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** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **x** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|---------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 26, 2009**

 

**OR**

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

 

**Commission File No. 001-33083**

 

**STANLEY,INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(703) 684-1125**

(Registrant’s telephone number,

 including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe 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 tosuch filing requirements for the past 90 days.  Yes x  No o

 

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

 

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

 

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

 

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

 

Asof July 29, 2009, there were 24,001,202 shares of our Common Stock, parvalue $0.01 per share, outstanding.

 

 

 

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**STANLEY, INC.**

**FORM 10-Q**

**FOR THE QUARTER ENDED JUNE 26, 2009**

**INDEX**

** **
| ** **                                   | ** **                                                                                  | **Page** |
|----------------------------------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I — FINANCIAL INFORMATION** |                                                                                        | 1        |
| ITEM 1.                                      | FINANCIAL STATEMENTS                                                                        |     | 1 |
| ITEM 2.                                      | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |     | 13 |
| ITEM 3.                                      | QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |     | 21 |
| ITEM 4.                                      | CONTROLS AND  PROCEDURES                                                                    |     | 21 |
| **PART II — OTHER INFORMATION**    |                                                                                        | 22       |
| ITEM 1.                                      | LEGAL PROCEEDINGS                                                                           |     | 22 |
| ITEM 1A.                                     | RISK FACTORS                                                                                |     | 22 |
| ITEM 2.                                      | UNREGISTERED SALES OF  EQUITY SECURITIES AND USE OF PROCEEDS                                |     | 22 |
| ITEM 3.                                      | DEFAULTS UPON  SENIOR SECURITIES                                                            |     | 22 |
| ITEM 4.                                      | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                        |     | 22 |
| ITEM 5.                                      | OTHER INFORMATION                                                                           |     | 22 |
| ITEM 6.                                      | EXHIBITS                                                                                    |     | 22 |

 

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**FORWARD-LOOKINGSTATEMENTS**

 

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

 

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

 

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

 

·                  our backlog;

 

·                  risks associated with the acquisition and integration of new companies;

 

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

 

·                  expected spending on information technology and other professionalservices by federal government agencies, including the Department of Defense;and

 

·                  other risks discussed in our Annual Report on Form 10-K for thefiscal year ended March 31, 2009, in the sections entitled “Risk Factors”and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and in any other documents we file with the Securities andExchange Commission.

 

Weare under no duty to update any of the forward-looking statements after thedate of this Quarterly Report on Form 10-Q to conform these statements toactual results, except as required by law.

 

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Income**

**(unaudited)**

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

** **
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **June 26, 2009**           | ** ** | **June 27, 2008** | ** ** |
| Revenues                            |       | $                                | 208,747    |   | $ | 172,566 |   |
|                                |       |                             |       |   |   |
| Operating costs and expenses:       |       |                             |       |   |   |
| Cost of revenues                    |       | 173,089                          |       | 145,760 |   |
| Selling, general and administrative |       | 14,092                           |       | 10,659 |   |
| Depreciation and amortization       |       | 2,830                            |       | 1,841 |   |
| Total operating costs and expenses  |       | 190,011                          |       | 158,260 |   |
| Operating income                    |       | 18,736                           |       | 14,306 |   |
|                                |       |                             |       |   |   |
| Other income (expense):             |       |                             |       |   |   |
| Other income                        |       | 3                                |       | 2 |   |
| Interest income                     |       | 37                               |       | 125 |   |
| Interest expense                    |       | (1,147                           | )          | (536 | ) |
| Total other expenses                |       | (1,107                           | )          | (409 | ) |
| Income before taxes                 |       | 17,629                           |       | 13,897 |   |
|                                |       |                             |       |   |   |
| Provision for income taxes          |       | (6,965                           | )          | (5,580 | ) |
| Net income                          |       | $                                | 10,664     |   | $ | 8,317 |   |
|                                |       |                             |       |   |   |
| Earnings per share:                 |       |                             |       |   |   |
| Basic                               |       | $                                | 0.46       |   | $ | 0.37 |   |
| Diluted                             |       | $                                | 0.45       |   | $ | 0.35 |   |
|                                |       |                             |       |   |   |
| Weighted-average shares:            |       |                             |       |   |   |
| Basic                               |       | 23,172                           |       | 22,676 |   |
| Diluted                             |       | 23,844                           |       | 23,649 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

**(unaudited)**

**(inthousands, except share data)**

** **
| ** **                                                                                                          | ** ** | **June 26, 2009** | ** ** | **March 31, 2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                          | ** ** | ** **             | ** ** | ** **              | ** ** |
|                                                                                                                |       |                   |       |                    |       |
| Current assets:                                                                                                     |       |                   |       |                    |       |
| Cash                                                                                                                |       | $                      | 4,636      |                    | $          | 1,811 |   |
| Accounts receivable - net                                                                                           |       | 196,132                |       | 187,680                 |       |
| Prepaid and other current assets                                                                                    |       | 5,367                  |       | 6,766                   |       |
| Total current assets                                                                                                |       | 206,135                |       | 196,257                 |       |
|                                                                                                                |       |                   |       |                    |       |
| Property and equipment - net                                                                                        |       | 19,802                 |       | 19,552                  |       |
| Goodwill                                                                                                            |       | 262,705                |       | 262,705                 |       |
| Intangible assets - net                                                                                             |       | 14,078                 |       | 15,557                  |       |
| Deferred taxes                                                                                                      |       | 4,183                  |       | 4,212                   |       |
| Other assets                                                                                                        |       | 4,257                  |       | 3,269                   |       |
| Total assets                                                                                                        |       | $                      | 511,160    |                    | $          | 501,552 |   |
|                                                                                                                |       |                   |       |                    |       |
| **Liabilities and Stockholders’  Equity**                                                                      | ** ** | ** **             | ** ** | ** **              | ** ** |
|                                                                                                                |       |                   |       |                    |       |
| Current liabilities:                                                                                                |       |                   |       |                    |       |
| Accounts payable                                                                                                    |       | $                      | 17,062     |                    | $          | 21,528 |   |
| Accrued expenses and other liabilities                                                                              |       | 82,084                 |       | 79,841                  |       |
| Current portion of long-term debt                                                                                   |       | 1,000                  |       | 1,000                   |       |
| Income taxes payable                                                                                                |       | 5,444                  |       | 2,034                   |       |
| Total current liabilities                                                                                           |       | 105,590                |       | 104,403                 |       |
|                                                                                                                |       |                   |       |                    |       |
| Line of credit                                                                                                      |       | 129,000                |       | 135,030                 |       |
| Long-term debt — net of current portion                                                                        |       | 34,500                 |       | 34,500                  |       |
| Other long-term liabilities                                                                                         |       | 10,252                 |       | 10,396                  |       |
| Total liabilities                                                                                                   |       | 279,342                |       | 284,329                 |       |
|                                                                                                                |       |                   |       |                    |       |
| Commitments and contingencies                                                                                       |       |                   |       |                    |       |
| Stockholders’ equity:                                                                                          |       |                   |       |                    |       |
| Common stock, $0.01 par value — 200,000,000 shares  authorized; 23,929,374 and 23,813,334 issued, respectively |       | 239                    |       | 238                     |       |
| Additional paid-in capital                                                                                          |       | 100,842                |       | 96,957                  |       |
| Retained earnings                                                                                                   |       | 132,098                |       | 121,434                 |       |
| Accumulated other comprehensive loss                                                                                |       | (820                   | )          | (886                    | )          |
| Less: treasury stock; 3,254 and 0 shares at cost,  respectively                                                     |       | (84                    | )          | —                  |       |
| Deferred compensation                                                                                               |       | (457                   | )          | (520                    | )          |
| Total stockholders’ equity                                                                                     |       | 231,818                |       | 217,223                 |       |
| Total liabilities and stockholders’ equity                                                                     |       | $                      | 511,160    |                    | $          | 501,552 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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 **STANLEY, INC.AND SUBSIDIARIES**

**Condensed Consolidated Statements of Cash Flows**

**(unaudited)**

**(in thousands)**

** **
| ** **                                                                         | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **June 26, 2009**           | ** ** | **June 27, 2008** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                | 10,664     |   | $ | 8,317 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                      |       | 2,830                            |       | 1,841 |   |
| Loss on disposal of property and equipment                                         |       | —                           |       | 14 |   |
| Deferred taxes                                                                     |       | (319                             | )          | 41 |   |
| Stock contributed to employee stock ownership plan                                 |       | 812                              |       | — |   |
| Income tax benefit from stock-based compensation                                   |       | 113                              |       | 1,889 |   |
| Stock compensation expense                                                         |       | 1,829                            |       | 1,063 |   |
| Changes in assets and liabilities – net of  acquisition effects:              |       |                             |       |   |   |
| Accounts receivable                                                                |       | (8,452                           | )          | 4,678 |   |
| Prepaid expenses and other current assets                                          |       | 1,399                            |       | (2,148 | ) |
| Other assets                                                                       |       | (987                             | )          | (14 | ) |
| Accounts payable                                                                   |       | (4,466                           | )          | (10,170 | ) |
| Accrued expenses                                                                   |       | 2,745                            |       | 3,297 |   |
| Other liabilities                                                                  |       | (173                             | )          | 2,467 |   |
| Income taxes payable                                                               |       | 3,410                            |       | (3,140 | ) |
| Net cash provided by operating activities                                          |       | 9,405                            |       | 8,135 |   |
|                                                                               |       |                             |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Acquisition of property and equipment                                              |       | (1,529                           | )          | (3,369 | ) |
| Net cash used in investing activities                                              |       | (1,529                           | )          | (3,369 | ) |
|                                                                               |       |                             |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net repayments under line-of-credit agreements                                     |       | (6,030                           | )          | — |   |
| Payments under capital lease obligations                                           |       | (68                              | )          | (54 | ) |
| Purchase of treasury stock                                                         |       | (84                              | )          | (196 | ) |
| Proceeds from exercise of stock options                                            |       | 859                              |       | 542 |   |
| Excess tax benefit from share-based compensation                                   |       | 272                              |       | 350 |   |
| Net cash (used in) provided by financing  activities                               |       | (5,051                           | )          | 642 |   |
|                                                                               |       |                             |       |   |   |
| **NET INCREASE IN CASH**                                                           |       | 2,825                            |       | 5,408 |   |
| **CASH — Beginning of period**                                                |       | 1,811                            |       | 271 |   |
| **CASH — End of period**                                                      |       | $                                | 4,636      |   | $ | 5,679 |   |
|                                                                               |       |                             |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF  CASH FLOW INFORMATION:**                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash paid during the period for:                                                   |       |                             |       |   |   |
| Income taxes                                                                       |       | $                                | 3,356      |   | $ | 6,546 |   |
| Interest                                                                           |       | $                                | 809        |   | $ | 501 |   |
| ** **                                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **SUPPLEMENTAL DISCLOSURE OF  NONCASH INVESTING ACTIVITIES:**                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Lease incentive                                                                    |       | $                                | —     |   | $ | 942 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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 **STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of ComprehensiveIncome**

