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**UNITED STATES**

**SECURITIES AND 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 25, 2010**

 

**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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

Asof July 23, 2010, there were 24,369,022 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 25, 2010**

**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                                 | 22       |
| ITEM 4.                                      | CONTROLS AND  PROCEDURES                                                                    | 23       |
| **PART II  — OTHER INFORMATION**   | 23                                                                                          |
| ITEM 1.                                      | LEGAL PROCEEDINGS                                                                           | 23       |
| ITEM 1A.                                     | RISK FACTORS                                                                                | 24       |
| ITEM 2.                                      | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 25       |
| ITEM 3.                                      | DEFAULTS  UPON SENIOR SECURITIES                                                            | 25       |
| ITEM 4.                                      | [REMOVED AND  RESERVED]                                                                     | 25       |
| ITEM 5.                                      | OTHER INFORMATION                                                                           | 25       |
| ITEM  6.                                     | EXHIBITS                                                                                    | 25       |

 

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**FORWARD-LOOKING STATEMENTS**

 

ThisQuarterly Report on Form 10-Q contains certain “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Such statements include, in particular, statements about our plans, strategiesand prospects. Forward-looking statements are generally identifiable by use offorward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,”“expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,”“believe,” “could,” “project,” “predict,” “continue” or other similar words orexpressions. References to “we,” “our” and the “Company” refer toStanley, Inc., together in each case with our consolidated subsidiariesunless the context suggests otherwise.

 

Theforward-looking statements contained in this Quarterly Report on Form 10-Qare based on current expectations, estimates, forecasts and projections aboutthe industry in which we operate and management’s beliefs and assumptions.These statements are not guarantees of future performance and involve risks,uncertainties and assumptions that are difficult to predict. Therefore, actualoutcomes and results may differ materially from what is expressed or forecastedin such forward-looking statements, including as a result of risks discussed in“Part I, Item 1A. Risk Factors” in our Annual Report onForm 10-K for the fiscal year ended March 31, 2010. Theseforward-looking statements include, but are not limited to, statements relatingto:

 

·                  the satisfaction of the conditions toconsummate the merger of the Company with CGI Group, Inc., including,among other things;

 

·                  the tender of at least amajority of the outstanding shares of our common stock (on a fully dilutedbasis) and the receipt of required stockholder approval, if required;

 

·                  the outcome of any legalproceedings that have been or may be instituted against us as a result of theproposed merger; and

 

·                  the approval by the Committee on ForeignInvestment in the United States, the receipt of certain other regulatoryapprovals and other customary closing conditions; and

 

·                  the non-occurrence of any event, change orother circumstance that could give rise to the termination of the mergertransaction;

 

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

 

·                  our backlog;

 

·                  risks associated with the acquisition andintegration of new companies;

 

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

 

·                  expected spending on information technologyand other professional services by federal government agencies, including theDepartment of Defense; and

 

·                  other risks discussed in our Annual Report onForm 10-K for the fiscal year ended March 31, 2010, in the sectionsentitled “Risk Factors” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” and in any other documents we file withthe Securities and Exchange Commission.

 

