**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

 

**FORM10-Q**

 

 
| x      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934** |
|--------|----------------------------------------------------------------------------------------------|
|   |                                                                                         |
|   | **For the quarterly period ended September 30, 2007**                                        |
|   |                                                                                         |
|   | **OR**                                                                                       |
|   |                                                                                         |
| o      | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|   |                                                                                         |
|   |                                                                                         |

 

**CommissionFile No. 001-33083**

 

 

**STANLEY,INC.**

(Exact name of registrantas 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’s telephone number,

 including area code)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes  x  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 

oLarge accelerated filer      oAccelerated filer      xNon-accelerated filer

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of November 2, 2007, there were 22,277,017 shares of our CommonStock, par value $0.01 per share, outstanding.

 

 

 

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**STANLEY,INC. AND SUBSIDIARIES**

** FORM 10-Q**

** FOR THE QUARTER ENDED SEPTEMBER 30, 2007**

** INDEX**

** **
| ** **                               | ** **                                                                                             | **Page** |
|------------------------------------------|--------------------------------------------------------------------------------------------------------|----------|
| **PART  1 — FINANCIAL INFORMATION** |                                                                                                   |
| ITEM  1.                                 | FINANCIAL STATEMENTS                                                                                   | 3        |
| ITEM 2.                                  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS | 14       |
| ITEM 3.                                  | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                            | 22       |
| ITEM 4.                                  | CONTROLS AND  PROCEDURES                                                                               | 23       |
| **PART  II — OTHER INFORMATION**    |                                                                                                   |
| ITEM 1.                                  | LEGAL PROCEEDINGS                                                                                      | 24       |
| ITEM 1A.                                 | RISK  FACTORS                                                                                          | 24       |
| ITEM 2.                                  | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                           | 24       |
| ITEM 3.                                  | DEFAULTS UPON  SENIOR SECURITIES                                                                       | 24       |
| ITEM 4.                                  | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                   | 24       |
| ITEM  5.                                 | OTHER INFORMATION                                                                                      | 24       |
| ITEM 6.                                  | EXHIBITS                                                                                               | 24       |

 

 

2

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**PART 1:  FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**STANLEY, INC.AND SUBSIDIARIES  Condensed Consolidated Statements ofIncome  (unaudited)  (in thousands, except per share data)**

** **
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues                               |       | $                                                    | 98,191     |                                     | $          | 150,239 |   | $ | 190,746 |   | $ | 283,720 |   |
|                                   |       |                                                 |       |                                     |       |   |   |   |   |
| Operating costs  and expenses:         |       |                                                 |       |                                     |       |   |   |   |   |
| Cost of revenues                       |       | 83,116                                               |       | 127,556                                  |       | 161,419 |   | 239,879 |   |
| Selling, general  and administrative   |       | 6,559                                                |       | 9,322                                    |       | 13,080 |   | 18,750 |   |
| Amortization of  deferred compensation |       | 355                                                  |       | 67                                       |       | 604 |   | 142 |   |
| Depreciation and  amortization         |       | 1,306                                                |       | 1,702                                    |       | 2,694 |   | 3,312 |   |
| Total operating  costs and expenses    |       | 91,336                                               |       | 138,647                                  |       | 177,797 |   | 262,083 |   |
| Operating income                       |       | 6,855                                                |       | 11,592                                   |       | 12,949 |   | 21,637 |   |
|                                   |       |                                                 |       |                                     |       |   |   |   |   |
| Other (expense)  income:               |       |                                                 |       |                                     |       |   |   |   |   |
| Other (expense)  income                |       | (804                                                 | )          | 6                                        |       | (544 | ) | 6 |   |
| Interest expense  - net                |       | (2,034                                               | )          | (1,138                                   | )          | (4,179 | ) | (2,200 | ) |
| Total other  expenses                  |       | (2,838                                               | )          | (1,132                                   | )          | (4,723 | ) | (2,194 | ) |
| Income before  taxes                   |       | 4,017                                                |       | 10,460                                   |       | 8,226 |   | 19,443 |   |
|                                   |       |                                                 |       |                                     |       |   |   |   |   |
| Provision for  income taxes            |       | (1,595                                               | )          | (4,125                                   | )          | (3,320 | ) | (7,744 | ) |
| Net income                             |       | $                                                    | 2,422      |                                     | $          | 6,335 |   | $ | 4,906 |   | $ | 11,699 |   |
|                                   |       |                                                 |       |                                     |       |   |   |   |   |
| Earnings per  share:                   |       |                                                 |       |                                     |       |   |   |   |   |
| Basic                                  |       | $                                                    | 0.16       |                                     | $          | 0.29 |   | $ | 0.34 |   | $ | 0.53 |   |
| Diluted                                |       | $                                                    | 0.15       |                                     | $          | 0.27 |   | $ | 0.30 |   | $ | 0.50 |   |
|                                   |       |                                                 |       |                                     |       |   |   |   |   |
| Weighted average  shares:              |       |                                                 |       |                                     |       |   |   |   |   |
| Basic                                  |       | 14,684                                               |       | 22,034                                   |       | 14,551 |   | 21,966 |   |
| Diluted                                |       | 16,533                                               |       | 23,591                                   |       | 16,435 |   | 23,478 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

 

3

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**STANLEY, INC.AND SUBSIDIARIES**

** Condensed Consolidated Balance Sheets**

** (in thousands, except share data)**

** (unaudited)**

** **
| ** **                                                                                                           | ** ** | **March 31, 2007** | ** ** | **September 30, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|
| **Assets**                                                                                                           | ** ** | ** **                   | ** ** | ** **             | ** ** |
|                                                                                                                 |       |                         |       |                   |       |
| Current Assets:                                                                                                      |       |                         |       |                   |       |
| Cash                                                                                                                 |       | $                            | 12,736     |                   | $          | — |   |
| Accounts  receivable - net                                                                                           |       | 110,029                      |       | 131,065                |       |
| Prepaid and  other current assets                                                                                    |       | 1,631                        |       | 5,029                  |       |
| Total current  assets                                                                                                |       | 124,396                      |       | 136,094                |       |
|                                                                                                                 |       |                         |       |                   |       |
| Property and  equipment - net                                                                                        |       | 11,736                       |       | 12,196                 |       |
| Goodwill                                                                                                             |       | 88,249                       |       | 113,610                |       |
| Intangible  assets - net                                                                                             |       | 9,417                        |       | 9,980                  |       |
| Deferred taxes                                                                                                       |       | 2,010                        |       | 2,044                  |       |
| Other assets                                                                                                         |       | 2,167                        |       | 1,843                  |       |
| Total assets                                                                                                         |       | $                            | 237,975    |                   | $          | 275,767 |   |
|                                                                                                                 |       |                         |       |                   |       |
| **Liabilities  and Stockholders’ Equity**                                                                       | ** ** | ** **                   | ** ** | ** **             | ** ** |
|                                                                                                                 |       |                         |       |                   |       |
| Current  liabilities                                                                                                 |       |                         |       |                   |       |
| Line of credit                                                                                                       |       | $                            | —     |                   | $          | 18,494 |   |
| Accounts payable                                                                                                     |       | 24,476                       |       | 20,978                 |       |
| Accrued expenses  and other liabilities                                                                              |       | 34,438                       |       | 44,495                 |       |
| Current portion  of long-term debt                                                                                   |       | 1,000                        |       | 1,000                  |       |
| Deferred taxes                                                                                                       |       | 2,646                        |       | 1,804                  |       |
| Income taxes  payable                                                                                                |       | 917                          |       | —                 |       |
| Total current  liabilities                                                                                           |       | 63,477                       |       | 86,771                 |       |
|                                                                                                                 |       |                         |       |                   |       |
| Long-term debt —  net of current portion                                                                        |       | 36,750                       |       | 36,250                 |       |
| Other long-term  liabilities                                                                                         |       | 3,596                        |       | 3,785                  |       |
| Total  liabilities                                                                                                   |       | 103,823                      |       | 126,806                |       |
|                                                                                                                 |       |                         |       |                   |       |
| Commitments and  contingencies:                                                                                      |       |                         |       |                   |       |
| Stockholders’  equity                                                                                           |       |                         |       |                   |       |
| Common stock,  $0.01 par value — 200,000,000 shares authorized; 21,887,564 and 22,252,801  issued, respectively |       | 219                          |       | 223                    |       |
| Additional  paid-in capital                                                                                          |       | 76,785                       |       | 80,094                 |       |
| Retained  earnings                                                                                                   |       | 58,345                       |       | 69,739                 |       |
| Accumulated  other comprehensive income                                                                              |       | (161                         | )          | (201                   | )          |
| Deferred  compensation                                                                                               |       | (1,036                       | )          | (894                   | )          |
| Total  stockholders’ equity                                                                                     |       | 134,152                      |       | 148,961                |       |
| Total  liabilities and stockholders’ equity                                                                     |       | $                            | 237,975    |                   | $          | 275,767 |   |

 

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

 

4

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**STANLEY, INC.AND SUBSIDIARIES**