**(unaudited)**

**(in thousands)**

** **
| ** **                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **June 26, 2009**           | ** ** | **June 27, 2008** | ** ** |
| Net income                            |       | $                                | 10,664     |   | $ | 8,317 |   |
|                                  |       |                             |       |   |   |
| Other comprehensive income:           |       |                             |       |   |   |
| Unrealized gain on interest rate swap |       | 132                              |       | 402 |   |
| Translation adjustments               |       | (66                              | )          | 5 |   |
| Total other comprehensive income      |       | 66                               |       | 407 |   |
| Comprehensive income                  |       | $                                | 10,730     |   | $ | 8,724 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**STANLEY, INC. AND SUBSIDIARIESNotes to Condensed Consolidated Financial Statements(unaudited)(in thousands, except share and per share data, or as otherwise noted)**

 

**1.  DESCRIPTION OF BUSINESS**

 

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

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation***—Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles (“GAAP”)in the United States and pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). In the opinion of management, thesestatements reflect all adjustments necessary to fairly present the Company’sfinancial position as of June 26, 2009, and its results of operations andits cash flows for the three months ended June 26, 2009 and June 27,2008. Certain information and note disclosures normally included in the annualfinancial statements have been condensed or omitted. The results of operationsfor the interim periods are not necessarily indicative of the results for thefull year. For further information, refer to the financial statements andfootnotes presented in the Company’s Annual Report on Form 10-K for thefiscal year ended March 31, 2009.

 

***Reporting Periods***—The Company’sfiscal year begins on April 1 and ends on March 31. The Company’sfirst three fiscal quarters end on the 13th Friday after the first day of thequarter and the fourth quarter will end on March 31. Fiscal quarters willtypically be 13 weeks. The first quarter of fiscal year 2010 ended on June 26,2009. The Company does not believe that there is a material impact to thecomparability of the periods presented.

 

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

 

***Revenue Recognition***—The Companyrecognizes revenue under its contracts when a contract has been executed, thecontract price is fixed and determinable, delivery of services or products hasoccurred, and collectibility is considered probable and can be reasonablyestimated. Revenue is earned under cost-plus-fee, fixed-price andtime-and-materials contracts. The Company uses a standard management process todetermine whether all required criteria for revenue recognition have been met,which includes regular reviews of the Company’s contract performance. Thisreview covers, among other matters, progress against a schedule, outstandingaction items, effort and staffing, quality, risks and issues, subcontractmanagement, costs incurred, commitments, and customer satisfaction. During thisreview, the Company determines whether the overall progress on a contract isconsistent with the effort expended.

 

Contractrevenue recognition inherently involves the use of estimates. Examples ofestimates include the contemplated level of effort to accomplish the tasksunder the contract, the cost of the effort, and an ongoing assessment of theCompany’s progress toward completing the contract. From time to time, as partof the Company’s standard management process, facts develop that require theCompany to revise its estimated total costs and revenues. To the extent that arevised estimate affects contract profit or revenue previously recognized, theCompany records the cumulative effect of the revision in the period in whichthe 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.

 

Undercost-plus-feecontracts, revenues are recognized as costs are incurred and include anestimate of applicable fees earned. For level of effort or term cost-plus-feecontracts, fixed fees are earned in proportion to the percentage of requiredeffort delivered. The Company considers fixed fees under cost-plus-feecontracts to be earned in proportion to the allowable costs actually incurredin performance of the contract for level of effort contracts. For completiontype cost-plus-fee contracts, fixed fees are earned in proportion to thepercentage of work completed. For time-and-materials contracts, revenues arecomputed by multiplying the number of direct labor-hours expended inperformance of the contract by the contractual billing rates and adding otherbillable direct and indirect costs. For fixed-price contracts, revenues arerecognized 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”).

 

Forcost-plus-award fee type contracts, the Company recognizes the expected fee tobe awarded by the customer at the time such fee can be reasonably estimated,based on factors such as prior award experience and communications with thecustomer regarding performance, including any interim performance evaluationsrendered by the customer. For cost-plus-incentive fee type contracts, themethod of calculating the incentive fee is specified in the contract and it istypically based on measuring actual costs to 

 

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performthe contract against a target cost to perform the contract. The Companyprepares periodic estimates to complete the contract and adjusts the incentivefee as required based on the contract incentive fee formula.

 

TheCompany’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 internal reviewprocess and management approval prior to commencement of work. Revenueassociated with such work is recognized without profit and only when it can bereliably estimated and realization is probable. The Company bases its estimateson notices to proceed from its customers, previous experiences with thecustomer, communications with the customer regarding funding status, and itsknowledge of available funding for the contract or program. Pre-contract costsrelated to unsuccessful contract bids are expensed in the period in which weare notified that the contract will not be issued.

 

Disputesoccasionally arise in the normal course of the Company’s business due to eventssuch as delays, changes in contract specifications, and questions of costallowability or collectibility. Such matters, whether claims or unapprovedchange orders in the process of being negotiated, are recorded at the lesser oftheir estimated net realizable value or actual costs incurred, and only whenrealization is probable and can be reliably estimated. Claims against us arerecognized where a loss is considered probable and can be reasonably estimatedin amount.

 

Theallowability of certain costs under government contracts is subject to audit bythe government. Certain indirect costs are charged to contracts usingprovisional or estimated indirect rates, which are subject to later revisionbased on government audits of those costs. Management is of the opinion thatcosts subsequently disallowed, if any, would not be significant.

 

***Concentration of Risk***—Contractsfunded by federal government agencies account for substantially all of theCompany’s revenues. For the three months ended June 26, 2009 and June 27,2008, the Company derived approximately 75% and 63% of its revenues,respectively, from the Department of Defense, including agencies within theintelligence community, and approximately 25% and 37% of its revenues,respectively, from federal civilian government agencies. The Company’s contractwith the Department of the Navy for production engineering and integrationservices under various Space and Naval Warfare Systems Command (SPAWAR)programs, which is the largest revenue-generating contract, accounted forapproximately 10% of its revenues for the three months ended June 26,2009.

 

***Property and Equipment***—Property andequipment are carried at cost, less accumulated depreciation. Depreciation ofproperty and equipment is calculated using the straight-line method over theuseful lives. The estimated useful lives of computers, peripherals and softwaretypically range from three to five years. The estimated useful lives offurniture and equipment typically range from five to ten years. Leaseholdimprovements are amortized over the lesser of the useful life or the term ofthe lease. Repairs and maintenance are expensed as incurred. Depreciationexpense related to property and equipment was $1.3 million and$0.9 million for the three months ended June 26, 2009 and June 27,2008, respectively.

 

***Goodwill and Intangible Assets****—*Goodwillrepresents the excess of cost over the fair value of net tangible andidentifiable intangible assets of acquired companies. In accordance with SFAS No. 142,*Goodwill and Other Intangible Assets* (“SFASNo. 142”), the Company does not amortize goodwill; rather it testsgoodwill for impairment at least on an annual basis. Testing for impairment isa two-step process as prescribed by SFAS No. 142. The first step is a testfor potential impairment, while the second step measures the amount ofimpairment, if any. Under the guidelines of SFAS No. 142, the Company isrequired to perform an impairment test at least on an annual basis at any timeduring the fiscal year provided the test is performed at the same time everyyear. An impairment loss would be recognized when the assets’ fair value isbelow their carrying value. Stanley has elected the last day of its third fiscal quarter as its testing date. Based on thetesting performed as of December 26, 2008, the Company determined that noimpairments existed. Intangible assets are amortized over their estimateduseful lives. Customer relationships are amortized on a straight-line basisover periods ranging from five to seven years. Non-competition agreements areamortized on a straight-line basis over three years. Backlog and contracts areamortized on a straight-line basis over periods ranging from two to five years.

 

***Impairment of Long-Lived Assets***—Wheneverevents or changes in circumstances indicate that the carrying amount oflong-lived assets may not be fully recoverable, Stanley evaluates theprobability that future undiscounted net cash flows, without interest charges,will be less than the carrying amount of the assets. If any impairment wereindicated as a result of this review, Stanley would recognize a loss based onthe amount by which the carrying amount exceeds the estimated fair value.Management believes that no impairments existed as of June 26, 2009.