We are under no duty to update any of theforward-looking statements after the date of this Quarterly Report onForm 10-Q to conform these statements to actual results, except asrequired 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 25, 2010**           | ** ** | **June 26, 2009** | ** ** |
| Revenues                                         |       | $                                | 213,321    |   | $ | 208,747 |   |
|                                             |       |                             |       |   |   |
| Operating costs and expenses:                    |       |                             |       |   |   |
| Cost of revenues                                 |       | 175,759                          |       | 173,089 |   |
| Selling, general and administrative              |       | 15,806                           |       | 14,092 |   |
| Merger and integration related charges and other |       | 4,018                            |       | — |   |
| Depreciation and amortization                    |       | 2,990                            |       | 2,830 |   |
| Total operating costs and expenses               |       | 198,573                          |       | 190,011 |   |
| Operating income                                 |       | 14,748                           |       | 18,736 |   |
|                                             |       |                             |       |   |   |
| Other income (expense):                          |       |                             |       |   |   |
| Other income                                     |       | 15                               |       | 3 |   |
| Interest income                                  |       | 10                               |       | 37 |   |
| Interest expense                                 |       | (737                             | )          | (1,147 | ) |
| Total other expenses                             |       | (712                             | )          | (1,107 | ) |
| Income before taxes                              |       | 14,036                           |       | 17,629 |   |
|                                             |       |                             |       |   |   |
| Provision for income taxes                       |       | (5,540                           | )          | (6,965 | ) |
| Net income                                       |       | $                                | 8,496      |   | $ | 10,664 |   |
|                                             |       |                             |       |   |   |
| Earnings per share:                              |       |                             |       |   |   |
| Basic                                            |       | $                                | 0.36       |   | $ | 0.46 |   |
| Diluted                                          |       | $                                | 0.35       |   | $ | 0.45 |   |
|                                             |       |                             |       |   |   |
| Weighted-average shares:                         |       |                             |       |   |   |
| Basic                                            |       | 23,530                           |       | 23,172 |   |
| Diluted                                          |       | 24,267                           |       | 23,844 |   |

 

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 25, 2010** | ** ** | **March 31, 2010** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                          | ** ** | ** **             | ** ** | ** **              | ** ** |
|                                                                                                                |       |                   |       |                    |       |
| Current assets:                                                                                                     |       |                   |       |                    |       |
| Cash                                                                                                                |       | $                      | 1,901      |                    | $          | 3,888 |   |
| Accounts receivable - net                                                                                           |       | 178,364                |       | 181,824                 |       |
| Prepaid and other current assets                                                                                    |       | 5,329                  |       | 8,878                   |       |
| Total current assets                                                                                                |       | 185,594                |       | 194,590                 |       |
|                                                                                                                |       |                   |       |                    |       |
| Property and equipment - net                                                                                        |       | 19,160                 |       | 19,328                  |       |
| Goodwill                                                                                                            |       | 262,705                |       | 262,705                 |       |
| Intangible assets - net                                                                                             |       | 8,173                  |       | 9,643                   |       |
| Deferred taxes                                                                                                      |       | 7,967                  |       | 7,683                   |       |
| Other assets                                                                                                        |       | 4,971                  |       | 4,197                   |       |
| Total assets                                                                                                        |       | $                      | 488,570    |                    | $          | 498,146 |   |
|                                                                                                                |       |                   |       |                    |       |
| **Liabilities and Stockholders’  Equity**                                                                      | ** ** | ** **             | ** ** | ** **              | ** ** |
|                                                                                                                |       |                   |       |                    |       |
| Current liabilities:                                                                                                |       |                   |       |                    |       |
| Accounts payable                                                                                                    |       | $                      | 13,610     |                    | $          | 10,917 |   |
| Accrued expenses and other liabilities                                                                              |       | 74,883                 |       | 75,294                  |       |
| Current portion of long-term debt                                                                                   |       | 1,000                  |       | 1,000                   |       |
| Deferred taxes                                                                                                      |       | 444                    |       | 444                     |       |
| Income taxes payable                                                                                                |       | 624                    |       | —                  |       |
| Total current liabilities                                                                                           |       | 90,561                 |       | 87,655                  |       |
|                                                                                                                |       |                   |       |                    |       |
| Line of credit                                                                                                      |       | 62,000                 |       | 88,000                  |       |
| Long-term debt — net of current portion                                                                        |       | 33,500                 |       | 33,500                  |       |
| Other long-term liabilities                                                                                         |       | 12,203                 |       | 10,631                  |       |
| Total liabilities                                                                                                   |       | 198,264                |       | 219,786                 |       |
|                                                                                                                |       |                   |       |                    |       |
| Commitments and contingencies                                                                                       |       |                   |       |                    |       |
| Stockholders’ equity:                                                                                          |       |                   |       |                    |       |
| Common stock, $0.01 par value — 200,000,000 shares  authorized; 24,358,059 and 24,141,919 issued, respectively |       | 244                    |       | 241                     |       |
| Additional paid-in capital                                                                                          |       | 114,796                |       | 111,393                 |       |
| Retained earnings                                                                                                   |       | 176,213                |       | 167,717                 |       |
| Accumulated other comprehensive loss                                                                                |       | (739                   | )          | (721                    | )          |
| Deferred compensation                                                                                               |       | (208                   | )          | (270                    | )          |
| Total stockholders’ equity                                                                                     |       | 290,306                |       | 278,360                 |       |
| Total liabilities and stockholders’ equity                                                                     |       | $                      | 488,570    |                    | $          | 498,146 |   |