** Condensed Consolidated Statements of CashFlows**

** (unaudited)**

** (in thousands)**
| ** **                                                                         | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**              | ** ** |
| ** **                                                                         | ** ** | **2006**                       | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 4,906      |   | $ | 11,699 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                     |       | 2,694                          |       | 3,312 |   |
| Amortization of  deferred compensation                                             |       | 604                            |       | 142 |   |
| Loss on disposal  of property and equipment                                        |       | 92                             |       | 18 |   |
| Deferred taxes                                                                     |       | —                         |       | (361 | ) |
| Income tax  benefit from stock compensation                                        |       | 88                             |       | 1,519 |   |
| Stock  compensation expense                                                        |       | 208                            |       | 923 |   |
| Changes in  assets and liabilities - net of acquisition effects:                   |       |                           |       |   |   |
| Decrease  (increase) in accounts receivable                                        |       | 2,602                          |       | (16,232 | ) |
| Increase in  prepaid income tax                                                    |       | (1,317                         | )          | (2,311 | ) |
| Increase in  prepaid expenses and other current assets                             |       | (809                           | )          | (849 | ) |
| Decrease in  other assets                                                          |       | 589                            |       | 324 |   |
| Decrease in  accounts payable                                                      |       | (169                           | )          | (3,620 | ) |
| Increase in  accrued expenses                                                      |       | 1,990                          |       | 6,600 |   |
| Increase in  other liabilities                                                     |       | 426                            |       | 387 |   |
| Decrease in  income taxes payable                                                  |       | (711                           | )          | (817 | ) |
| Net cash  provided by operating activities                                         |       | 11,193                         |       | 734 |   |
|                                                                               |       |                           |       |   |   |
| **CASH FLOWS  FROM INVESTING ACTIVITIES:**                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchase of  Morgan — net of cash acquired                                    |       | 134                            |       | — |   |
| Purchase of  Techrizon — net of cash acquired                                 |       | —                         |       | (30,558 | ) |
| Acquisition of  property and equipment                                             |       | (1,389                         | )          | (1,709 | ) |
| Net cash used in  investing activities                                             |       | (1,255                         | )          | (32,267 | ) |
|                                                                               |       |                           |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net (repayments)  borrowings under line-of-credit agreements                       |       | (9,736                         | )          | 18,494 |   |
| Repayments on  long-term debt                                                      |       | (500                           | )          | (500 | ) |
| Payments under  capital lease obligations                                          |       | (11                            | )          | (69 | ) |
| Purchase of  treasury stock                                                        |       | (259                           | )          | (260 | ) |
| Proceeds from  exercise of stock options                                           |       | 414                            |       | 1,147 |   |
| Proceeds from  sale of treasury stock                                              |       | 197                            |       | — |   |
| Other                                                                              |       | —                         |       | (15 | ) |
| Net cash (used  in) provided by financing activities                               |       | (9,895                         | )          | 18,797 |   |
|                                                                               |       |                           |       |   |   |
| **NET  INCREASE (DECREASE) IN CASH**                                               |       | 43                             |       | (12,736 | ) |
| **CASH —  Beginning of period**                                               |       | —                         |       | 12,736 |   |
| **CASH —  End of period**                                                     |       | $                              | 43         |   | $ | — |   |
|                                                                               |       |                           |       |   |   |
| **SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:**                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash paid during  the period for:                                                  |       |                           |       |   |   |
| Income taxes                                                                       |       | $                              | 5,224      |   | $ | 9,375 |   |
| Interest                                                                           |       | $                              | 4,237      |   | $ | 2,041 |   |
|                                                                               |       |                           |       |   |   |
| **SUPPLEMENTAL  DISCLOSURES OF NONCASH FINANCING ACTIVITIES:**                     | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Assets purchased  under a capital lease agreement                                  |       | $                              | 22         |   | $ | 124 |   |
|                                                                                    |            |                                |            |  |  |  |  |  |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

** **

 

5

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**STANLEY, INC.AND SUBSIDIARIES  Notes to Condensed ConsolidatedFinancial Statements  (unaudited)  (in thousands, except share and pershare data, or as otherwise noted)**

 

**1.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

***Description ofBusiness***—Stanley, Inc.,together with its subsidiaries (“Stanley” or the “Company”), is a provider ofinformation technology services and solutions to U.S. defense and federalcivilian government agencies. Stanley offers its customers solutions to supportany stage of program, product development or business lifecycle through fiveservice areas: systems engineering, enterprise integration, operationallogistics, business process outsourcing and advanced engineering andtechnology. The Company has derived substantially all of its revenue from U.S.federal government agencies.

 

***Basis ofPresentation***—Theaccompanying condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles in the United Statesand pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). In the opinion of management, these statements reflect alladjustments necessary to fairly present the Company’s financial position as ofSeptember 30, 2007, and its results of operations and its cash flows for thethree and six months ended September 30, 2006 and 2007. The results ofoperations for the interim periods are not necessarily indicative of theresults for the full year. For further information, refer to the financialstatements and footnotes presented in the Company’s Annual Report on Form 10—Kfor the year ended March 31, 2007.

 

***Principles ofConsolidation***—Theaccompanying condensed consolidated financial statements include the accountsof Stanley’s wholly—owned subsidiaries. All intercompany balances andtransactions have been eliminated in consolidation.

 

***Fair Value ofFinancial Instruments***—The fair value of accounts receivable, accounts payable, accrued expenses,note payable, and the swap contract approximates their respective carryingamounts.

 

***Revenue Recognition***—The Company recognizes revenue under itscontracts when 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, andcustomer satisfaction. During this review, the Company determines whether theoverall progress on a contract is consistent with the effort expended.

 

Contract revenue recognition inherently involves the use of estimates.Examples of estimates include the contemplated level of effort to accomplishthe tasks under the contract, the cost of the effort, and an ongoing assessmentof the Company’s progress toward completing the contract. From time to time, aspart of the Company’s standard management process, facts develop that requirethe Company to revise its estimated total costs and revenues. To the extentthat a revised estimate affects contract profit or revenue previously recognized,the Company records the cumulative effect of the revision in the period inwhich the facts requiring the revision become known. The full amount of ananticipated loss on any type of contract is recognized in the period in whichit becomes probable and can be reasonably estimated.

 

Under cost-plus-fee contracts, revenues are recognized as costs areincurred and include an estimate of applicable fees earned. The Companyconsiders fixed fees under cost-plus-fee contracts to be earned in proportionto the allowable costs actually incurred in performance of the contract forlevel of effort contracts. For completion type cost-plus-fee contracts, fixedfees are earned in proportion to the percentage of work completed. For time-and-materialscontracts, revenues are computed by multiplying the number of direct labor-hoursexpended in performance of the contract by the contractual billing rates andadding other billable direct and indirect costs. For fixed-price contracts,revenues are recognized as services are performed, using the percentage-of-completionmethod, applying the cost-to-cost or units of delivery method, in accordancewith Accounting Research Bulletin No. 45, *Accountingfor Long-Term Construction-Type Contracts* (“ARB 45”) and AmericanInstitute of Certified Public Accountants (“AICPA”) Statement of Position 81-1,*Accounting for Performance of Construction-Type andCertain Production-Type Contracts* (“SOP 81-1”).

 

For cost-plus-award fee type contracts, the Company recognizes theexpected fee to be awarded by the customer at the 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.

 

 

6

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The Company’s contracts with agencies of the government are subject to periodicfunding by the respective contracting agency. Funding for a contract may beprovided in full at inception of the contract or ratably throughout thecontract as the services are provided. From time to time, the Company mayproceed with work based on customer direction prior to the completion andsigning of formal contract documents. The Company has a formal review processfor approving any such 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 the Company is notified that thecontract will not be issued.

 

Disputes occasionally arise in the normal course of the Company’sbusiness due to events such as delays, changes in contract specifications, andquestions of cost allowability or collectibility. Such matters, whether claimsor unapproved change orders in the process of negotiation, are recorded at thelesser of their estimated net realizable value or actual costs incurred, andonly when realization is probable and can be reliably estimated. Claims againstthe Company are recognized where a loss is considered probable and can bereasonably estimated in amount.

 

The allowability of certain costs under government contracts is subjectto audit by the government. Certain indirect costs are charged to contractsusing provisional or estimated indirect rates, which are subject to laterrevision based on government audits of those costs. Management is of theopinion that costs subsequently disallowed, if any, would not be significant.

 

***Concentration ofRisk***—Contractsfunded by federal government agencies account for substantially all of ourrevenues. For the three months ended September 30, 2006 and 2007, we derivedapproximately 66% and 68% of our revenues, respectively, from the Department ofDefense, including agencies within the intelligence community, andapproximately 34% and 32% of our revenues, respectively, from federal civiliangovernment agencies. The Company’s contracts with the Department of State forthe provision of passport processing and support services, which is our largestrevenue-generating contract, and with the Department of the Navy for productionengineering and integration services under various SPAWAR programs, accountedfor approximately 18% and 15% of our revenues for the three months endedSeptember 30, 2007, respectively.

 

For the six months ended September 30, 2006 and 2007, we derivedapproximately 66% and 68% of our revenues, respectively, from the Department ofDefense, including agencies within the intelligence community, andapproximately 34% and 32% of our revenues, respectively, from federal civiliangovernment agencies. The Company’s contracts with the Department of State forthe provision of passport processing and support services, which is our largestrevenue-generating contract, and with the  Department of the Navy forproduction engineering and integration services under various SPAWAR programs,accounted for approximately 17% and 14% of our revenues for the six monthsended September 30, 2007, respectively.

 

***Property andEquipment***—Propertyand equipment are carried at cost, less accumulated depreciation. Depreciationof property and equipment is calculated using the straight-line method over theuseful lives, ranging from three to ten years. Leasehold improvements areamortized over the lesser of the useful life or the term of the lease. Repairsand maintenance are expensed as incurred. Depreciation expense related toproperty and equipment was $0.5 million and $0.7 million for the threemonths ended September 30, 2006 and 2007, respectively. Depreciation expenserelated to property and equipment was $1.1 million and $1.4 million forthe six months ended September 30, 2006 and 2007, respectively.