 

***Earnings per share***—Basic earningsper share has been computed by dividing net income available to commonstockholders by the weighted-average number of shares of common stockoutstanding during each period. Restricted shares of common stock that vestbased on the satisfaction of certain conditions are treated as contingentlyissuable shares until the conditions are satisfied. These shares are includedin the computation of basic earnings per share only after the shares vest.Shares issued during the period and shares reacquired during the period areweighted for the portion of the period that they were outstanding. Dilutedearnings per share consider the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto 

 

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commonstock. Shares that are anti-dilutive are not included in the computation ofdiluted earnings per share. Stock options that were not included in thecomputation of diluted earnings per share calculation, because to do so wouldhave been anti-dilutive totaled 885,663 and 414,785 for the three months ended June 26,2009 and June 27, 2008, respectively. The weighted-average number ofcommon shares outstanding is computed as follows:

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **June 26, 2009**           | ** ** | **June 27, 2008** | ** ** |
| ** **                                                    | ** ** | **(in  thousands)**              | ** ** |
| Basic weighted-average common shares outstanding              |       | 23,172                           |       | 22,676 |   |
| Effect of stock options and unvested restricted  stock grants |       | 672                              |       | 973 |   |
| Diluted weighted-average common shares outstanding            |       | 23,844                           |       | 23,649 |   |

 

***Derivative Instruments and HedgingActivities***— In accordance with SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities* (“SFAS No. 133”), as amended by SFAS No. 138,*Accounting for Certain Derivative Instruments andCertain Hedging Activities, 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 unaudited condensedconsolidated balance sheet at June 26, 2009. For qualifying cash flowhedges, SFAS No. 133, as amended, states that the effective portion ofderivative gains and losses be recorded as a component of other comprehensiveincome and be reclassified into earnings in the same period in which the hedgedtransaction affects such earnings. Any ineffectiveness is reported currently inearnings.

 

Stanleyentered 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 anotional amount of $19.0 million. The Company designated this swapagreement, at its inception, as a qualifying cash flow hedge. The fair value ofthe swap at June 26, 2009 of $1.5 million has been reported in “Accruedexpenses and other liabilities” with an offset, net of tax, included in “Accumulatedother comprehensive loss” in the accompanying unaudited condensed consolidatedbalance sheets. None of the $1.5 million unrealized loss was recognized inearnings during the three months ended June 26, 2009 based on hedgeineffectiveness and none of the swap’s unrealized loss was excluded from theassessment of hedge effectiveness. Amounts in accumulated other comprehensiveloss will be reclassified into earnings in the period in which variableinterest payments (the hedged transaction) are made under the Senior CreditFacility (defined in Note 6). Amounts paid or received on the swap are recordedas interest expense in the period incurred.

 

***Segment Reporting***—Operatingsegments are defined as components of an enterprise for which separatefinancial information is available and evaluated regularly by the chiefoperating decision maker, or decision making group, in deciding how to allocateresources and assess performance. The Company currently has one reportablesegment for financial reporting purposes, which represents the Company’s corebusiness of providing information technology solutions and services for federalgovernment customers. The Company does not report revenue by product or serviceor groups of products or services because it is impracticable to do so.

 

***Use of Estimates***—Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.Significant items subject to such estimates and assumptions include revenuerecognition, carrying amount and useful lives of long-lived assets, valuationallowances for accounts receivable and deferred tax assets, softwaredevelopment costs and loss contingencies such as litigation, claims andassessments.

 

***Reclassifications***—Certainreclassifications have been made to prior period balances to conform to thecurrent presentation.

 

***Fair Value of Financial Instruments***—The fair valueof accounts receivable, accounts payable, accrued expenses, debt, and the swapcontract approximates their respective carrying amounts.

 

SFAS 157 established athree level fair value hierarchy to classify the inputs used in measuring fairvalue as follows:

 

Level 1: Quoted pricesfor identical instruments in active markets.

 

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

 

Level 3: Significantinputs to the valuation model are unobservable.

 

As of June 26, 2009,the financial liability measured at fair value consisted of an interest rateswap agreement. The value is based on model-driven valuations whose inputs areobservable. The following table summarizes the financial liability measured atfair value on a recurring basis as of June 26, 2009 and the level it fallswithin the fair value hierarchy:

 

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| ** **         | ** ** | **Fair Value Measurement Using:**                                    | ** ** | ** **                                         | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable Inputs** | ** ** | **Significant  Unobservable   Inputs** | ** ** | **Total** | ** ** |
| ** **         | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)**                                 | ** ** | **(Level 3)** | ** ** | **June 26, 2009** | ** ** |
| Liabilities:       |       |                                                                                |       |                                               |       |   |   |   |   |
| Interest rate swap |       | $                                                                                   | —     |                                               | $          | 1,487 |   | $ | — |   | $ | 1,487 |   |
|                    |            |                                                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 

***Recent Accounting Pronouncements***—In May 2009, the FASB issuedStatement of Financial Accounting Standards No. 165, *SubsequentEvents* (“SFAS 165”). SFAS 165 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or available to be issued. SFAS 165requires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date. SFAS 165 is effective for theinterim and annual periods ended after June 15, 2009, and, accordingly,the Company has adopted this statement during its first fiscal quarter ended June 26,2009. SFAS 165 requires that public entities evaluate subsequent events throughthe date that the financial statements are issued. The Company has evaluatedsubsequent events through the time of filing these financial statements withthe SEC on August 4, 2009.

 

In June 2009, theFASB issued Statement of Financial Accounting Standards No. 168, *The FASB Accounting Standards Codification* (“Codification”) *and the Hierarchy of Generally Accepted Accounting Principles*(“GAAP”),*a replacement of FASB Statement No. 162*(“SFAS 168”). SFAS 168 establishes the Codification as the single sourceof authoritative GAAP in the United States, other than rules andinterpretive releases issued by the SEC. The Codification is a reorganizationof current GAAP into a topical format that eliminates the current GAAPhierarchy and establishes instead two levels of guidance — authoritative andnonauthoritative. All non-grandfathered, non-SEC accounting literature that isnot included in the Codification will become nonauthoritative. The FASB’sprimary goal in developing the Codification is to simplify user access to allauthoritative GAAP by providing all the authoritative literature related to aparticular accounting topic in one place. The Codification will be effectivefor interim and annual periods ending after September 15, 2009. As theCodification is not intended to change or alter existing GAAP, it is notanticipated to impact the Company’s condensed consolidated financial position,results of operations or cash flows.

 

**3****. ****ACCOUNTS RECEIVABLE**

 

Accountsreceivable consists of the following:

 
| ** **                                      | ** ** | **As of**         | ** ** | **As of**          | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **June 26, 2009** | ** ** | **March 31, 2009** | ** ** |
| Billed receivables                              |       | $                      | 117,665    |                    | $          | 122,322 |   |
| Unbilled receivables:                           |       |                   |       |                    |       |
| Amounts billable                                |       | 72,244                 |       | 57,912                  |       |
| Revenues recorded in excess of contract funding |       | 6,996                  |       | 8,132                   |       |
| Retainage and contract fee withholding          |       | 490                    |       | 451                     |       |
| Allowance for doubtful accounts                 |       | (1,263                 | )          | (1,137                  | )          |
| Total                                           |       | $                      | 196,132    |                    | $          | 187,680 |   |

 

Amountsbillable consist primarily of amounts to be billed within a month. Revenuesrecorded in excess of contract funding are billable upon receipt of contractualamendments or modifications adding additional funding. The retainage and feewithholding is billable upon completion of the contract performance andapproval of final indirect expense rates by the government. Consistent withindustry practice, certain receivables related to long-term contracts areclassified as current, although a portion of these amounts is not expected tobe billed and collected within one year. Unbilled accounts receivable at June 26,2009 are expected to be billed and collected within one year except forapproximately $0.5 million.

 

**4.  PROPERTY AND EQUIPMENT**

 

Propertyand equipment consists of the following:

 
| ** **                                                                               | ** ** | **As of**         | ** ** | **As of**          | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                               | ** ** | **June 26, 2009** | ** ** | **March 31, 2009** | ** ** |
| Computers and peripherals                                                                |       | $                      | 6,108      |                    | $          | 5,684 |   |
| Software                                                                                 |       | 4,373                  |       | 4,265                   |       |
| Furniture and equipment                                                                  |       | 6,076                  |       | 5,669                   |       |
| Leasehold improvements                                                                   |       | 14,905                 |       | 14,323                  |       |
|                                                                                     |       | 31,462                 |       | 29,941                  |       |
|                                                                                     |       |                   |       |                    |       |
| Less: Accumulated depreciation and amortization                                          |       | (11,660                | )          | (10,389                 | )          |
| Property and equipment — net                                                        |       | $                      | 19,802     |                    | $          | 19,552 |   |
| Property and equipment included above that are  under capital lease obligations include: |       |                   |       |                    |       |
| Software                                                                                 |       | $                      | 947        |                    | $          | 947 |   |
| Furniture and equipment                                                                  |       | 170                    |       | 161                     |       |
| Less: Accumulated depreciation                                                           |       | (840                   | )          | (766                    | )          |
| Total                                                                                    |       | $                      | 277        |                    | $          | 342 |   |

 

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**5.  ACCRUED EXPENSES AND OTHER LIABILITIES**

 

Accruedexpenses and other liabilities consist of the following:

 
| ** **                    | ** ** | **As of**         | ** ** | **As of**          | ** ** |
|-------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **June 26, 2009** | ** ** | **March 31, 2009** | ** ** |
| Accrued payroll-related costs |       | $                      | 26,056     |                    | $          | 28,089 |   |
| Accrued contract costs        |       | 38,136                 |       | 34,848                  |       |
| Accrued indirect costs        |       | 8,429                  |       | 7,405                   |       |
| Other payables                |       | 9,463                  |       | 9,499                   |       |
| Total accrued expenses        |       | $                      | 82,084     |                    | $          | 79,841 |   |

 

**6.  DEBT**

 

TheCompany is party to credit agreement (“Senior Credit Facility” or “AmendedCredit Agreement”) with a group of lenders for which SunTrust Robinson Humphrey, Inc.acted as sole book manager and lead arranger, SunTrust Bank acted asadministrative agent and M&T Bank and BB&T Bank acted asco-documentation agents.