 

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 25, 2010**           | ** ** | **June 26, 2009** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                | 8,496      |   | $ | 10,664 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                      |       | 2,990                            |       | 2,830 |   |
| Deferred taxes                                                                     |       | (284                             | )          | (319 | ) |
| Stock contributed to employee stock ownership plan                                 |       | —                           |       | 812 |   |
| Income tax benefit from stock-based compensation                                   |       | —                           |       | 113 |   |
| Stock compensation expense                                                         |       | 1,953                            |       | 1,829 |   |
| Changes in assets and liabilities:                                                 |       |                             |       |   |   |
| Accounts receivable                                                                |       | 3,460                            |       | (8,452 | ) |
| Prepaid expenses and other current assets                                          |       | 3,549                            |       | 1,399 |   |
| Other assets                                                                       |       | (774                             | )          | (987 | ) |
| Accounts payable                                                                   |       | 2,693                            |       | (4,466 | ) |
| Accrued expenses                                                                   |       | (71                              | )          | 2,745 |   |
| Other liabilities                                                                  |       | 1,258                            |       | (173 | ) |
| Income taxes payable                                                               |       | 624                              |       | 3,410 |   |
| Net cash provided by operating activities                                          |       | 23,894                           |       | 9,405 |   |
|                                                                               |       |                             |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Acquisition of property and equipment                                              |       | (1,289                           | )          | (1,529 | ) |
| Net cash used in investing activities                                              |       | (1,289                           | )          | (1,529 | ) |
|                                                                               |       |                             |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net repayments under line-of-credit agreements                                     |       | (26,000                          | )          | (6,030 | ) |
| Payments under capital lease obligations                                           |       | (45                              | )          | (68 | ) |
| Purchase of treasury stock                                                         |       | —                           |       | (84 | ) |
| Proceeds from exercise of stock options                                            |       | 987                              |       | 859 |   |
| Excess tax benefit from share-based compensation                                   |       | 466                              |       | 272 |   |
| Net cash used in financing activities                                              |       | (24,592                          | )          | (5,051 | ) |
|                                                                               |       |                             |       |   |   |
| **NET (DECREASE) INCREASE IN CASH**                                                |       | (1,987                           | )          | 2,825 |   |
| **CASH — Beginning of period**                                                |       | 3,888                            |       | 1,811 |   |
| **CASH — End of period**                                                      |       | $                                | 1,901      |   | $ | 4,636 |   |
|                                                                               |       |                             |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF  CASH FLOW INFORMATION:**                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash paid during the period for:                                                   |       |                             |       |   |   |
| Income taxes                                                                       |       | $                                | 448        |   | $ | 3,356 |   |
| Interest                                                                           |       | $                                | 461        |   | $ | 809 |   |

 

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 25, 2010**           | ** ** | **June 26, 2009** | ** ** |
| Net income                              |       | $                                | 8,496      |   | $ | 10,664 |   |
|                                    |       |                             |       |   |   |
| Other comprehensive (loss) income:      |       |                             |       |   |   |
| Unrealized gain on interest rate swap   |       | 83                               |       | 132 |   |
| Translation adjustments                 |       | (100                             | )          | (66 | ) |
| Total other comprehensive (loss) income |       | (17                              | )          | 66 |   |
| Comprehensive income                    |       | $                                | 8,479      |   | $ | 10,730 |   |

 

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

 

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**STANLEY, INC. ANDSUBSIDIARIES**

**Notes 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, operationalsupport, business process management and advanced engineering and technology.The Company derives substantially all of its revenue from U.S. federalgovernment agencies.