 

***Goodwill andIntangible Assets****—*Goodwill represents the excess of cost over the fairvalue of net tangible and identifiable intangible assets of acquired companies.In accordance with SFAS No. 142,*Goodwill and Other Intangible Assets* (“SFAS No. 142”), the Companydoes not amortize goodwill; rather it tests goodwill for impairment at least onan annual basis. Testing for impairment is a two—step process as prescribed bySFAS No. 142. The first step is a test for potential impairment, while thesecond step measures the amount of impairment, if any. Under the guidelines ofSFAS No. 142, the Company is required to perform an impairment test atleast on an annual basis at any time during the fiscal year provided the testis performed at the same time every year. An impairment loss would berecognized when the assets’ fair value is below their carrying value. Stanleyhas elected December 31 as its testing date. Based on the testingperformed as of December 31, 2006, the Company determined that no impairmentsexisted as of December 31, 2006. Customer relationships and other intangiblesare amortized on a straight-line basis over periods ranging from two to sevenyears.

 

***Impairment of Long-LivedAssets***—Wheneverevents or changes in circumstances indicate that the carrying amount of long-livedassets may not be fully recoverable, Stanley evaluates the probability thatfuture undiscounted net cash flows, without interest charges, will be less thanthe carrying amount of the assets. If any impairment were indicated as a resultof this review, Stanley would recognize a loss based on the amount by which thecarrying amount exceeds the estimated fair value. Stanley believes that noimpairments existed as of September 30, 2007.

 

***Stock***-***Based Compensation***—Stanley adopted theprovisions of SFAS No. 123(R),*Share-basedPayment* (“SFAS No. 123(R)”), on a prospective basis during thefiscal year beginning April 1, 2006.

 

 

7

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***Earnings per share***—Basic earnings per share has beencomputed by dividing net income available to common stockholders by theweighted average number of shares of common stock outstanding during eachperiod. Shares issued during the period and shares reacquired during the periodare weighted for the portion of the period that they were outstanding. Dilutedearnings per share considers the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock. The weighted average number of common shares outstanding iscomputed as follows:

 

| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                                  | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                                   | ** ** |
| Basic weighted  average common shares outstanding   |       | 14,684                                                    |       | 22,034                                                  |       | 14,551 |   | 21,966 |   |
| Effect of  potential exercise of stock options      |       | 1,849                                                     |       | 1,557                                                   |       | 1,884 |   | 1,512 |   |
| Diluted weighted  average common shares outstanding |       | 16,533                                                    |       | 23,591                                                  |       | 16,435 |   | 23,478 |   |

 

All options to purchase common stock are included in the computation ofdiluted earnings per share because the average fair value per common share wasgreater than the options’ exercise prices.

 

***DerivativeInstruments and Hedging Activities***— In accordance with SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*  (“SFASNo. 133”), as amended by SFAS No. 138,*Accounting for Certain Derivative Instruments and Certain HedgingActivities, an Amendment of SFAS 133* and SFAS No. 149,*Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities,* the fair value of the hedge arrangement isrecorded as an asset or a liability in the accompanying condensed consolidatedbalance sheet at September 30, 2007. For qualifying cash flow hedges, SFASNo. 133, as amended, holds that the effective portion of derivative gainsand losses be recorded as a component of other comprehensive income and bereclassified into earnings in the same period in which the hedged transactionaffects such earnings. Any ineffectiveness is reported currently in earnings.

 

As required by its senior credit facility dated February 16, 2006,Stanley entered into an interest rate swap agreement on October 27, 2006 with amaturity date of January 31, 2012, an annual fixed rate of 5.28% and a notionalamount of $19.0 million. The Company designated this swap agreement, at itsinception, as a qualifying cash flow hedge. The fair value of the swap atSeptember 30, 2007 of $0.3 million has been reported in “Accrued expenses andother liabilities” with an offset, net of tax, included in “Accumulated othercomprehensive income” in the accompanying condensed consolidated balancesheets. None of the $0.3 million unrealized loss was recognized in earningsduring the six months ended September 30, 2007 based on hedge ineffectivenessand none of the swap’s unrealized loss was excluded from the assessment ofhedge effectiveness. Amounts in accumulated other comprehensive income will bereclassified into earnings in the period in which variable interest payments(the hedged transaction) are made under the senior credit facility. As ofSeptember 30, 2007, the estimated net amount of existing losses expected to bereclassified into earnings within the next 12 months is zero.

 

***Segment Reporting***—Operating segments are defined ascomponents of an enterprise for which separate financial information isavailable and evaluated regularly by the chief operating decision maker, ordecision making group, in deciding how to allocate resources and assessperformance. The Company currently has one reportable segment for financialreporting purposes, which represents the Company’s core business of providinginformation technology solutions and services for federal government customers.The Company does not report revenue by product or service or groups of productsor services because it is impracticable to do so.

 

***Use of Estimates***—The preparation of financial statementsin conformity with generally accepted accounting principles (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. Significant items subject to such estimates andassumptions include revenue recognition, carrying amount and useful lives oflong-lived assets, valuation allowances for accounts receivable and deferredtax assets, software development costs and loss contingencies, such aslitigation, claims and assessments.

 

***Recently AdoptedAccounting Pronouncements***— In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes**, aninterpretation of FASB Statement No. 109* (“FIN 48”). FIN 48 providesguidance on recognition, derecognition, measurement, classification, interestand penalties, accounting for interim periods, and disclosures. FIN 48 requiresan entity to recognize the financial statement impact of a tax position when itis more likely than not that the position will be sustained upon examination bya taxing authority. The amount recognized is measured at the largest amount ofbenefit that is greater than fifty percent likely of being realized uponultimate settlement. In addition, FIN 48 permits an entity to recognizeinterest and penalties related to tax uncertainties as income tax expense oroperating expenses. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006.

 

 

 

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The Company adopted the provisions of FIN 48 on April 1, 2007. Thecumulative effects of applying this interpretation have been recorded as adecrease of $0.3 million to retained earnings, an increase of $0.5 million tonet deferred tax assets, a decrease to income taxes payable of $0.1 million andan increase in liabilities of $0.5 million for unrecognized tax benefits and$0.4 million for interest and penalties. Since April 1, 2007, there has been anincrease of $0.3 million in the liability for gross unrecognized tax benefits.As of April 1 and September 30, 2007, the Company has $0.5 and $0.8 million,respectively, in unrecognized tax benefits, the recognition of which would nothave a material impact on the effective tax rate. Included in the balance ofunrecognized tax positions at April 1 and September 30, 2007 is $0.5 millionand $0.8 million, respectively, related to tax positions for which it isreasonably possible that the total amounts could change significantly in thenext twelve months. The amount represents unrecognized tax benefits fromforeign jurisdictions. The Company recognizes interest and penalties accruedrelated to unrecognized tax benefits as interest expense and operatingexpenses, respectively, in the accompanying condensed consolidated statementsof income, which is consistent with the recognition of these items in prioryears. As of April 1 and September 30, 2007, the Company accrued liabilities of$0.4 million for interest and penalties, respectively.

 

The Congressional Joint Committee on Taxation is currently reviewing apre-acquisition period of one of our subsidiaries. We do not expect anyadjustments to result from this review. The Company is open to audit under thestatute of limitations for tax years 2003 through 2007 for federal and statejurisdictions and tax years 1998 through 2007 for foreign jurisdictions.

 

As of September 30, 2007, there have been no material changes to theliability for uncertain tax positions.

 

***Recently IssuedAccounting Standards***— In September 2006, the FASB issued Statement of Financial AccountingStandards No. 157,*Fair Value Measurements*(“SFAS 157”). SFAS 157 provides guidance for measuring the fair value of assetsand liabilities. It requires additional disclosures related to the extent towhich companies measure assets and liabilities at fair value, the informationused to measure fair value, and the effect of fair value measurements onearnings. SFAS 157 is effective for fiscal years beginning after November 15,2007. The Company is in the process of determining what effect, if any, theadoption of SFAS 157 will have on its financial position, results ofoperations, or cash flows.

 

In February 2007, the FASB issued Statement of FinancialAccounting Standards No. 159,*The FairValue Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115*  (“SFAS 159”). SFAS 159 permits entitiesto measure many financial instruments and certain other items at fair value toimprove financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accounting. Mostof the provisions in SFAS 159 are elective. This statement will be effectivefor the Company in fiscal 2009, and it may be applied prospectively. Earlyadoption is permitted provided the Company also elects to apply the provisionsof SFAS 157. The Company is in the process of determining what effect, if any,the application of the provisions of SFAS 159 will have on its financialposition and results of operations.

 

***Reclassifications***— Certain reclassifications have beenmade to prior year presentations to conform to the current presentation. In thefourth quarter of fiscal year 2007, the Company reviewed the mapping of itsoperating expenses relative to cost of revenues, and Selling,General & Administrative expenses, or SG&A. Cost of revenues aredirect and indirect contract costs, while SG&A expenses are period costsrelated to selling activities and overall support and management of thebusiness as a whole. As a result of this review, certain expenses previouslyclassified as cost of revenues in the first three quarters of fiscal year 2007,were reclassified to SG&A to more closely align such costs with the incomestatement captions that best capture the nature of the expenses.

 

***Stock Split andAmendment of Certificate of Incorporation***— On August 28, 2006, the Company increased the numberof authorized shares of common stock to 200,000,000 shares and on September 12,2006, the Company completed a thirty-for-one stock split of its outstandingcommon stock. The accompanying financial statements include the effects of thestock split and the resulting increase in the number of authorized shares ofcommon stock. All share and per share amounts included in the accompanyingfinancial statements for periods prior to the stock split have been restated toreflect the stock split.