 

AtJune 26, 2009, the lenders’ aggregate commitment under the Senior CreditFacility was $277.1 million, which consisted of a $241.6 million revolving lineof credit (“Revolver”) and a $35.5 million term loan (“Term Loan”), and theCompany had outstanding indebtedness of $35.5 million on the Term Loan and$129.0 million on the Revolver, with a weighted-average interest rate ofapproximately 1.87% and 3.81% for the three months ended June 26, 2009 andJune 27, 2008, respectively.  At June 26,2009, the Company’s borrowing availability under the Senior Credit Facility was$112.5 million, including outstanding letters of credit.

 

Underthe terms of the Amended Credit Agreement, the Company may request an increasein the size of the Revolver by an aggregate amount not greater than $33.4million. If any lender elects not to increase its commitment, the Company maydesignate another bank or other financial institution to become a party to theAmended Credit Agreement.

 

TheAmended Credit Agreement also contains a number of affirmative and restrictivecovenants, including limitations on mergers, consolidations and dissolutions;sales of assets; investments and acquisitions; indebtedness and liens;repurchases of shares of capital stock and options to purchase shares ofcapital stock; transactions with affiliates; sale and leaseback transactions;and restricted payments.

 

Inaddition, the Amended Credit Agreement requires the Company to meet thefollowing financial covenants:

 

·                  a fixed chargecoverage ratio as of the end of any fiscal quarter of not less than 1.35 to1.00, based upon the ratio of (i) consolidated EBITDA (as defined in theAmended Credit Agreement) less the actual amount paid by the Company and itssubsidiaries in cash on account of capital expenditures and taxes to (ii) consolidatedinterest expense for such period, scheduled principal payments required to bemade on consolidated total debt during such period and certain restrictedpayments paid during such period, in each case measured for the fourconsecutive fiscal quarters ending on or immediately prior to such date; and

 

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

 

AtJune 26, 2009, the Company was in compliance with all covenants under itsSenior Credit Facility. The obligations under the Senior Credit Facility areunconditionally guaranteed by each of Stanley’s existing and subsequentlyacquired or organized subsidiaries and are secured on a first-priority basis bysecurity interests (subject to permitted liens) in substantially all assetsowned by the Company and each of its subsidiaries, including the shares ofcapital stock of its subsidiaries, subject to certain exceptions.

 

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**7.  ACQUISITIONS**

 

***Oberon Associates, Inc.***

 

OnJuly 15, 2008, Stanley acquired Oberon Associates, Inc. (“Oberon”),an engineering, intelligence operations and information technology servicescompany for approximately $167.8 million at closing, net of cash acquired,plus an additional $3.0 million in post closing net working capital andother purchase price adjustments. Stanley financed the acquisition with borrowingsunder its Senior Credit Facility.

 

Oberonprovides engineering, operational intelligence and information technologysupport to multiple elements of the U.S. Army, in addition to the U.S. AirForce, Defense Information Systems Agency, Transportation Security Administrationand several agencies throughout the intelligence community. Oberon’s areas ofexpertise include biometrics systems engineering, integration and operationaldeployment; intelligence community support; communications engineering; andinformation technology and enterprise data management. The acquisition ofOberon expands the range of solutions offered to the Company’s customers,bringing to Stanley biometric applications experts, functional experts withinthe intelligence community, and expertise in communications and informationmanagement systems.

 

Inaccordance with SFAS No. 141,*BusinessCombinations* (“SFAS No. 141”), the acquisition was accountedfor under the purchase method of accounting. Accordingly, the results of Oberonhave been included in the accompanying condensed consolidated financialstatements since the date of acquisition. The purchase price has been allocatedto the assets acquired and liabilities assumed based upon their estimated fairvalues. Of the purchase consideration, $149.1 million has been allocatedto goodwill, based upon the excess of the purchase price over the$8.6 million estimated fair value of net tangible assets and$13.1 million has been assigned to other identifiable intangible assets.The Company is continuing to evaluate the fair value of the assets andliabilities of Oberon and will complete the purchase accounting entriesrelating to the acquisition prior to the end of the Company’s fiscal 2010second quarter. None of the amount allocated to goodwill is expected to bedeductible for tax purposes. Included in identifiable intangibles arising fromthe Oberon acquisition are $10.5 million, $1.9 million and$0.7 million related to customer contracts and relationships, orderbacklog and non-compete agreements, respectively. The amortization period forcustomer contracts and relationships, order backlog and non-compete agreementsis five years, two years and three years, respectively. No residual value hasbeen assumed at the end of their useful lives.

 

**8****. ****STOCKHOLDERS’ EQUITY**

 

***Common Stock***

 

Stanleyhas one class of common stock, with each share of common stock having one voteper share. Holders of common stock share in dividends declared, if any, by theboard of directors.

 

Stanleyrepurchased 3,254 shares of stock from its employees for $0.1 millionduring the three months ended June 26, 2009. The repurchases were made tosatisfy certain employees’ tax obligations upon the vesting of restrictedstock. The shares were recorded at market price using the cost method ofaccounting.

 

***Equity Compensation***

 

Underthe 2006 Omnibus Incentive Compensation Plan (the “Omnibus Plan”), Stanley isauthorized to provide awards for a maximum of 4,000,000 shares of common stockto directors, officers, employees or consultants. The Omnibus Plan allows forcash 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.

 

OnMay 6, 2009, the board of directors of the Company adopted the Amended andRestated 2006 Omnibus Incentive Compensation Plan (the “Amended and RestatedPlan”), subject to approval from its stockholders at the 2009 Annual Meeting ofStockholders to be held on August 7, 2009. The Amended and Restated Planis the successor to and continuation of the Omnibus Plan. If approved, theAmended and Restated Plan will, among other things, (i) increase thenumber of shares reserved for issuance under the plan by 500,000 shares, from4,000,000 shares to 4,500,000 shares, (ii) raise the sub-limit for themaximum number of shares that may be delivered pursuant to incentive stockoptions under the plan from 2,300,000 shares to 4,500,000 shares and (iii) eliminatethe sub-limit for the maximum number of shares that may be delivered asrestricted stock awards under the plan.

 

Priorto July 2006, under the Executive Deferred Compensation and EquityIncentive Plan (the “Executive Plan”), Stanley was authorized to provide awardsfor 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 varied. Holders of restricted stock awards have voting rightswith respect to the awards. The trustee of restricted stock trust awards hasvoting rights with respect to the trust awards. The option awards granted underthe Executive Plan have exercise prices that range from 85% to 110% of the fairmarket value of the common stock on the date the option was granted. No furthergrants under the Executive Plan will be made.

 

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EffectiveApril 1, 2006, the Company adopted the provisions of SFAS No. 123(R) usingthe prospective-transition method. Under that transition method, compensationcost recognized in the three months ended June 26, 2009 includescompensation cost for all share-based payments granted on or after April 1,2006, based on the grant-date fair value estimated in accordance with theprovisions 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) usingthe accounting principles originally applied to those awards.

 

TheCompany has presented all tax benefits resulting from stock-based compensationawarded prior to the adoption of SFAS No. 123(R) as operating cashflows in the accompanying unaudited condensed consolidated statements of cashflows. The tax benefits associated with share-based compensation in effectprior to the adoption of SFAS No. 123(R) were $0.1 million and $1.9million for the three months ended June 26, 2009 and June 27, 2008,respectively. For share-based payment transactions awarded subsequent to theadoption of SFAS No. 123(R), the tax benefits in excess of thecompensation cost recognized are classified as financing cash flows. The excesstax benefits associated with share-based payment transactions accounted forafter the adoption of SFAS No. 123(R) were $0.3 million and $0.4million for the three months ended June 26, 2009 and June 27, 2008,respectively, and are disclosed within financing activities in the accompanyingCondensed Consolidated Statements of Cash Flows.

 

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes-Merton closed-form option-pricing model that uses the assumptionsnoted in the following table. Expected volatility for the three months ended June 26,2009 was based on historical volatility of the Company’s stock price. Expectedvolatility for the three months ended June 27, 2008 was based on aweighted-average of the historical volatilities of similar public entities. Theexpected term of options granted is derived using the simplified method andrepresents the period of time that options granted are expected to beoutstanding. Options granted meet the criteria of “plain vanilla” for purposesof applying the simplified method. This method was used as the Company did nothave sufficient historical exercise data to provide a reasonable basis uponwhich to estimate expected term due to the limited period of time the shareshave been publicly traded. The risk-free rate for periods within the contractuallife of the option is based on the U.S. Treasury yield curve in effect at thetime of grant. The Company has not issued dividends in the past nor does itcurrently intend to issue dividends in the near future.

 

Asummary of the weighted average assumptions is presented below.

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **June 26, 2009**           | ** ** | **June 27, 2008** | ** ** |
| Expected volatility      |       | 38.8                             | %          | 32.3 | % |
| Expected dividends       |       | 0.0                              | %          | 0.0 | % |
| Expected term (in years) |       | 3.5                              |       | 3.5 |   |
| Risk-free rate           |       | 1.6                              | %          | 2.6 | % |

 

Duringthe three months ended June 26, 2009, the Company granted 455,226 stockoption awards at a weighted-average exercise price of $25.22, which reflectsthe fair value of the shares on the date of grant. These options vest ratablyover three years and have a contractual term of five years. The options have aweighted-average fair value of $7.66 per share. The weighted-average fair valueof stock option awards granted during the three months ended June 26, 2009and June 27, 2008, as determined by the Black-Scholes-Merton closed-formoption-pricing model, was $7.66 and $6.86, respectively. The stock optionawards that vested during the three months ended June 26, 2009 and June 27,2008 had a combined fair value of $1.8 million and $1.2 million, respectively.

