or after June 15, 2010, and can beapplied prospectively or retrospectively. We are currently evaluating theeffect that adoption of this update will have, if any, on our consolidatedfinancial position and results of operations.

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our principal exposure tomarket risk relates to changes in interest rates. From time to time, we enterinto interest rate swap agreements to limit exposure to interest rate movementswithin the parameters of our interest rate hedging policy. As of September 25,2009, all of the outstanding debt under our Senior Credit Facility, with theexception of the portion covered by an interest rate swap, was subject tointerest rate risk. In October 2006, we entered into an interest rate swapagreement covering fifty percent of our term indebtedness under which the swapand term debt maturities match. Even after giving effect to this agreement, we remainexposed to risks due to fluctuations in the market value of this agreement andchanges in interest rates with respect to the portion of our Senior CreditFacility that is not covered by this swap agreement. A hypothetical increase inthe interest rate of 100 basis points would have increased our interest expensefor the six months ended September 25, 2009 on that portion of our outstandingdebt not covered by the interest rate swap by $0.7 million.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of September 25,2009, under the supervision and with the participation of our management,including our chief executive officer and our chief financial officer, we haveevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Rule 13a-15 of the Securities ExchangeAct of 1934, as amended, or Exchange Act. Based on this evaluation, our chiefexecutive officer and our chief financial officer have concluded that ourdisclosure controls and procedures are effective in providing reasonableassurance that the information required to be disclosed in this report has beenrecorded, processed, summarized and reported as of the end of the periodcovered by this report.  In evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

**Changesin Internal Control over Financial Reporting**

 

There has not been anychange in our internal control over financial reporting (as defined in Rule 13a-15(f) ofthe Exchange Act) identified in connection with the evaluation required by Rule 13a-15(d) underthe Exchange Act during the quarter ended September 25, 2009 that hasmaterially affected, or is reasonably likely to materially affect, thosecontrols.

 

**Limitationson the Effectiveness of Controls**

 

Our management, includingour chief executive officer and chief financial officer, does not expect thatour disclosure controls and procedures and internal controls over financialreporting will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met, and our managementhas concluded that our disclosure controls and procedures and internal controlsover financial reporting were effective at a reasonable assurance level as of September 25,2009. Further, the design of a control system must reflect the fact that thereare resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, with the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people or by managementoverride of the controls.

 

The design of any systemof controls also is based in part upon certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Over time, acontrol may become inadequate because of changes in conditions or the degree ofcompliance with the policies or procedures may deteriorate. Because of theinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and may not be detected.

 

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**PART II: OTHER INFORMATION**

 

**ITEM1. LEGAL PROCEEDINGS**

 

**S.C.Diamond Litigation — Virginia Beach Circuit Court**

 

On April 2, 2009, SCDiamond Associates, L.P. filed a lawsuit in Virginia Beach Circuit Courtagainst us and Allied Technology Group, Inc., or Allied.  S.C. Diamond is the owner of a warehouseproperty in Virginia Beach, Virginia in which we subleased a portion of thefacility. In March 2008, the warehouse caught fire, allegedly as a resultof an exploded high-intensity metal halide bulb, which is alleged to have beenmanufactured by Philips Electronics N.A. Corporation, d/b/a Philips LightingCompany, or Philips.  S.C. Diamond hassued Allied, as its tenant, and us, as sub-lessee, alleging breach of contractand negligence against Allied, and negligence against us.  S.C. Diamond seeks to recover approximately$12 million in damages from Allied and us. Travelers Indemnity Company, which insured S.C. Diamond, intervened inthe lawsuit on September 15, 2009, making subrogation claims against usand Philips, seeking to recover approximately $8 million in insurance proceedspreviously paid to S.C. Diamond.

 

We dispute all the allegationsagainst us, and have joined Allied and Travelers in a third-party actionagainst Philips, alleging that Philips is liable for the warehouse fire.  We are being defended in this action by ourgeneral liability insurer, which has issued a reservation of rights. Inmanagement’s opinion, the disposition of this litigation is not expected tohave a material adverse effect on the Company’s financial position, results ofoperations or liquidity.

 

**OtherLitigation**

 

Other than as set forthabove, neither we, nor any of our subsidiaries, are currently subject to anymaterial legal proceedings, nor, to our knowledge, is any material legalproceeding currently threatened against us.

 

**ITEM1A. RISK FACTORS**

 

In addition to the otherinformation set forth in this report, you should carefully consider the risksdiscussed in “Part I, Item 1A. Risk Factors” in our Form 10-K for thefiscal year ended March 31, 2009. These risks and uncertainties have thepotential to affect materially our business, financial condition, results ofoperation, cash flows and future prospects.