 

**2****. ****ACCOUNTS RECEIVABLE**

 

Accounts receivable consists of the following:

 

| ** **                             | ** ** | **As of**               | ** ** | **As of**              | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **March 31, 2007** | ** ** | **September 30, 2007** | ** ** |
| Billed  receivables                    |       | $                            | 73,676     |                        | $          | 97,521 |   |
| Unbilled  receivables                  |       | 36,962                       |       | 33,936                      |       |
| Less: Allowance  for doubtful accounts |       | (609                         | )          | (392                        | )          |
| Total                                  |       | $                            | 110,029    |                        | $          | 131,065 |   |

 

 

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Consistent with industry practice, certain receivables related tolong-term contracts are classified as current, although a portion of these amountsis not expected to be billed and collected within one year. Unbilled accountsreceivable are expected to be billed and collected within one year except for$0.5 million at September 30, 2007.

 

**3.  PROPERTY AND EQUIPMENT**

 

Property and equipment consists of the following:

 

| ** **                                                                               | ** ** | **As of**               | ** ** | **As of**              | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **March 31, 2007** | ** ** | **September 30, 2007** | ** ** |
| Computers and  peripherals                                                               |       | $                            | 4,008      |                        | $          | 4,485 |   |
| Software                                                                                 |       | 1,882                        |       | 2,117                       |       |
| Furniture and  equipment                                                                 |       | 3,630                        |       | 3,897                       |       |
| Leasehold  improvements                                                                  |       | 6,417                        |       | 7,315                       |       |
|                                                                                     |       | 15,937                       |       | 17,814                      |       |
|                                                                                     |       |                         |       |                        |       |
| Less:  Accumulated depreciation and amortization                                         |       | (4,201                       | )          | (5,618                      | )          |
| Property and  equipment — net                                                       |       | $                            | 11,736     |                        | $          | 12,196 |   |
|                                                                                     |       |                         |       |                        |       |
| Property and  equipment included above that are under capital lease obligations include: |       |                         |       |                        |       |
| Software                                                                                 |       | $                            | 569        |                        | $          | 637 |   |
| Furniture and  equipment                                                                 |       | 80                           |       | 136                         |       |
| Less:  Accumulated depreciation                                                          |       | (158                         | )          | (239                        | )          |
| Total                                                                                    |       | $                            | 491        |                        | $          | 534 |   |

 

**4.  ACCRUED EXPENSES AND OTHERCURRENT LIABILITIES**

 

Accrued expenses consist of the following:

 

|                    |   | **As of**               | ** ** | **As of**              |   |
|-------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                    |   | **March 31, 2007** | ** ** | **September 30, 2007** |   |
| Accrued payroll  costs  |   | $                            | 9,778      |                        | $      | 11,611 |   |
| Accrued contract  costs |   | 19,131                       |       | 24,958                      |   |
| Accrued indirect  costs |   | 2,807                        |       | 3,690                       |   |
| Other payables          |   | 2,722                        |       | 4,236                       |   |
| Total accrued  expenses |   | $                            | 34,438     |                        | $      | 44,495 |   |

 

**5.  DEBT**

** **

| ** **                                                    | ** ** | **As of**               | ** ** | **As of**              | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **March 31, 2007** | ** ** | **September 30, 2007** | ** ** |
| Borrowings under  the term loan and revolving line of credit: |       |                         |       |                        |       |
| Revolving line  of credit                                     |       | $                            | —     |                        | $          | 18,494 |   |
| Term loan                                                     |       | 37,750                       |       | 37,250                      |       |
| Total debt                                                    |       | 37,750                       |       | 55,744                      |       |
| Less: Current  portion                                        |       | (1,000                       | )          | (19,494                     | )          |
| Debt — net of  current portion                           |       | $                            | 36,750     |                        | $          | 36,250 |   |

 

As of September 30, 2007, Stanley had $37.3 million of term loanindebtedness and $18.5 million of revolving indebtedness outstanding under itssenior credit facility with a weighted average interest rate of 7.61% and 7.37%for the six months ended September 30, 2006 and 2007, respectively. As ofSeptember 30, 2007, Stanley’s borrowing availability under its $50.0 millionrevolving credit facility was $31.4 million (including outstanding letters ofcredit). At September 30, 2007, the Company was in compliance with allcovenants under its senior credit facility. The obligations under its seniorcredit facility are unconditionally guaranteed by each of its existing andsubsequently acquired or organized subsidiaries and are secured on afirst-priority basis by security interests (subject to permitted liens) insubstantially all assets owned by the Company and each of its subsidiaries,including the shares of capital stock of its subsidiaries, subject to certain exceptions.

** **

 

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**6.  ACQUISITION**

 

On April 1, 2007, Stanley acquired Techrizon, LLC (“Techrizon”), apremier provider of software, training, simulation and information securitysolutions, for $30.3 million, net of cash acquired, and financed theacquisition with a combination of existing cash and borrowings under its seniorcredit facility. Additionally, acquisition related costs of $0.3 million wereincurred. In accordance with SFAS No. 141,*Business Combinations* (“SFAS No. 141”), the acquisition wasaccounted for under the purchase method of accounting. Accordingly, the resultsof Techrizon have been included in the accompanying condensed consolidatedfinancial statements since the date of acquisition. The purchase price has beenallocated to the assets acquired and liabilities assumed based upon theirestimated fair values. Of the purchase consideration, $25.1 million has beenallocated to goodwill, based upon the excess of the purchase price over the$2.7 million estimated fair value of net tangible assets and $2.5 million hasbeen assigned to other identifiable intangible assets. Included in identifiableintangibles is $1.6 million, $0.8 million and $0.1 million related to customercontracts and relationships, order backlog and non-compete agreements,respectively, which are being amortized over periods of two to five years. TheCompany is continuing to evaluate the fair value of the assets and liabilitiesof Techrizon, and will complete the purchase accounting entries related to theacquisition prior to the end of the Company’s fiscal year ending March 31,2008.

 

The following unaudited pro forma financial information presentsconsolidated results of operations data for the three months and six monthsended September 30, 2006, as if the acquisition of Techrizon had occurred onApril 1, 2006. The pro forma information is provided based on historical datathat does not necessarily reflect the actual results that would have occurred,nor is it necessarily indicative of the future results of operations of thecombined entity. The pro forma financial information reflects the provision forfederal and state income taxes at the Company’s effective rate of 40% forTechrizon’s historical data. Prior to the acquisition, Techrizon was a limitedliability company with all income, losses and tax credits flowing through tothe individual members.

 

| ** **                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **September 30, 2006**           | ** ** | **September 30, 2006**         | ** ** |
| Revenue                     |       | $                                | 105,819    |                           | $          | 205,639 |   |
| Net income                  |       | $                                | 3,198      |                           | $          | 6,408 |   |
| Basic earnings  per share   |       | $                                | 0.22       |                           | $          | 0.44 |   |
| Diluted earnings  per share |       | $                                | 0.19       |                           | $          | 0.39 |   |

 

**7****. ****STOCKHOLDERS’ EQUITY**

 

***Common Stock***

 

Stanley has one class of common stock, with each share of common stockhaving one vote per share. Holders of common stock share equally in anydividends declared by the board of directors.

 

Stanley purchased 14,490 shares of treasury stock from one of itsstockholders for $0.3 million during the six months ended September 30, 2007.The shares were recorded at market price using the cost method.

 

***DeferredCompensation and Stock Options***

 

Under the 2006 Omnibus Incentive Compensation Plan (the “Omnibus Plan”),Stanley is authorized to provide awards for a maximum of 4,000,000 shares ofcommon stock to any director, officer, employee or consultant. The Omnibus Planallows for 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 andEquity Incentive Plan (the “Executive Plan”), Stanley was authorized to provideawards for a maximum of 15,000,000 shares of common stock to key employees andnon-employee directors. The Executive Plan allowed for cash awards, restrictedstock awards, restricted stock trust awards and option awards. Vesting periodsof these awards vary. Holders of restricted stock awards have voting rightswith respect to the awards. The trustee of the restricted stock trust awardshas voting rights with respect to the trust awards. The option awards have anexercise price that ranges from 85% to 110% of the fair market value of thecommon stock on the date the option was granted.

 

Effective April 1, 2006, the Company adopted the provisions of SFAS No.123(R) using the prospective-transition method. Under that transition method,compensation cost recognized in the six months ended September 30, 2007includes compensation cost for all share-based payments granted on or afterApril 1, 2006 based on the grant-date fair value estimated in accordance withthe provisions of SFAS No. 123(R). The Company is required to account for anyportion of awards outstanding at the date of adoption of SFAS No.123(R) using the accounting principles originally applied to those awards.

 

The Company has presented all tax benefits resulting from stock basedcompensation awarded prior to the adoption of SFAS No. 123(R) as operating cashflows in the accompanying condensed consolidated statements of cash flows. Thetax benefits associated with share based compensation in effect prior to theadoption of SFAS No. 123(R) were $0.1 million and $1.5 million for the six 

 

 

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months ended September 30, 2006 and 2007, respectively. For share-basedpayment transactions awarded subsequent to the adoption of SFAS No. 123(R), thetax benefits in excess of the compensation cost recognized should be classifiedas financing cash flows. The excess tax benefits associated with share-basedpayment transactions accounted for under SFAS No. 123(R) were zero and fivethousand dollars for the six months ended September 30, 2006 and 2007,respectively, and are displayed within financing activities in the accompanyingcondensed consolidated statements of cash flows.

 

The fair value of each option award is estimated on the date of grantusing the Black-Scholes-Merton closed-form option-pricing model that uses theassumptions noted in the following table. Expected volatility is based on aweighted-average of the historical volatilities of similar public entities. Thevaluation model includes assumed forfeiture rates of 7.5 to 12.6 percent. 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. 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.