 

Asummary of option activity for the year ended March 31, 2009, and thethree months ended June 26, 2009 is presented below.

 
| **Options**                       | ** ** | **Number of   Underlying Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Aggregate Intrinsic  Value (in thousands)** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|
| Outstanding at April 1, 2008 |       | 1,609,475                                        |       | $                                         | 9.15       |                                                         |       |   |
| Granted                           |       | 445,210                                          |       | $                                         | 26.43      |                                                         |       |   |
| Exercised                         |       | (338,834                                         | )          | $                                         | 5.17       |                                                         | $          | 7,762 |   |
| Forfeited                         |       | (111,452                                         | )          | $                                         | 14.90      |                                                         |       |   |
| Outstanding at April 1, 2009 |       | 1,604,399                                        |       | $                                         | 14.38      |                                                         |       |   |
| Granted                           |       | 455,226                                          |       | $                                         | 25.22      |                                                         |       |   |
| Exercised                         |       | (95,519                                          | )          | $                                         | 8.99       |                                                         | $          | 1,798 |   |
| Forfeited                         |       | (42,416                                          | )          | $                                         | 14.41      |                                                         |       |   |
| Outstanding at June 26, 2009 |       | 1,921,690                                        |       | $                                         | 17.22      |                                                         | $          | 29,081 |   |

 

Asummary of nonvested stock option activity for the three months ended June 26,2009 is presented below.

 

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| **Nonvested Options**        | ** ** | **Number of  Underlying Shares** | ** ** | **Weighted-Average  Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| Outstanding at April 1, 2009 |       | 1,051,141                                  |       | $                                     | 5.46       |   |
| Granted                           |       | 455,226                                    |       | $                                     | 7.66       |   |
| Vested                            |       | (364,674                                   | )          | $                                     | 5.05       |   |
| Forfeited                         |       | (42,416                                    | )          | $                                     | 4.84       |   |
| Outstanding at June 26, 2009 |       | 1,099,277                                  |       | $                                     | 6.53       |   |

 

Asummary of vested stock options at June 26, 2009, and stock optionsexpected to vest in future periods is presented below.

 
| **Options**                      | ** ** | **Number of   Underlying   Shares** | ** ** | **Weighted-   Average   Exercise   Price** | ** ** | **Weighted-Average  Remaining  Contractual Term  (years)** | ** ** | **Aggregate   Intrinsic   Value (in   thousands)** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Exercisable                      |       | 822,413                                            |       | $                                                         | 11.44      |                                                            | 4.2        |                                                                   | $          | 17,201 |   |
| Expected to vest                 |       | 1,016,831                                          |       | $                                                         | 21.54      |                                                            | 4.5        |                                                                   | $          | 10,989 |   |
| Exercisable and expected to vest |       | 1,839,244                                          |       |                                                      |       |                                                            |       |                                                                   |       |

 

Duringthe three months ended June 26, 2009, the Company granted 44,678restricted stock awards at a weighted-average fair value of $25.22 per sharethat vest ratably over a period of three years. The weighted-average fair valueof restricted stock awards granted during the three months ended June 26,2009 and June 27, 2008 was $25.22 and $25.12, respectively. The restrictedstock awards that vested during the three months ended June 26, 2009 and June 27,2008 had a combined fair value of $0.9 million and $0.7 million, respectively.

 

Asummary of restricted stock activity for the three months ended June 26,2009 is presented below.

 
| **Restricted Stock**         | ** ** | **Number of Shares** | ** ** | **Weighted-Average  Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|
| Outstanding at April 1, 2009 |       | 676,437                        |       | $                                     | 24.25      |   |
| Granted                           |       | 44,678                         |       | $                                     | 25.22      |   |
| Vested                            |       | (50,137                        | )          | $                                     | 17.59      |   |
| Forfeited                         |       | (54,157                        | )          | $                                     | 24.72      |   |
| Outstanding at June 26, 2009 |       | 616,821                        |       | $                                     | 24.82      |   |

 

Duringthe three months ended June 26, 2009 and June 27, 2008, the Companyrecognized $1.8 million and $1.1 million of share-based compensation costs,respectively. As of June 26, 2009, there was $17.5 million of total unrecognizedcompensation cost related to nonvested share-based compensation arrangementsgranted under the Omnibus Plan. That cost is expected to be recognized over aweighted-average period of 2.5 years.

 

Priorto the adoption of SFAS No. 123(R), the fair market value of each issuanceand grant was determined by the Company on a contemporaneous basis. The Companyrecorded stock-based deferred compensation in aggregate 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 three months ended June 26,2009. The remaining deferred compensation of $0.5 million will be amortizedover the final two years of the vesting period of the awards.

 

**9.  COMMITMENTS AND CONTINGENCIES**

 

***Contract Cost Audits***— Substantiallyall payments to Stanley under cost-reimbursable contracts and subcontracts withthe U.S. Government are provisional payments, which are subject to potentialadjustments upon audit by the Defense Contract Audit Agency (“DCAA”). Auditsthrough December 31, 2005 have been completed. In the opinion ofmanagement, adjustments resulting from the audits of all subsequent years arenot expected to have a material effect on the Company’s financial position,results of operations, or cash flows.

 

***Litigation***— The Companyis involved in legal actions in the normal course of business. These actions,when finally concluded and determined, will not, in the opinion of management,have a material effect on the Company’s financial position, results ofoperations or cash flows.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*You should read the following discussion inconjunction with the unaudited and audited consolidated financial statementsand the accompanying notes included in this Form 10-Q and our Annual Report on Form10-K for the fiscal year ended March 31, 2009,**filedby us with the Securities and Exchange Commission on May 21, 2009**.This discussion contains forward-looking statements that involve risks anduncertainties. Our actual results may differ materially from those discussed inor implied by any of the forward-looking statements as a result of variousfactors, including but not limited to, those listed in**the “RiskFactors” section of this Report, as well as in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2009.**Wecaution readers not to place undue reliance on any such forward-lookingstatements, which speak only as of the date made.**We areunder no duty to update any of the forward-looking statements after the date ofthis Quarterly Report on Form 10-Q to conform these statements to actualresults, except as required by law.*

 

**Overview**

 

Weprovide information technology services and solutions to U.S. defense,intelligence and federal civilian government agencies. We offer our customerssolutions and expertise to support their mission-essential needs at any stageof program, product development or business lifecycle through five serviceareas: systems engineering, enterprise integration, operational logistics,business process outsourcing and advanced engineering and technology. As asystems integrator, we apply these five service areas to enable our customersto achieve interoperability between different business processes andinformation technology systems.

 

Contractsfunded by federal government agencies account for substantially all of ourrevenues. As of June 26, 2009, we had approximately 300 active contractualengagements across more than 50 federal government agencies. Our customersinclude all major agencies of the Department of Defense, the Department ofState, the Department of Homeland Security, the Department of Transportation,the Department of the Treasury, NASA, the Department of Justice and theDepartment of Health and Human Services.

 

**Key Metrics Evaluated By Management**

 

Wemanage and assess the performance of our business by evaluating a variety offinancial and non-financial metrics derived from and in addition to our UnitedStates generally accepted accounting principles, or GAAP, results. The mostsignificant of these metrics are discussed below.

 

***Revenue Growth***

 

Weclosely monitor revenue growth in order to assess the performance of our business.In monitoring this growth, we focus on both internal revenue growth and revenuegrowth through acquisitions. Our internal revenue growth is driven primarily bytwo factors. First, internal revenue growth is driven by adding new customers.For example, over the past several years we have added the Department ofHomeland Security’s Citizenship and Immigration Services, the Department of theTreasury’s Office of the Comptroller of the Currency, the National GuardBureau, the Department of Transportation and agencies in the intelligencecommunity as new customers. Second, internal revenue growth is driven by increasing revenues withexisting customers by adding new contracts or expanding existing contracts. For example,since the initial award of our contract with the Department of State for theprovision of passport processing and support services, the scope of servicesprovided by us, and the revenues generated by those services, have grownsignificantly.

 

Ourrevenue growth strategy also includes the pursuit of strategic acquisitions. Wehave completed the following six acquisitions since 2000:

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

 

Forfurther information on our recent acquisition of Oberon Associates, Inc. (“Oberon”),please see Note 7 to the Condensed Consolidated Financial Statements, includedelsewhere in this report.

 

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***Backlog***

 

Wemonitor backlog, which provides us with visibility of our future revenues, as ameasure of the strength of our target markets and our ability to retainexisting contracts and win new contracts. The following table summarizes ourbacklog as of the dates indicated:

 
| ** **    | ** ** | **As of**         | ** ** |
|---------------|------------|-------------------|------------|
| ** **    | ** ** | **June 26, 2009** | ** ** | **June 27, 2008** | ** ** |
| ** **    | ** ** | **(in millions)** | ** ** |
| Backlog:      |       |              |       |   |   |
| Funded        |       | $                 | 351.4      |   | $ | 308.5 |   |
| Unfunded      |       | 1,672.2           |       | 1,687.9 |   |
| Total Backlog |       | $                 | 2,023.6    |   | $ | 1,996.4 |   |

 

Eachyear, a significant portion of our revenues is derived from our backlog, and asignificant portion of our backlog represents work related to the continuationof services and solutions under contracts or projects where we are theincumbent provider.

 

Wedefine backlog as the amount of revenues we expect to realize (i) over theremaining base contract performance period and (ii) from the exercise by thecustomer of option periods that we reasonably believe will be exercised, ineach case from signed contracts in existence as of the measurement date. We donot include contract ceiling values, which represent the maximum amount ofcontract awards that could be awarded to all contractors under government-wideacquisition contracts or agency-specific indefinite delivery/indefinitequantity contracts in our backlog calculation.

 

Wealso do not include in backlog (i) the expected amount of revenues that wouldbe realized if, and when, we were successful in the re-compete of signedcontracts in existence as of the measurement date, or (ii) the expected amountof revenues that would be realized from future unidentified growth on signedcontracts and task orders in existence as of the measurement date.