 

We do not believe thatthere have been any material changes to the risk factors previously disclosedin our Form 10-K for the fiscal year ended March 31, 2009.

 

**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

TheAnnual Meeting of the Company’s Stockholders was held on August 7, 2009.The stockholders voted and approved the following matters:

 

*The election of eight directors tohold office until the 2010 Annual Meeting of Stockholders:*

 
| **Nominee**                                | ** ** | **Shares Voted For** | ** ** | **Votes  Withheld** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|---------------------|------------|
| Mr. Philip  O. Nolan                  |       | 22,643,762                     |       | 523,565             |       |
| Mr. George  H. Wilson                 |       | 22,539,393                     |       | 627,934             |       |
| Mr. William  E. Karlson               |       | 22,081,397                     |       | 1,085,930           |       |
| Mr. James  C. Hughes                  |       | 22,919,741                     |       | 247,586             |       |
| Lt.  General Richard L. Kelly, USMC (Ret.) |       | 22,937,483                     |       | 229,844             |       |
| Mr. Charles  S. Ream                  |       | 22,911,372                     |       | 255,955             |       |
| Mr. John  P. Riceman                  |       | 22,945,820                     |       | 221,507             |       |
| General  Jimmy D. Ross, USA (Ret.)         |       | 22,919,115                     |       | 248,212             |       |

 

*The approval of the Amended andRestated 2006 Omnibus Incentive Compensation Plan:*

* *
| ** **         | ** ** | **Number of Shares** | ** ** | ** **    | ** ** | ** **            | ** ** |
|--------------------|------------|--------------------------------|------------|---------------|------------|-----------------------|------------|
| **Voted For** | ** ** | **Voted Against**         | ** ** | **Abstained** | ** ** | **Broker  Non-Votes** | ** ** |
| 13,798,615         |       | 7,975,493                      |       | 32,706        |       | 1,360,513             |       |

 

*The ratification of the appointmentof Deloitte & Touche LLP as independent registered public accountingfirm for our fiscal year ending March 31, 2010:*

 
| ** **         | ** ** | **Number of Shares** | ** ** | ** **    | ** ** | ** **            | ** ** |
|--------------------|------------|--------------------------------|------------|---------------|------------|-----------------------|------------|
| **Voted For** | ** ** | **Voted Against**         | ** ** | **Abstained** | ** ** | **Broker  Non-Votes** | ** ** |
| 22,842,915         |       | 309,619                        |       | 14,793        |       | 0                     |       |

 

**ITEM5. OTHER INFORMATION**

 

None.

 

**ITEM6. EXHIBITS**

 

See the exhibit index.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned.

 
| ** ** | **STANLEY,  INC.**                                               |
|------------|------------------------------------------------------------------|
| ** ** | ** **                                                       |
| ** ** | ** **                                                       |
| ** ** | **/s/  PHILIP O. NOLAN**                                         |
|       | Philip O. Nolan                                                  |
|       | Chairman, President and  Chief Executive Officer                 |
|       | (Principal Executive  Officer)                                   |
|       | October 29, 2009                                            |
|       |                                                             |
| ** ** | **/s/  BRIAN J. CLARK**                                          |
|       | Brian J. Clark                                                   |
|       | Executive Vice President,  Chief Financial Officer and Treasurer |
|       | (Principal Financial  and Accounting Officer)                    |
|       | October 29, 2009                                            |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                    |
| 3.1                  |       | Amended and Restated  Certificate of Incorporation of Stanley, Inc. (incorporated by reference  to Exhibit 3.1 to the Company’s Form 10-K for the fiscal year ended  March 31, 2008) |
|                 |       |                                                                                                                                                                                                          |
| 3.2                  |       | Amended and Restated  Bylaws of Stanley, Inc. (incorporated by reference to Exhibit 3.2  to the Company’s Form 10-K for the fiscal year ended March 31,  2008)                       |
|                 |       |                                                                                                                                                                                                          |
| 10.1                 |       | Stanley, Inc.  Amended and Restated 2006 Omnibus Incentive Compensation Plan (incorporated  by reference to Exhibit 10.1 to the Company’s 8-K, filed on  August 7, 2009)†            |
|                 |       |                                                                                                                                                                                                          |
| 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 and Chief Financial Officer pursuant to Section 906 of  The Sarbanes-Oxley Act of 2002.*                                                                       |

 

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*      Filed herewith

†      Denotes management contract or compensation plan or arrangement

 

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