 

| ** **                | ** ** | **As of**              | ** ** |
|---------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **September 30, 2007** | ** ** |
| Expected  volatility      |       | 34.5                        | %          |
| Expected  dividends       |       | 0.0                         | %          |
| Expected term  (in years) |       | 3.3 - 6.5                   |       |
| Risk-free rate            |       | 4.3-5.1                     | %          |

 

A summary of option activity as of September 30, 2007, and changesduring the six months then ended, are presented below:

 
| **Options**                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Outstanding at  April 1, 2007      |       | 2,014,986  |       | $                                                     | 4.87       |   |
| Granted                            |       | 531,525    |       | $                                                     | 15.35      |   |
| Exercised                          |       | (226,550   | )          | $                                                     | 5.06       |   |
| Forfeited                          |       | (136,670   | )          | $                                                     | 8.94       |   |
| Outstanding at  September 30, 2007 |       | 2,183,291  |       | $                                                     | 7.15       |   |
| Exercisable at  September 30, 2007 |       | 1,154,086  |       | $                                                     | 3.08       |   |

 

An option summary as of September 30, 2007 is presented below:

 
| **Options**                                                  | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value ($000)** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Outstanding at  September 30, 2007                           |       | 2,183,291  |       | $                                                     | 7.15       |                                                                   | 5.4        |                                             | $          | 44,540 |   |
| Exercisable at  September 30, 2007                           |       | 1,154,086  |       | $                                                     | 3.08       |                                                                   | 4.7        |                                             | $          | 28,241 |   |
| Unvested at  September 30, 2007, net of expected forfeitures |       | 952,015    |       | $                                                     | 11.71      |                                                                   | 6.1        |                                             | $          | 15,076 |   |
|                                                              |            |            |            |                                                       |            |                                                                        |            |                                                  |            |  |  |  |

 

 

During the six months ended September 30, 2007, the Company granted531,525 option awards with a vesting period of three years. The options wereissued with a weighted-average exercise price of $15.35. The total intrinsicvalue of options exercised during the six months ended September 30, 2007 was$3.1 million.

 

During the six months ended September 30, 2006 and 2007, the Companyrecognized $0.2 million and $0.9 million of share-based employee compensationcosts, respectively. As of September 30, 2007, there was $5.9 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 2.8 years.

 

During the six months ended September 30, 2007, there were nomodifications to share-based payment arrangements.

 

During the six months ended September 30, 2007, the Company granted159,882 restricted stock awards at an estimated weighted average fair value of$15.65 per share with a vesting period of three years and 6,725 restrictedstock awards at an estimated weighted average fair value of $15.26 wereforfeited. The assumed forfeiture rates applicable to the restricted sharesgranted in the six months ended September 30, 2007 was zero to five percent.

 

 

 

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Prior to the adoption of SFAS No. 123(R), the fair market value of eachissuance and grant was determined by the Company on a contemporaneous basis.The Company recorded stock-based deferred compensation of approximately $1.4million in connection with compensatory grants of stock options and shares ofrestricted stock awarded during fiscal 2006 and 2007. Approximately, $0.1million of compensation expense was recognized during the six months endedSeptember 30, 2007. The remaining deferred compensation will be amortized overthe remaining four year vesting period of the awards.

 

**8.  COMMITMENTS ANDCONTINGENCIES**

 

***Contract CostAudits***—Substantially all payments to Stanley under cost-reimbursable contracts andsubcontracts with the U.S. Government are provisional payments, which aresubject to potential adjustments upon audit by the Defense Contract AuditAgency. Audits through March 31, 2004 have been completed. In the opinionof management, adjustments resulting from the audits of all subsequent yearsare not expected to have a material effect on the Company’s financial positionor results of operations.

 

**9.  SUBSEQUENT EVENTS**

 

***Credit Facility andBorrowing Capacity —***On October 10, 2007, Stanley entered into an Amended and RestatedRevolving Credit and Term Loan Agreement with a group of lenders for whichSunTrust Robinson Humphrey, Inc. acted as sole book manager and lead arranger,SunTrust Bank acted as administrative agent and M&T Bank and BB&T Bankacted as co-documentation agents. The agreement amends and restates theprevious credit agreement entered into in February 2006. The amended creditagreement increased the amount of the lenders’ aggregate commitment under thefacility from $87.0 million to $187.0 million, which includes a $150.0 millionrevolving credit facility and a $37.0 million term loan. The term loancommitment matures on January 31, 2012 and the revolving commitment matures onOctober 31, 2012. The agreement also increased the letter of credit commitmentfrom $5.0 million to $10.0 million, increased the swing line facility from $5.0million to $20.0 million and eliminated the requirement to hedge a portion ofour outstanding indebtedness under our senior credit facility. In connectionwith the agreement, Stanley paid fees of approximately $0.5 million.

 

 

 

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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 audited andunaudited consolidated financial statements and the accompanying notes includedin this Form 10-Q and our annual report on Form 10-K for the fiscal year endedMarch 31, 2007. This discussion contains forward-looking statements thatinvolve risks and uncertainties. Our actual results may differ materially fromthose discussed in or implied by any of the forward-looking statements as aresult of various factors, including but not limited to, those listed in**the “Risk Factors” section ofour Annual Report on Form 10-K for the year ended March 31, 2007, filed by uswith the Securities and Exchange Commission on June 1, 2007, and our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2007, filed by us with theSecurities Exchange Commission on August 9, 2007.**We caution readers notto place undue reliance on any such forward-looking statements, which speakonly as of the date made. We undertake no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise, after the date of this Form 10-Q.*

 

**Overview**

 

We provide informationtechnology services and solutions to U.S. defense and federal civiliangovernment agencies. We offer our customers solutions and expertise to supporttheir mission-essential needs at any stage of program, product development orbusiness lifecycle through five service areas: systems engineering, enterpriseintegration, operational logistics, business process outsourcing and advancedengineering and technology. As a systems integrator, we apply these fiveservice areas to enable our customers to achieve interoperability betweendifferent business processes and information technology systems.

 

Contracts funded byfederal government agencies account for substantially all of our revenues. Asof September 30, 2007, we had more than 200 active contractual engagementsacross 44 federal government agencies. Our customers include the Department ofDefense (including all major agencies within the Department of Defense), theDepartment of State, 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.

 

**Key Metrics 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 our revenue growth, we focus on both internal revenue growth andrevenue growth through acquisitions. Our internal revenue growth is drivenprimarily by two factors. First, internal revenue growth is driven by addingnew customers and by obtaining new task orders and contracts with our existingcustomers. For example, over the past several years we have added theDepartment of the Treasury’s Office of the Comptroller of the Currency, theNational Guard Bureau, the Department of Transportation and agencies in theintelligence community as new customers. Second, internal revenue growth isdriven by increasing revenues under existing contracts and task orders withcustomers. For example, since the initial award of our contract with theDepartment of State for the provision of passport processing and supportservices, the scope of services provided by us, and the revenues generated bythose services, have grown significantly.

 

Our revenue growthstrategy also includes the pursuit of strategic acquisitions. We have completedthe following five acquisitions since 2000: our acquisition of GCI InformationServices, Inc. in January 2000, our acquisition of CCI, Incorporated, or CCI,in September 2002, our acquisition of Fuentez Systems Concepts, Inc., or FSC,in December 2003, our acquisition of Morgan Research Corporation, or Morgan, inFebruary 2006, and our acquisition of Techrizon, LLC, or Techrizon, in April2007.

*** ***

*** ***

 

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***Backlog***

 

We monitor backlog, whichprovides us with visibility of our future revenues, as a measure of thestrength of our target markets and our ability to retain existing contracts andwin new contracts. The following table summarizes our backlog as of the datesindicated:

 
| ** **    | ** ** | **As of September 30,** | ** ** |
|---------------|------------|-----------------------------------|------------|
| ** **    | ** ** | **2006**                          | ** ** | **2007** | ** ** |
| ** **    | ** ** | **(in millions)**            | ** ** |
| Backlog:      |       |                              |       |   |   |
| Funded        |       | $                                 | 241.0      |   | $ | 309.5 |   |
| Unfunded      |       | 708.4                             |       | 1,050.4 |   |
| Total Backlog |       | $                                 | 949.4      |   | $ | 1,359.9 |   |

 

Each year, a significantportion of our revenues is derived from our backlog, and a substantial 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 base contractperformance period and (ii) from the exercise by the customer of option periodsthat we reasonably believe will be exercised, in each case from signedcontracts in existence as of the measurement date. We do not include contractceiling values, which represent the maximum amount of contract awards thatcould be awarded to all contractors under government-wide acquisition contracts(“GWACs”) or agency-specific indefinite delivery/indefinite quantity (“ID/IQ”)contracts, in our backlog calculation. We also do not include in backlog (i)the expected amount of revenues that would be realized if, and when, we weresuccessful in the re-compete of signed contracts in existence as of themeasurement date or (ii) the expected amount of revenues that would be realizedfrom future unidentified growth on signed contracts and task orders inexistence 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, generallyprovide greater opportunity for the customer to manage risk and for us togenerate higher margins. Our acquisition of Techrizon in April 2007 has resultedin a shift in our contract mix toward a greater percentage oftime-and-materials contracts. The following table summarizes our historicalcontract mix, measured as a percentage of total revenues, for the periodsindicated:

 
| ** **         | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|--------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **         | ** ** | **2006**                                                  | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Cost-plus-fee      |       | 54                                                        | %          | 49                                                      | %          | 53 | % | 49 | % |
| Time-and-materials |       | 32                                                        | %          | 35                                                      | %          | 32 | % | 35 | % |
| Fixed-price        |       | 14                                                        | %          | 16                                                      | %          | 15 | % | 16 | % |

 

***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.

 

 

 

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***Indirect Costs***

 

Indirect costs constitutea substantial portion of the costs associated with our performance of contractsfor customers. We carefully monitor the amount by which our actual indirectcosts under our contracts vary from those expected to be incurred, which werefer to as indirect expense variance. Increased indirect rates can adverselyaffect our ability to achieve attractive contract pricing, our profitability,and our competitive 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 30, 2007, we reported DSO of 77 days, adecrease from 81 days we reported for the three months ended June 30, 2007.