 

Wedefine funded backlog as the portion of our backlog for which funding currentlyis appropriated and obligated to us under a signed contract or task order bythe purchasing agency, or otherwise authorized for payment to us by a customerupon completion of a specified portion of work, less the amount of revenue wehave previously recognized under the contract. Our funded backlog does notinclude the full potential value of our contracts because Congress oftenappropriates funds to be used by an agency for a particular program or contracton a yearly or quarterly basis, even though the contract may call forperformance over a number of years. As a result, contracts typically are onlypartially funded at any point during their term, and all or some of the work tobe performed under the contracts may remain unfunded unless and until Congressmakes subsequent appropriations and the procuring agency allocates funding tothe contract.

 

***Contract Mix***

 

Wework with the federal government under contracts employing one of three typesof price structures: cost-plus-fee, time-and-materials and fixed-price.Cost-plus-fee contracts are typically lower risk arrangements and thus yieldlower profit margins than time-and-materials and fixed-price arrangements.Because the customer usually specifies the type of contract for a particularcontractual engagement, we generally do not influence the choice of contracttype. However, where we do have the opportunity to influence the contract type,and where customer requirements are clear, we prefer time-and-materials andfixed-price arrangements rather than cost-plus-fee arrangements becausetime-and-materials and fixed-price contracts, as compared with cost-plus-feecontracts, generally provides us with a greater opportunity to generate highermargins and provides the customer with a fixed value for services provided.

 

Oursuccessful recompete win in March 2008 of the contract with the Department ofState to support passport production and services and our acquisition of Oberonin July 2008 have resulted in an increase to our percentage oftime-and-materials contracts and a corresponding reduction in the percentage ofcost-plus-fee contracts. The following table summarizes our historical contractmix, measured as a percentage of total revenues, for the periods indicated:

 
| ** **         | ** ** | **Three Months Ended** | ** ** |
|--------------------|------------|------------------------|------------|
| ** **         | ** ** | **June 26, 2009**      | ** ** | **June 27, 2008** | ** ** |
| Cost-plus-fee      |       | 29                     | %          | 33 | % |
| Time-and-materials |       | 50                     | %          | 47 | % |
| Fixed-price        |       | 21                     | %          | 20 | % |

 

***Headcount and Labor Utilization***

 

Wegenerate revenues primarily from services provided by our employees andsubcontractors, with services provided by our employees generally yieldinghigher profits than services provided by our subcontractors. Our ability to hireand deploy additional qualified employees is a key driver of our ability togenerate additional revenues, and our successful deployment of existingemployees on direct-billable jobs is a key driver of our profitability.

 

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***Indirect Costs***

 

Indirectcosts constitute a substantial portion of the costs associated with ourperformance of contracts. We carefully monitor the amount by which our actualindirect costs under our contracts vary from those expected to be incurred,which we refer to as indirect expense variance. Increased indirect rates canadversely affect our ability to achieve attractive contract pricing, ourprofitability, and our competitive position, by resulting in unexpectedincreased costs to our customers.

 

***Days Sales Outstanding***

 

Dayssales outstanding, or DSO, is a measure of how efficiently we manage thebilling and collection of our accounts receivable, our most significant workingcapital requirement. For the three months ended June 26, 2009, we reported DSOof 84 days, an increase from 81 days for the year ended March 31, 2009. Theincrease in DSO was primarily the result of higher average receivables balancedue to the delay of collections on several contracts.

 

***Unbilled Receivables***

 

Unbilledreceivables are comprised of work-in-process that will be billed in accordancewith contract terms and delivery schedules, as well as amounts billable upon finalexecution of 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.

 

Paymentsto us for performance on certain of our federal government contracts aresubject to audit by the DCAA and are also subject to government funding. Weprovide a reserve against our receivables for estimated losses that may resultfrom rate negotiations, audit adjustments and/or government fundingavailability. To the extent that actual adjustments due to rate negotiations,audit adjustments or government funding availability differ from our estimates,our revenue may be impacted. Because substantially all of our receivables comefrom contracts funded by the federal government, we believe that the likelihoodof a material loss on an uncollectible account from this activity is low.

 

**Critical Accounting Policies**

 

Thediscussion and analysis of our financial condition and results of operations isbased on our condensed consolidated financial statements, which have beenprepared in accordance with GAAP. The preparation of our condensed consolidatedfinancial statements requires management to make estimates and assumptions thataffect reported amounts, and actual results may differ from the estimates. Oursignificant accounting policies are described in Note 2 to our unauditedcondensed consolidated financial statements included elsewhere in this report.

 

Weconsider the following accounting policies to be critical to the understandingof our financial condition and results of operations because these policiesrequire the 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***

 

Werecognize revenue under our contracts when a contract has been executed, thecontract price is fixed and determinable, delivery of services or products hasoccurred and collectibility is considered probable and can be reasonablyestimated. Revenue is earned under cost-plus-fee, fixed-price andtime-and-materials contracts. We use a standard management process to determinewhether all required criteria for revenue recognition have been met, whichincludes regular reviews of our contract performance. This review covers, amongother matters, progress against a schedule, outstanding action items, effortand staffing, quality, risks and issues, subcontract management, costsincurred, commitments and customer satisfaction. During this review, wedetermine whether the overall progress on a contract is consistent with theeffort expended.

 

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

 

Under cost-plus-feecontracts, revenues are recognized as costs are incurred and include anestimate of applicable fees earned. For level of effort or term cost-plus-feecontracts, fixed fees are earned in proportion to the percentage of requiredeffort delivered. We consider fixed fees under cost-plus-fee contracts to beearned in proportion to the allowable costs actually incurred in performance ofthe contract for level of effort contracts. For completion type cost-plus-feecontracts, fixed fees are earned in proportion to the percentage of workcompleted. For time-and-materials contracts, revenues are computed bymultiplying the number of direct labor-

 

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hours expended inperformance of the contract by the contractual billing rates and adding otherbillable direct and indirect costs. For fixed-price contracts, revenues arerecognized as services are performed, using the percentage-of-completionmethod, applying the cost-to-cost or units of delivery method, in accordancewith ARB 45 and SOP 81-1.

 

Forcost-plus-award fee type contracts, we recognize the expected fee to be awardedby the customer at the time such fee can be reasonably estimated, based onfactors such as prior award experience and communication with the customerregarding performance, including any interim performance evaluations renderedby the customer. For cost-plus-incentive fee type contracts, the method ofcalculating the incentive fee is specified in the contract and it is typicallybased on measuring actual costs to perform the contract against a target costto perform the contract. We prepare periodic estimates to complete the contractand adjust the incentive fee as required based on the contract incentive feeformula.

 

Ourcontracts with agencies of the government are subject to periodic funding bythe respective contracting agency. Funding for a contract may be provided infull at inception of the contract or ratably throughout the contract as theservices are provided. From time to time, we may proceed with work based oncustomer direction prior to the completion and signing of formal contractdocuments. Such situations require completion of a formal internal reviewprocess and management approval prior to commencement of work. Additionally,revenue associated with such work is recognized without profit and only when itcan be reliably estimated and realization is probable. We base our estimates onnotices to proceed from our customers, previous experience with customers,communications with customers regarding funding status, and our knowledge ofavailable funding for the contract or program. Pre-contract costs related tounsuccessful contract bids are expensed in the period in which we are notifiedthat the contract will not be issued.

 

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

 

Theallowability of certain costs under government contracts is subject to audit bythe government. Certain indirect costs are charged to contracts usingprovisional or estimated indirect rates, which are subject to later revisionbased on government audits of those costs. Management is of the opinion thatcosts subsequently disallowed, if any, would not be significant.

 

***Contract Cost Accounting***

 

Asa contractor providing services primarily to the federal government, we mustcategorize our costs as either direct or indirect and allowable or unallowable.Direct costs are those costs that are identified with specific contracts. Thesecosts include labor, travel, subcontractor and consultant services, third partymaterials we purchase under a contract and other non-labor costs incurred insupport of a contract. Indirect costs are those costs not identified withspecific contracts. Rather, indirect costs are allocated to contracts inaccordance with federal government rules and regulations. These costs typicallyinclude certain of our selling, general and administrative expenses, fringebenefit expenses, overhead expenses and depreciation and amortization costs.Direct and indirect costs that are not allowable under the Federal AcquisitionRegulation or specific contract provisions cannot be considered forreimbursement under our federal government contracts. We must specificallyidentify these costs to ensure we comply with these requirements. Ourunallowable costs include a portion of our executive compensation, certainemployee morale activities, certain types of legal and consulting costs,interest expense and the amortization of identified intangible assets, amongothers.

 

***Goodwill and Intangible Assets***

 

Goodwillrepresents the excess of cost over the fair value of net tangible andidentifiable intangible assets of acquired companies. In accordance with SFAS No.142,*Goodwill and Other Intangible Assets*(“SFAS No. 142”), we do not amortize goodwill. Rather, we test goodwill forimpairment at least on an annual basis. Testing for impairment is a two-stepprocess as prescribed by SFAS No. 142. The first step is a test for potentialimpairment, while the second step measures the amount of impairment, if any.Under the guidelines of SFAS No. 142, we are required to perform an impairmenttest at least on an annual basis at any time during the fiscal year, providedthat the test is performed at the same time every year. An impairment losswould be recognized when the assets’ fair value is below their carrying value. Wehave elected the last day of our third fiscal quarter as our testing date.Based on the testing performed as of December 26, 2008, we determined that noimpairments existed. Customer relationships are amortized on a straight-linebasis over periods ranging from five to seven years. Non-competition agreementsare amortized on a straight-line basis over three years. Backlog and contractsare amortized on a straight-line basis over periods ranging from two to fiveyears.