 

***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, the likelihood of a material loss on anuncollectible account from this activity is low.

 

**Critical Accounting Policies**

 

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withGAAP. The preparation of these condensed consolidated financial statementsrequires management to make estimates and assumptions that affect reportedamounts, and actual results may differ from the estimates. Our significantaccounting policies are described in Note 1 to our unaudited condensedconsolidated financial statements included in this report. We consider thefollowing accounting policies to be critical to the understanding of ourfinancial condition and results of operations because these policies requirethe most difficult, subjective or complex judgments on the part of ourmanagement in their application, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain, and arethe most important to our 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. We use astandard management process to determine whether all required criteria forrevenue 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 and issues,subcontract management, costs incurred, commitments and customer satisfaction.During this review, we determine whether the overall progress on a contract isconsistent 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 thecontract, the cost of the effort and an ongoing assessment of our progresstoward completing the contract. From time to time, as part of our standardmanagement process, facts develop that require us to revise our estimated totalcosts and revenues. To the extent that a revised estimate affects contractprofit or revenue previously recognized, we record the cumulative effect of therevision in the period in which the facts requiring the revision become known.The full amount of an anticipated loss on any type of contract is recognized inthe period in which it becomes probable and can be reasonably estimated.

 

Under cost-plus-feecontracts, revenues are recognized as costs are incurred and include anestimate of applicable fees earned. We consider 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 arecomputed by multiplying the number of direct labor-hours expended in performanceof the contract by the contractual billing rates and adding other billabledirect and indirect costs. For fixed-price contracts, revenues are recognizedas services are performed, using the percentage-of-completion method, applyingthe cost-to-cost or units of delivery method, in accordance with ARB 45 and SOP81-1.

 

 

 

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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 on noticesto 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 or collectibility.Such matters, whether claims or unapproved change orders in the process ofnegotiation, are recorded at the lesser of their estimated net realizable valueor actual costs incurred, and only when the realization is probable and can bereliably estimated. Claims against us are recognized where a loss is consideredprobable and can be reasonably estimated in amount.

 

***Contract Cost Accounting***

 

As a contractor providingservices primarily to the federal government, we must categorize our costs as eitherdirect or indirect and allowable or unallowable. Direct costs are those coststhat are identified with specific contracts. These costs include labor, travel,subcontractor and consultant services, third party materials we purchase undera contract and other non-labor costs incurred in support of a contract.Indirect costs are those costs not identified with specific contracts. Rather,indirect costs are allocated to contracts in accordance with federal governmentrules and regulations. These costs typically include certain of our selling,general and administrative expenses, fringe benefit expenses, overhead expensesand depreciation and amortization costs. Direct and indirect costs that are notallowable under the Federal Acquisition Regulation or specific contractprovisions cannot be considered for reimbursement under our federal governmentcontracts. We must specifically identify these costs to ensure we comply withthese requirements. Our unallowable costs include a portion of our executivecompensation, certain employee morale activities, certain types of legal andconsulting costs, interest expense and the amortization of identifiedintangible assets, among others.

 

***Goodwill and Intangible Assets***

 

Goodwill represents the excess of cost over the fair value of nettangible and identifiable intangible assets of acquired companies. Inaccordance with SFAS No. 142,*Goodwilland Other Intangible Assets*  (“SFASNo. 142”), we do not amortize goodwill. Rather, we test goodwill for impairmentat least on an annual basis. Testing for impairment is a two-step process asprescribed by SFAS No. 142. The first step is a test for potential impairment,while the second step measures the amount of impairment, if any. Under theguidelines of SFAS No. 142, we are required to perform an impairment test atleast on an annual basis at any time during the fiscal year, provided that thetest is performed at the same time every year. An impairment loss would berecognized when the assets’ fair value is below their carrying value. Based onthe testing performed as of December 31, 2006, we determined that noimpairments existed as of December 31, 2006. Customer relationships, noncompeteagreements and backlog and contracts are amortized on a straight-line basisover periods ranging from two to seven years.

** **

** **

 

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**Results of Operations**

 

Our historical financial statements reflect the operating results ofour acquisitions from the date of acquisition. The following tables set forththe results of operations expressed in dollars (in thousands) and as apercentage of revenues, for the periods below:

 
| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Consolidated Statements of Income Data** | ** ** | **2006**                                                  | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues                                                       |       | $                                                         | 98,191     |                                                    | $          | 150,239 |   | $ | 190,746 |   | $ | 283,720 |   |
| Operating costs  and expenses:                                 |       |                                                      |       |                                                    |       |   |   |   |   |
| Cost of revenues                                               |       | 83,116                                                    |       | 127,556                                                 |       | 161,419 |   | 239,879 |   |
| Selling, general  and administrative                           |       | 6,559                                                     |       | 9,322                                                   |       | 13,080 |   | 18,750 |   |
| Amortization of  deferred compensation                         |       | 355                                                       |       | 67                                                      |       | 604 |   | 142 |   |
| Depreciation and  amortization                                 |       | 1,306                                                     |       | 1,702                                                   |       | 2,694 |   | 3,312 |   |
| Total operating  costs and expenses                            |       | 91,336                                                    |       | 138,647                                                 |       | 177,797 |   | 262,083 |   |
| Operating income                                               |       | 6,855                                                     |       | 11,592                                                  |       | 12,949 |   | 21,637 |   |
| Other (expense)  income:                                       |       |                                                      |       |                                                    |       |   |   |   |   |
| Other (expense)  income                                        |       | (804                                                      | )          | 6                                                       |       | (544 | ) | 6 |   |
| Interest  expense—net                                     |       | (2,034                                                    | )          | (1,138                                                  | )          | (4,179 | ) | (2,200 | ) |
| Total other  expenses                                          |       | (2,838                                                    | )          | (1,132                                                  | )          | (4,723 | ) | (2,194 | ) |
| Income before  taxes                                           |       | 4,017                                                     |       | 10,460                                                  |       | 8,226 |   | 19,443 |   |
| Provision for  income taxes                                    |       | (1,595                                                    | )          | (4,125                                                  | )          | (3,320 | ) | (7,744 | ) |
| Net income                                                     |       | $                                                         | 2,422      |                                                    | $          | 6,335 |   | $ | 4,906 |   | $ | 11,699 |   |

 

 
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **As a Percentage of Revenues** | ** ** | **2006**                                                  | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues                                            |       | 100.0                                                     | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |
| Operating costs  and expenses:                      |       |                                                      |       |                                                    |       |   |   |   |   |
| Cost of revenues                                    |       | 84.6                                                      |       | 84.9                                                    |       | 84.6 |   | 84.5 |   |
| Selling, general  and administrative                |       | 6.7                                                       |       | 6.3                                                     |       | 6.9 |   | 6.6 |   |
| Amortization of  deferred compensation              |       | 0.4                                                       |       | —                                                  |       | 0.3 |   | 0.1 |   |
| Depreciation and  amortization                      |       | 1.3                                                       |       | 1.1                                                     |       | 1.4 |   | 1.2 |   |
| Total operating  costs and expenses                 |       | 93.0                                                      |       | 92.3                                                    |       | 93.2 |   | 92.4 |   |
| Operating income                                    |       | 7.0                                                       |       | 7.7                                                     |       | 6.8 |   | 7.6 |   |
| Other (expense)  income:                            |       |                                                      |       |                                                    |       |   |   |   |   |
| Other (expense)  income                             |       | (0.8                                                      | )          | —                                                  |       | (0.3 | ) | — |   |
| Interest  expense—net                          |       | (2.1                                                      | )          | (0.8                                                    | )          | (2.2 | ) | (0.8 | ) |
| Total other  expenses                               |       | (2.9                                                      | )          | (0.8                                                    | )          | (2.5 | ) | (0.8 | ) |
| Income before  taxes                                |       | 4.1                                                       |       | 6.9                                                     |       | 4.3 |   | 6.8 |   |
| Provision for  income taxes                         |       | (1.6                                                      | )          | (2.7                                                    | )          | (1.7 | ) | (2.7 | ) |
| Net income                                          |       | 2.5                                                       | %          | 4.2                                                     | %          | 2.6 | % | 4.1 | % |

 

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.

 

 

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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 and insurance. Among thefunctions covered by these expenses are sales, business development, contractadministration, legal, finance, accounting, human resources, informationtechnology and general management. Most of these costs are allowable costsunder the cost accounting standards for contracting with the federal governmentand are recoverable under cost-plus-fee contracts.

 

Our depreciation andamortization expenses include the amortization of purchased intangibles inconnection with acquisitions and 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 30, 2006 and 2007***

 

***Revenues.***  Our consolidated revenues increased $52.0million, or 53.0%, from $98.2 million for the three months ended September 30,2006, to $150.2 million for the three months ended September 30, 2007. Theincrease was primarily due to $15.0 million of increased revenues attributableto expanding demand for passport services for the Department of State’s Bureauof Consular Affairs, $10.8 million of increased revenues attributable to theacquisition of Techrizon, $8.6 million of increased revenues attributable toproduction and engineering services under various SPAWAR programs, and $4.6million of increased revenues attributable to contracts that includespecialized engineering and technology services provided to the U.S. ArmyAviation and Missile Command (“AMCOM”) and the U.S. Army Program ExecutiveOffice for Simulation, Training and Instrumentation (“PEO STRI”). The balanceof the increased revenues of $13.1 million were primarily related to continuedgrowth providing enterprise integration and operational support services forthe Department of Defense, and ongoing logistics support for the Army’sequipment reset effort in the United States and abroad.

 

***Cost of Revenues.***  Our cost of revenues increased $44.5 million,or 53.5%, from $83.1 million for the three months ended September 30, 2006, to$127.6 million for the three months ended September 30, 2007. This increase wasprimarily the result of additional costs attributable to revenues generated byTechrizon operations, in addition to the cost of revenues associated with theincreased services provided under the contracts referred to above. Cost ofrevenues represented 84.9% of total revenues for the three months endedSeptember 30, 2007, as compared to 84.6% of total revenues for the three monthsended September 30, 2006. This increase was primarily the result of a greaterproportion of these costs being represented by materials and subcontractorcosts versus direct labor costs.

 

***Selling, General and Administrative.***  Our selling, general andadministrative expense increased $2.7 million, or 42.2%, from $6.6 million forthe three months ended September 30, 2006, to $9.3 million for the three monthsended September 30, 2007. This increase was primarily due to selling, generaland administrative expenses to support expanding operations from organic andacquired growth, higher recruiting costs to expand our workforce, andadditional costs associated with being a public company, including costsassociated with legal, internal and external audit, tax and Sarbanes-Oxleycompliance services.

 

***Depreciation and Amortization.***  Our depreciation and amortizationexpense increased $0.4 million, or 30.1%, from $1.3 million for the threemonths ended September 30, 2006, to $1.7 million for the three months endedSeptember 30, 2007. The increase in depreciation and amortization was primarilydue to the amortization of intangible assets associated with the Techrizonacquisition as well as additional depreciation expense associated with capitalexpenditures during fiscal 2007.

 

***Other Expense.***  Our other expense decreased $0.8 million from$0.8 million for the three months ended September 30, 2006, to $0.0 million forthe three months ended September 30, 2007. The other expense resulted from anet unrealized loss in the fair value of our interest rate swap agreements.

 

***Interest Expense, Net.***  Our net interest expense decreased $0.9 millionfrom $2.0 million for the three months ended September 30, 2006, to $1.1million for the three months ended September 30, 2007. The decrease in netinterest expense was due to the repayment of term loan borrowings with theproceeds from our initial public offering completed in October 2006 offset byborrowings used to finance the acquisition of Techrizon.

 

***Net Income.***  Our net income increased $3.9 million from $2.4million for the three months ended September 30, 2006, to $6.3 million for thethree months ended September 30, 2007. The primary reasons for the increase innet income are higher operating income, lower interest expense, and profitsfrom Techrizon.

 

***Comparison of Results of Operations for the Six Months EndedSeptember 30, 2006 and 2007***

 

***Revenues.***  Our consolidated revenues increased $93.0million, or 48.7%, from $190.7 million for the six months ended September 30,2006, to $283.7 million for the six months ended September 30, 2007. Theincrease was primarily due to $25.1 million 

 

 

 

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of increased revenues attributable to expanding demand for passportservices for the Department of State’s Bureau of Consular Affairs, $20.4 millionof increased revenues attributable to the acquisition of Techrizon, $17.2million of increased revenue attributable to production and engineeringservices under various SPAWAR programs, and $9.8 million of increased revenuesattributable to specialized engineering and technology services provided toAMCOM and PEO STRI. The balance of the increased revenues of $20.5 million wererelated to continued growth providing enterprise integration and operationalsupport services for the Department of Defense, and ongoing logistics supportfor the Army’s equipment reset effort in the United States and abroad.

 

***Cost of Revenues.***  Our cost of revenues increased $78.5 million,or 48.6%, from $161.4 million for the six months ended September 30, 2006, to$239.9 million for the six months ended September 30, 2007. This increase wasprimarily the result of additional costs attributable to revenues generated byTechrizon operations, in addition to the cost of revenues associated with theincreased services provided under the contracts referred to above. Cost ofrevenues represented 84.5% of total revenues for the six months ended September30, 2007, as compared to 84.6% of total revenues for the six months endedSeptember 30, 2006. This decrease was primarily the result of a greaterproportion of time-and-material and fixed-price contracts versus cost-plus-feecontracts, offset by a greater proportion of these costs being represented bymaterials and subcontractor costs versus direct labor costs.

 

***Selling, General and Administrative.***  Our selling, general andadministrative expense increased $5.7 million, or 43.4%, from $13.1 million forthe six months ended September 30, 2006, to $18.8 million for the six monthsended September 30, 2007. This increase was primarily due to selling, generaland administrative expenses to support expanding operations from organic andacquired growth, higher recruiting costs to expand our workforce, andadditional costs associated with being a public company, including costsassociated with legal, internal and external audit, tax and Sarbanes-Oxleycompliance services.

 

***Depreciation and Amortization.***  Our depreciation and amortizationexpense increased $0.6 million, or 22.8%, from $2.7 million for the six monthsended September 30, 2006, to $3.3 million for the six months ended September30, 2007. The increase in depreciation and amortization was primarily due tothe amortization of intangible assets associated with the Techrizon acquisitionas well as additional depreciation expense associated with capital expendituresduring fiscal 2007.

 

***Other Expense.***  Our other expense decreased $0.5 million from$0.5 million for the six months ended September 30, 2006, to $0.0 million forthe six months ended September 30, 2007. The other expense resulted from a netunrealized loss in the fair value of our interest rate swap agreements.

 

***Interest Expense, Net.***  Our net interest expense decreased $2.0 millionfrom $4.2 million for the six months ended September 30, 2006, to $2.2 millionfor the six months ended September 30, 2007. The decrease in net interestexpense was due to the repayment of term loan borrowings with the proceeds fromour initial public offering completed in October 2006 offset by borrowings usedto finance the acquisition of Techrizon.

 

***Net Income.***  Our net income increased $6.8 million from $4.9million for the six months ended September 30, 2006, to $11.7 million for thesix months ended September 30, 2007. The primary reasons for the increase innet income are higher operating income, lower interest expense, and profitsfrom Techrizon.

 

**Liquidity and Capital Resources**

 

Our primary liquidityneeds are to finance the costs of operations pending the billing and collectionof accounts receivable, to service our debt, to make capital expenditures andto make selective strategic acquisitions. Based upon our current operations, weexpect that our cash flow from operations, together with amounts we are able toborrow under our senior credit facility, will be adequate to meet ouranticipated needs for the foreseeable future. In addition, we expect that ourcash flow from operations will be adequate to meet all contractual obligationsunder the senior credit facility and our operating leases. Although we have nospecific plans to do so, to the extent we decide to pursue one or moresignificant strategic acquisitions, we will likely need to incur additionaldebt or sell additional equity.

 

***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.

 

 

 

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| ** **                                           | ** ** | **Six Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(in millions)**                                  | ** ** |
| Net cash  provided by operating activities           |       | $                                                       | 11.2       |   | $ | 0.7 |   |
| Net cash used in  investing activities               |       | $                                                       | (1.3       | ) | $ | (32.3 | ) |
| Net cash (used in)  provided by financing activities |       | $                                                       | (9.9       | ) | $ | 18.8 |   |

 

Net cash provided byoperating activities of $0.7 million for the six months ended September 30,2007 primarily reflected our net income plus depreciation and amortizationexpenses for that period and a $6.6 million increase in accrued expenses,partially offset by a $16.2 million increase in accounts receivable and a $3.6million decrease in accounts payable. For the six months ended September 30,2006, net cash provided by operating activities of $11.2 million consistedprimarily of net income plus depreciation and amortization expenses, a $2.6million decrease in accounts receivable and a $2.0 million increase in accruedexpenses, partially offset by a $1.3 million increase in payments of prepaid incometaxes.

 

Net cash used ininvesting activities of $32.3 million for the six months ended September 30,2007, consisted primarily of $30.6 million to complete the acquisition ofTechrizon. Net cash used in investing activities of $1.3 million for the sixmonths ended September 30, 2006 consisted primarily of the purchase ofequipment in the ordinary course of business.

 

Net cash provided byfinancing activities of $18.8 million for the six months ended September 30,2007 consisted primarily of $18.5 million of borrowings under the revolvingportion of our senior credit facility to support the acquisition of Techrizon.Net cash used in financing activities of $9.9 million for the six months endedSeptember 30, 2006 consisted primarily of $9.7 million of net repayments of ourline of credit.

 

***Credit Facility and Borrowing Capacity***

 

As of September 30, 2007, we had $37.3 million of termloan indebtedness and $18.5 million of revolving indebtedness outstanding underour credit facility. As of September 30, 2007, our borrowing availability underthe revolving portion of our $50 million credit facility was $31.4 million(including outstanding letters of credit). The obligations under our seniorcredit facility are unconditionally guaranteed by each of our existing andsubsequently acquired or organized subsidiaries and are secured on afirst-priority basis by security interests (subject to permitted liens) insubstantially all assets owned by us and each of our subsidiaries, includingthe shares of capital stock of our subsidiaries, subject to certain exceptions.

 

On October 10, 2007, weentered into an Amended and Restated Revolving Credit and Term Loan Agreement(the “Amended Credit Agreement”) with a group of lenders for which SunTrustRobinson Humphrey, Inc. acted as sole book manager and lead arranger, SunTrustBank acted as administrative agent and M&T Bank and BB&T Bank acted asco-documentation agents. The Amended Credit Agreement amends and restates theprevious credit agreement entered into in February 2006. In connection with theAmended Credit Agreement, we paid fees of approximately $0.5 million.