 

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**Results of Operations**

 

Ourhistorical financial statements reflect the operating results of Oberon from July15, 2008, the date of acquisition. The following unaudited tables set forth theresults of operations expressed in thousands of dollars and as a percentage ofrevenues, for the periods below:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| **Consolidated Statements of Income  Data** | ** ** | **June 26, 2009**      | ** ** | **June 27, 2008** | ** ** |
| Revenues                                    |       | $                      | 208,747    |   | $ | 172,566 |   |
| Operating costs and expenses:               |       |                   |       |   |   |
| Cost of revenues                            |       | 173,089                |       | 145,760 |   |
| Selling, general and administrative         |       | 14,092                 |       | 10,659 |   |
| Depreciation and amortization               |       | 2,830                  |       | 1,841 |   |
| Total operating costs and expenses          |       | 190,011                |       | 158,260 |   |
| Operating income                            |       | 18,736                 |       | 14,306 |   |
| Other income (expense):                     |       |                   |       |   |   |
| Other income                                |       | 3                      |       | 2 |   |
| Interest income                             |       | 37                     |       | 125 |   |
| Interest expense                            |       | (1,147                 | )          | (536 | ) |
| Total other expenses                        |       | (1,107                 | )          | (409 | ) |
| Income before taxes                         |       | 17,629                 |       | 13,897 |   |
| Provision for income taxes                  |       | (6,965                 | )          | (5,580 | ) |
| Net income                                  |       | $                      | 10,664     |   | $ | 8,317 |   |

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| **As a Percentage of Revenues**     | ** ** | **June 26, 2009**      | ** ** | **June 27, 2008** | ** ** |
| Revenues                            |       | 100.0                  | %          | 100.0 | % |
| Operating costs and expenses:       |       |                   |       |   |   |
| Cost of revenues                    |       | 82.9                   |       | 84.5 |   |
| Selling, general and administrative |       | 6.8                    |       | 6.2 |   |
| Depreciation and amortization       |       | 1.4                    |       | 1.1 |   |
| Total operating costs and expenses  |       | 91.0                   |       | 91.7 |   |
| Operating income                    |       | 9.0                    |       | 8.3 |   |
| Other income (expense):             |       |                   |       |   |   |
| Other income                        |       | —                 |       | — |   |
| Interest income                     |       | —                 |       | 0.1 |   |
| Interest expense                    |       | (0.5                   | )          | (0.3 | ) |
| Total other expenses                |       | (0.5                   | )          | (0.2 | ) |
| Income before taxes                 |       | 8.4                    |       | 8.1 |   |
| Provision for income taxes          |       | (3.3                   | )          | (3.2 | ) |
| Net income                          |       | 5.1                    | %          | 4.8 | % |

 

Wegenerate revenues primarily from services provided by our employees andsubcontractors, with services provided by our employees generally yieldinghigher profits than services provided by our subcontractors. To a lesserdegree, we earn revenues through reimbursable travel and other reimbursabledirect and indirect costs to support the contractual effort and third-partyhardware and software that we purchase and integrate for customers as part ofthe solutions we provide.

 

Ourmost significant expense is cost of revenues, which includes the costs ofdirect labor, subcontractors, materials, equipment, non-reimbursable travel andan allocation of indirect costs (other than selling, general and administrativeexpenses and depreciation). Indirect costs consist primarily of fringebenefits, human resources, recruiting, training, other overhead and certainother non-direct costs that are necessary to support direct labor. The numberand types of personnel, their salaries and other costs, can have a significantimpact on our cost of revenues.

 

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

 

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

 

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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 June 26, 2009 and June 27, 2008***

 

***Revenues.***  Ourconsolidated revenues increased $36.1 million, or 21.0%, from $172.6 millionfor the three months ended June 27, 2008, to $208.7 million for the threemonths ended June 26, 2009. The increase was primarily due to $12.5million of increased revenues attributable to military intelligence trainingand operations support for the U.S. Army, $10.5 million of increased revenuesattributable to biometric software development, training and support forcertain agencies in the Department of Defense, offset by $11.5 million ofdecreased revenues due to reduced demand for passport services for theDepartment of State. The balance of increased revenues was a result ofengineering and technical support services for the U.S. Air Force and theDefense Information Systems Agency, production and engineering services undervarious SPAWAR programs, and information technology life cycle support andlogistics management services for the U.S. Army. A significant portion of thisgrowth was due to the impact of the contracts obtained as part of the Oberonacquisition.

 

***Cost of Revenues.***  Our cost ofrevenues increased $27.3 million, or 18.7%, from $145.8 million for the threemonths ended June 27, 2008, to $173.1 million for the three months ended June 26,2009. This increase was primarily the result of additional costs attributableto revenues associated with the increased services referred to above. Cost ofrevenues represented 82.9% of revenues for the three months ended June 26,2009, as compared to 84.5% of revenues for the three months ended June 27,2008. This decrease was primarily the result of a greater percentage of moreprofitable time-and-material and fixed price contracts.

 

***Selling, General and Administrative.***  Our selling, general and administrativeexpense increased $3.4 million, or 32.2%, from $10.7 million for the threemonths ended June 27, 2008, to $14.1 million for the three months ended June 26,2009. This increase was primarily due to higher share-based payment expenses,an increase in business development costs and higher selling, general andadministrative expenses attributable to the acquisition of Oberon. Selling,general and administrative expense represented 6.8% of revenues for the threemonths ended June 26, 2009, as compared to 6.2% of revenues for the threemonths ended June 27, 2008. This increase was primarily a result of higherselling, general and administrative expense as a percentage of revenuesassociated with supporting contracts and operations that were obtained as partof the Oberon acquisition.

 

***Depreciation and Amortization.***  Our depreciation and amortization expenseincreased $1.0 million, or 53.7%, from $1.8 million for the three months ended June27, 2008, to $2.8 million for the three months ended June 26, 2009. Theincrease in depreciation and amortization was primarily due to the amortizationof intangible assets associated with the acquisition of Oberon as well asdepreciation expense associated with capital expenditures and leaseholdimprovements.

 

***Interest Income.***  Our interestincome decreased $0.1 million from $0.1 million for the three months ended June27, 2008, to $0.0 million for the three months ended June 26, 2009. Theinterest income for the three months ended June 27, 2008 was primarily due tointerest earned on collections of delayed payments from several customers.

 

***Interest Expense.***  Our interestexpense increased $0.6 million from $0.5 million for the three months ended June27, 2008, to $1.1 million for the three months ended June 26, 2009. Theincrease in interest expense was primarily due to borrowings under our SeniorCredit Facility relating to the Oberon acquisition, partially offset by a loweroverall borrowing rate.

 

***Provisionfor Income Taxes. ***Our effective tax rate decreased by 0.7%from 40.2% for the three months ended June 27, 2008, to 39.5% for the threemonths ended June 26, 2009. The decrease was primarily attributable to a lowerconsolidated effective state income tax rate.

 

***Net Income.***  Our net incomeincreased $2.4 million, or 28.2%, from $8.3 million for the three months ended June27, 2008, to $10.7 million for the three months ended June 26, 2009. Theprimary reasons for the increase in net income were higher revenues andincreased operating income as well as improved margins primarily due to alarger percentage of more profitable time-and-material and fixed-pricecontracts.

 

**Liquidity and Capital Resources**

 

***Short-Term Liquidity Requirements.***  We generally consider our short-term liquidityrequirements to consist primarily of funds necessary to finance the costs ofoperations pending the billing and collection of accounts receivable. We expectto meet our short-term liquidity needs through existing cash balances and cashprovided by our operations and, if necessary, from borrowings under our SeniorCredit Facility (defined below).

 

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***Long-Term Liquidity Requirements.***  We generally consider our long-term liquidityrequirements to consist primarily of funds necessary to pay scheduled debtmaturities, non-recurring capital expenditures and the costs associated withacquisitions that we may pursue. Historically, we have satisfied our long-termliquidity requirements through various sources of capital, including cashprovided by operations, equity offerings and borrowings under our Senior CreditFacility.

 

Webelieve that these sources of capital will continue to be available to us inthe future to fund our long-term liquidity requirements. However, our abilityto incur additional debt is dependent upon a number of factors, including ourdegree of leverage, the value of our unencumbered assets, borrowingrestrictions imposed by existing lenders and general market conditions. Inaddition, our ability to raise funds through the issuance of equity securitiesis dependent upon, among other things, general market conditions and marketperceptions about us. We will continue to analyze which source of capital ismost advantageous to us at any particular point in time, but the equity marketsmay not be consistently available on terms that are attractive, or at all.

 

Weexpect we will require additional borrowings, including borrowings under ourSenior Credit Facility, to satisfy our long-term liquidity requirements. Othersources of liquidity may be sales of common or preferred stock.

 

***Cash Flows***

 

Accountsreceivable represents our largest working capital requirement. We bill most ofour customers 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.

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **June 26, 2009**      | ** ** | **June 27, 2008** | ** ** |
| ** **                                           | ** ** | **(in millions)**      | ** ** |
| Net cash provided by operating activities            |       | $                      | 9.4        |   | $ | 8.1 |   |
| Net cash used in investing activities                |       | $                      | (1.5       | ) | $ | (3.4 | ) |
| Net cash (used in) provided by financing  activities |       | $                      | (5.1       | ) | $ | 0.6 |   |

 

Netcash provided by operating activities of $9.4 million for the three monthsended June 26, 2009 primarily reflected the increased earnings as a result ofthe improved profitability of our contracts and the decrease in the amount ofestimated tax payments, partially offset by an increase in accounts receivabledue to the timing of collections. Net cash provided by operating activities of$8.1 million for the three months ended June 27, 2008 primarily reflected ournet income plus depreciation and amortization expenses, $1.9 million of incometax benefits from stock compensation and a decrease in our accounts receivable,partially offset by a decrease in accounts payable do to the timing of paymentsto several vendors.

 

Netcash used in investing activities of $1.5 million for the three months ended June26, 2009 consisted primarily of purchases of office equipment and leaseholdimprovements to support our continued growth in operations. Net cash used ininvesting activities of $3.4 million for the three months ended June 27, 2008consisted primarily of leasehold improvements for a new facility leased inAlexandria, Virginia.