 

The Amended Credit Agreement increased the amount ofthe lenders’ aggregate commitment under the facility from $87.0 million to$187.0 million, which includes a $150.0 million revolving credit facility and a$37.0 million term loan. The term loan commitment matures on January 31, 2012and the revolving commitment matures on October 31, 2012. The Amended CreditAgreement also increased the letter of credit commitment from $5.0 million to$10.0 million, increased the swing line facility from $5.0 million to $20.0million and eliminated the requirement to hedge a portion of our outstandingindebtedness under our senior credit facility.

 

Under the terms of theamended credit facility, we are entitled to request an increase in the size ofthe credit facility by an amount not greater than $125.0 million in theaggregate. If any lender elects not to increase its commitment under the seniorcredit facility, we may designate another bank or other financial institutionto become a party to the credit facility.

 

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 provides that we are required to meet the following financialcovenants:

 

•                  a fixed charge coverage ratio as of the end of any fiscal quarter ofnot less than 1.35 to 1.00, based upon the ratio of (i) consolidated EBITDA (asdefined in the Amended Credit Agreement) less the actual amount paid by us andour 

 

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subsidiaries incash on account of capital expenditures and taxes to (ii) consolidated interestexpense for such period, scheduled principal payments required to be made onconsolidated total debt during such period and certain restricted payments paidduring such period, in each case measured for the four consecutive fiscalquarters ending on or immediately prior to such date; and

 

•                  a maximum leverage ratio not greater than 3.75 to 1.00, based upon theratio of (i) consolidated total debt to (ii) consolidated EBITDA (as defined inthe Amended Credit Agreement).

 

As of September 30, 2007,we had $37.3 million of term loan indebtedness and $18.5 million of revolvingindebtedness outstanding under our senior credit facility. As of October 10,2007, when we entered into our amended and restated credit agreement, ourborrowing availability under our amended $150.0 million revolving creditfacility was $131.4 million (including outstanding letters of credit). As ofSeptember 30, 2007, we were in compliance with all covenants under our senior creditfacility. Theobligations under our senior credit facility are unconditionally guaranteed byeach of our existing and subsequently acquired or organized subsidiaries andsecured subsidiaries and secured on a first-priority basis by securityinterests (subject to permitted liens) in substantially all assets owned by theCompany and each of its subsidiaries, including the shares of capital stock ofits subsidiaries, subject to certain exceptions.

 

**Capital Expenditures**

 

We have relatively lowcapital expenditure requirements. Our capital expenditures were $1.4 millionand $1.7 million for the six months ended September 30, 2006 and 2007,respectively. Substantially all of these expenditures consisted of leaseholdimprovements and purchases of office equipment.

 

**Off-Balance Sheet Arrangements**

 

We do not have anysignificant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofSEC Regulation S-K as of September 30, 2007.

 

**Recent Accounting Pronouncements**

 

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, Accounting for Income Taxes*  (“FIN 48”). FIN 48 provides guidance onrecognition, derecognition, measurement, classification, interest andpenalties, accounting for interim periods and disclosures. FIN 48 requires anentity to recognize the financial statement impact of a tax position when it ismore likely than not that the position will be sustained upon examination. Theamount recognized is measured at the largest amount of benefit that is greaterthan fifty percent likely of being realized upon ultimate settlement. Inaddition, FIN 48 permits an entity to recognize interest and penalties relatedto tax uncertainties as income tax expense or operating expenses. FIN 48 iseffective for fiscal years beginning after December 15, 2006. We adopted theprovisions of FIN 48 on April 1, 2007. The cumulative effects of applying thisinterpretation have been recorded as a decrease of $0.3 million to retainedearnings, an increase of $0.5 million to net deferred tax assets, a decrease toincome taxes payable of $0.1 million and an increase in liabilities of $0.5million for unrecognized tax benefits and $0.4 million for interest andpenalties.

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157,*Fair Value Measurements* (“SFAS 157”).SFAS 157 provides guidance for measuring the fair value of assets andliabilities. It requires additional disclosures related to the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFAS157 is effective for fiscal years beginning after November 15, 2007. We are inthe process of determining what effect, if any, the adoption of SFAS 157 willhave on our financial position, results of operations, or cash flows.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities—Including an Amendment of FASB Statement No. 115*  (“SFAS 159”). SFAS 159 permits entitiesto measure many financial instruments and certain other items at fair value toimprove financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accounting. Mostof the provisions in SFAS 159 are elective. This statement will be effectivefor the Company in fiscal 2009, and it may be applied prospectively. Earlyadoption is permitted provided the Company also elects to apply the provisionsof SFAS 157. We are in the process of determining what effect, if any, theapplication of the provisions of SFAS 159 will have on its financial position andresults of operations.

 

 

**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 effectively limit exposure to interestrate movements within the parameters of our interest rate hedging policy. As of

 

 

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September 30, 2007, all of the outstanding debt under our senior creditfacility, with the exception of that portion covered by an interest rate swap,was subject to floating interest rate risk. In October 2006, we entered into aninterest rate swap agreement currently covering $18.9 million of our termindebtedness under which the swap and term debt maturities match. Even aftergiving effect to this agreement, we are exposed to risks due to fluctuations inthe market value of this agreement and changes in interest rates with respectto the portion of our senior credit facility that is not covered by this agreement.A hypothetical increase in the interest rate of 100 basis points would haveincreased our six month interest expense on that portion of our outstandingdebt not covered by the interest rate swap by $0.2 million.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

As of September 30, 2007,under the supervision and with the participation of our management, includingour chief executive officer and our chief financial officer, we have evaluatedthe effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.Based on this evaluation, our chief executive officer and our chief financialofficer have concluded that our disclosure controls and procedures areeffective in timely alerting management, including the chief executive officerand chief financial officer, of material information about us required to beincluded in periodic Securities and Exchange Commission filings. However, inevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectivesand management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

There were no changes inour internal control over financial reporting during the three months endedSeptember 30, 2007 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

 

 

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**PART 2: OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

Neither we, nor any ofour subsidiaries, are currently subject to any material legal proceedings, nor,to our knowledge, is any material legal proceeding threatened against us.

 

**ITEM 1A.RISK FACTORS**

 

Our business is subjectto certain risks and events that, if they occur, could adversely affect ourfinancial condition and results of operations and the trading price of ourcommon stock. For a discussion of these risks, please refer to the “RiskFactors” section of our Annual Report on Form 10-K for the year ended March 31,2007, filed by us with the Securities and Exchange Commission on June 1, 2007,and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007,filed by us with the Securities Exchange Commission on August 9, 2007.

 

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

 

None.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The Annual Meeting of Stockholders was held on Thursday, August16, 2007. The stockholders voted and approved the following matters:

 

The electionof nine directors to hold office until the 2008 Annual Meeting of Stockholders:

 

| **Nominee**                                | ** ** | **Shares Voted For** | ** ** | **Authority  Withheld** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|
| Mr. Philip  O. Nolan                  |       | 21,044,023                     |       | 585,346                 |       |
| Mr. George  H. Wilson                 |       | 20,890,368                     |       | 739,001                 |       |
| Mr. William  E. Karlson               |       | 20,832,254                     |       | 797,115                 |       |
| Mr. Lawrence  A. Gallagher            |       | 21,233,045                     |       | 396,324                 |       |
| Mr. James  C. Hughes                  |       | 21,448,819                     |       | 180,550                 |       |
| Lt. General  Richard L. Kelly, USMC (Ret.) |       | 21,536,189                     |       | 93,180                  |       |
| Mr. Charles  S. Ream                  |       | 19,189,477                     |       | 2,439,892               |       |
| Mr. John P.  Riceman                  |       | 21,453,193                     |       | 176,176                 |       |
| General Jimmy D.  Ross, USA (Ret.)         |       | 19,862,793                     |       | 1,766,576               |       |

** **

**Theratification of the appointment of Deloitte & Touche LLP as independentregistered public accounting firm for our fiscal year ending March 31, 2008 asfollows:**

| ** **    | ** ** | **Number of  Shares** | ** ** | ** **    |
|---------------|------------|-----------------------|------------|---------------|
| **Voted For** | ** ** | **Voted Against**     | ** ** | **Abstained** |
| 21,461,398    |       | 139,906               |       | 28,065        |

 

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

**ITEM 6.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)

November 7, 2007 |
|   |       |                                                                                                              |
|   |       |                                                                                                              |
|   | ** ** | **/s/  BRIAN J. CLARK**                                                                                           |
|   |       | Brian J. Clark

Chief Financial Officer and Treasurer

(Principal Financial Officer)

November 7, 2007            |

 

 

 

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**EXHIBIT INDEX**

** **
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                           |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended and Restated Certificate of Incorporation of  Stanley, Inc., incorporated by reference to Exhibit 3.1 to  Pre-Effective Amendment No. 2 to the Registration Statement  on Form S-1 (File No. 333-134053), filed July 28, 2006. |
|             |       |                                                                                                                                                                                                                                                                      |
| 3.3              |       | Amended and Restated Bylaws of Stanley, Inc.,  incorporated by reference to Exhibit 3.3 to Pre-Effective Amendment  No. 2 to the Registration Statement on Form S-1  (File No. 333-134053), filed July 28, 2006.                  |
|             |       |                                                                                                                                                                                                                                                                      |
| 31.1             |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                      |
| 31.2             |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                      |
| 32.1             |       | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                             |

 

 

 

 

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