 

Netcash used in financing activities of $5.1 million for the three months ended June26, 2009 consisted primarily of $6.0 million in payments on our revolvingportion of our Senior Credit Facility, partially offset by $0.9 million inproceeds from the exercise of stock options. Net cash provided by financingactivities of $0.6 million for the three months ended June 27, 2008 consistedprimarily of proceeds from the exercise of stock options.

 

Asof June 26, 2009, we had approximately $4.6 million in available cash.

 

***Credit Facilityand Borrowing Capacity***

 

Weare party to a credit agreement (“Senior Credit Facility” or “Amended CreditAgreement”) with a group of lenders for which SunTrust Robinson Humphrey, Inc.acted as sole book manager and lead arranger, SunTrust Bank acted asadministrative agent and M&T Bank and BB&T Bank acted asco-documentation agents.

 

AtJune 26, 2009, the lenders’ aggregate commitment under the Senior CreditFacility was $277.1 million, which consisted of a $241.6 million revolving lineof credit (“Revolver”) and a $35.5 million term loan (“Term Loan”), and we hadoutstanding indebtedness of $35.5 million on the Term Loan and $129.0 millionon the Revolver, with a weighted-average interest rate of approximately 1.87%and 3.81% for the three months ended June 26, 2009 and June 27, 2008,respectively.  At June 26, 2009, ourborrowing availability under the Senior Credit Facility was $112.5 million, includingoutstanding letters of credit.

 

Underthe terms of the Amended Credit Agreement, we may request an increase in thesize of the Revolver by an aggregate amount not greater than $33.4 million. Ifany lender elects not to increase its commitment, we may designate another bankor other financial institution to become a party to the Amended CreditAgreement.

 

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TheAmended Credit Agreement also contains a number of affirmative and restrictivecovenants, including limitations on mergers, consolidations and dissolutions;sales of assets; investments and acquisitions; indebtedness and liens;repurchases of shares of capital stock and options to purchase shares ofcapital stock; transactions with affiliates; sale and leaseback transactions;and restricted payments.

 

Inaddition, the Amended Credit Agreement requires us to meet the followingfinancial covenants:

 

·                  a fixed chargecoverage ratio as of the end of any fiscal quarter of not less than 1.35 to1.00, based upon the ratio of (i) consolidated EBITDA (as defined in theAmended Credit Agreement) less the actual amount paid by us and oursubsidiaries in cash on account of capital expenditures and taxes to (ii) consolidatedinterest expense for such period, scheduled principal payments required to bemade on consolidated total debt during such period and certain restrictedpayments paid during such period, in each case measured for the fourconsecutive fiscal quarters ending on or immediately prior to such date; and

 

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

 

AtJune 26, 2009, we were in compliance with all covenants under its Senior CreditFacility. The obligations under the Senior Credit Facility are unconditionallyguaranteed by each of our existing and subsequently acquired or organizedsubsidiaries and are secured on a first-priority basis by security interests(subject to permitted liens) in substantially all assets owned by us and eachof our subsidiaries, including the shares of capital stock of our subsidiaries,subject to certain exceptions.

 

**Capital Expenditures**

 

Ourcapital expenditures were $1.5 million and $3.4 million for the three monthsended June 26, 2009 and June 27, 2008, respectively. Substantially all of theseexpenditures consisted of leasehold improvements and purchases of officeequipment.

 

**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii)of SEC Regulation S-K as of June 26, 2009.

 

**Recent Accounting Pronouncements**

 

In May 2009, the FASBissued Statement of Financial Accounting Standards No. 165, *Subsequent Events* (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or available tobe issued. SFAS 165 requires the disclosure of the date through which an entityhas evaluated subsequent events and the basis for that date. SFAS 165 iseffective for the interim and annual periods ended after June 15, 2009, and,accordingly, we adopted this statement during our first fiscal quarter ended June26, 2009. SFAS 165 requires that public entities evaluate subsequent eventsthrough the date that the financial statements are issued. We have evaluatedsubsequent events through the time of filing these financial statements withthe SEC on August 4, 2009.

 

In June2009, the FASB issued Statement of Financial Accounting Standards No. 168, *The FASB Accounting Standards Codification* (“Codification”) *and the Hierarchy of Generally Accepted Accounting Principles*(“GAAP”),*a replacement of FASB Statement No. 162*(“SFAS 168”). SFAS 168 establishes the Codification as the single source ofauthoritative GAAP in the United States, other than rules and interpretivereleases issued by the SEC. The Codification is a reorganization of currentGAAP into a topical format that eliminates the current GAAP hierarchy andestablishes instead two levels of guidance — authoritative andnonauthoritative. All non-grandfathered, non-SEC accounting literature that isnot included in the Codification will become nonauthoritative. The FASB’sprimary goal in developing the Codification is to simplify user access to allauthoritative GAAP by providing all the authoritative literature related to aparticular accounting topic in one place. The Codification will be effectivefor interim and annual periods ending after September 15, 2009. As theCodification is not intended to change or alter existing GAAP, it is notanticipated to impact our condensed consolidated financial position, results ofoperations or cash flows.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Ourprincipal exposure to market risk relates to changes in interest rates. Fromtime to time, we enter into interest rate swap agreements to effectively limitexposure to interest rate movements within the parameters of our interest ratehedging policy. As of June 26, 2009, all of the outstanding debt under ourSenior Credit Facility, with the exception of that portion covered by aninterest rate swap, was subject to floating interest rate risk. In October 2006,we entered into an interest rate swap agreement covering fifty percent of ourterm indebtedness under which the swap and term debt maturities match. Evenafter giving effect to this agreement, we are exposed to risks due tofluctuations in the market value of this agreement and changes in interestrates with respect to the portion of our Senior Credit Facility that is notcovered by this agreement. A hypothetical increase in the interest rate of 100basis points would have increased our three month interest expense on thatportion of our outstanding debt not covered by the interest rate swap by $0.4million.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of June 26, 2009,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, asamended, or Exchange Act. Based on this evaluation, our chief executive officerand our chief financial officer have concluded that our disclosure controls andprocedures are effective in providing reasonable assurance that the informationrequired to be disclosed in this report has been recorded, processed,summarized and reported as of the end of the period covered by this report.  In evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

**Changes in Internal Control overFinancial Reporting**

 

There has not been anychange in our internal control over financial reporting (as defined in Rule 13a-15(f)of the Exchange Act) identified in connection with the evaluation required by Rule13a-15(d) under the Exchange Act during the quarter ended June 26, 2009 thathas materially affected, or is reasonably likely to materially affect, thosecontrols.

 

**Limitations on the Effectiveness ofControls**

 

Our management, includingour chief executive officer and chief financial officer, does not expect thatour disclosure controls and procedures and internal controls over financialreporting will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met, and our managementhas concluded that our disclosure controls and procedures and internal controlsover financial reporting were effective at a reasonable assurance level as of June26, 2009. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, with the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people or by managementoverride of the controls.

 

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

 

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 **PART II:OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Neitherwe, nor any of our subsidiaries, are currently subject to any material legalproceedings, nor, to our knowledge, is any material legal proceeding threatenedagainst us.

 

**ITEM 1A. RISK FACTORS**

 

In addition to the otherinformation set forth in this report, you should carefully consider the risksdiscussed in “Part I, Item 1A. Risk Factors” in our Form 10-K for the fiscalyear ended March 31, 2009. These risks and uncertainties have the potential toaffect materially our business, financial condition, results of operation, cashflows and future prospects.

 

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

 

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

 

**Issuer Purchases of Equity Securities**

 
| **Period**                   | ** ** | **Total  Number******** of Shares******** Purchased** | ** ** | **Average  Price********Paid per Share** | ** ** | **Total  Number of Shares********Purchased as Part of Publicly********Announced Plans or Programs** | ** ** | **Maximum  Number of Shares that********May Yet Be Purchased Under the********Plans or Programs** | ** ** |
|------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| April 1, 2009 - May 1, 2009  |       | —                                                          |       | $                                        | —     |                                                                                                | —     |                                                                                              | —     |   |
| May 2, 2009 - May 29, 2009   |       | 3,254                                                           | (1)        | $                                        | 25.92      |                                                                                                | —     |                                                                                              | —     |   |
| May 30, 2009 - June 26, 2009 |       | —                                                          |       | $                                        | —     |                                                                                                | —     |                                                                                              | —     |   |

 

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(1)Represents shares of common stock repurchased by the Company to satisfy certainemployees’ tax obligations upon the vesting of restricted stock.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

Seethe exhibit index.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused 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)                                   |
|       | August  4, 2009                                                  |
|       |                                                             |
|       |                                                             |
| ** ** | **/s/ BRIAN J. CLARK**                                           |
|       | Brian  J. Clark                                                  |
|       | Executive  Vice President, Chief Financial Officer and Treasurer |
|       | (Principal  Financial and Accounting Officer)                    |
|       | August  4, 2009                                                  |

 

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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 the Company’s Form 10-K for the fiscal year ended  March 31, 2008) |
|            |       |                                                                                                                                                                                      |
| 3.2             |       | Amended  and Restated Bylaws of Stanley, Inc. (incorporated by reference to Exhibit  3.2 to the Company’s Form 10-K for the fiscal year ended March 31, 2008)                        |
|            |       |                                                                                                                                                                                      |
| 10.1            |       | Stanley  Executive Savings Plan, dated as of May 6, 2009 (incorporated by reference to  Exhibit 10.26 to the Company’s Form 10-K for the fiscal year ended March 31,  2009)†    |
|            |       |                                                                                                                                                                                      |
| 31.1            |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.*                                                                                    |
|            |       |                                                                                                                                                                                      |
| 31.2            |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.*                                                                                    |
|            |       |                                                                                                                                                                                      |
| 32.1            |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to Section  906 of The Sarbanes-Oxley Act of 2002.*                                                        |

 

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*      Filed herewith

†      Denotes management contract or compensation plan orarrangement

 

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