 

**1A.PROPOSED ACQUISTION BY CGI GROUP, INC.**

 

OnMay 6, 2010, the Company entered into an Agreement and Plan of Merger (the“Merger Agreement”) with CGI Group Inc., a corporation organized under thelaws of the Province of Québec, Canada (“CGI”), CGI Federal Inc., aDelaware corporation and an indirect wholly-owned subsidiary of CGI (“CGIFederal”), and CGI Fairfax Corporation, a Delaware corporation and a directwholly-owned subsidiary of CGI Federal (“Merger Sub”), pursuant to which, amongother things, Merger Sub agreed to commence a tender offer for all of theoutstanding shares of the Company’s common stock, subject to the terms andconditions of the Merger Agreement.

 

Pursuantto the Merger Agreement, and upon the terms and subject to the conditionsthereof, Merger Sub has commenced a tender offer (the “Offer”) to acquire allof the outstanding shares of the Company’s common stock, par value $0.01 per share(“Common Stock”), at a price of $37.50 per share, net to the sellingstockholders in cash, without interest (the “Offer Price”). Following theconsummation of the Offer, and subject to the satisfaction or waiver of certainconditions set forth in the Merger Agreement, Merger Sub will merge with andinto the Company (the “Merger”) and the Company will become a wholly-ownedsubsidiary of CGI. At the effective time of the Merger, the shares of CommonStock not purchased pursuant to the Offer (other than shares held by theCompany, CGI, CGI Federal, Merger Sub or by the Company’s stockholders who haveperfected their statutory rights of appraisal under Delaware law) will beconverted into the right to receive an amount in cash, without interest, equalto the Offer Price.

 

Consummationof the Offer is subject to various conditions, including among others, approvalby the Committee on Foreign Investment in the United States, the receipt ofcertain other regulatory approvals and other customary closing conditions, eachas described in the Merger Agreement. In addition, it is also a condition tothe consummation of the Offer that at least a majority of the outstandingshares of Common Stock (determined on a fully diluted basis) shall have beenvalidly tendered and not withdrawn in accordance with the terms of the Offer.Subject to the terms of the Merger Agreement, the Company has granted MergerSub an option to purchase that number of newly-issued shares of Common Stockthat is equal to one share more than the amount needed to give Merger Subownership of 90% of the outstanding shares of Common Stock (determined on afully-diluted basis (which assumes conversion or exercise of all derivativesecurities regardless of the conversion or exercise price, the vesting scheduleor the other terms and conditions thereof)) (the “Top-Up Option”). The Top-UpOption is exercisable only if Merger Sub acquires at least 80% of theoutstanding shares of Common Stock pursuant to the Offer or otherwise. MergerSub will pay the Company the Offer Price for each share acquired upon exerciseof the Top-Up Option.

 

**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 25, 2010, and its results of operations andits cash flows for the three months ended June 25, 2010 and June 26,2009. Certain information and note disclosures required by GAAP and normallyincluded in the annual financial statements have been condensed or omitted. Theresults of operations for the interim periods are not necessarily indicative ofthe results for the full year. For further information, refer to the financialstatements and footnotes presented in the Company’s Annual Report onForm 10-K for the fiscal year ended March 31, 2010.

 

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***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 2011 ended onJune 25, 2010. The Company does not believe that there is a materialimpact to the comparability 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.

 

***Fair Value of Financial Instruments***—The fair valueof accounts receivable, accounts payable, accrued expenses, note payable, andswap contract approximates their respective carrying amounts.

 

***Accounting Standards Updates***— InOctober 2009, the FASB issued an update to*“Revenue Recognition — Multiple Deliverable Revenue Arrangements.”* This update removes the objective-and-reliable-evidence-of-fair-valuecriterion from the separation criteria used to determine whether an arrangementinvolving multiple deliverables contains more than one unit of accounting,replaces references to “fair value” with “selling price” to distinguish fromthe fair value measurements required under the “*Fair Value Measurements and Disclosures”* guidance, providesa hierarchy that entities must use to estimate the selling price, eliminatesthe use of the residual method for allocation, and expands the ongoingdisclosure requirements. This update is effective for fiscal years beginning onor after June 15, 2010, and can be applied prospectively orretrospectively. The Company does not expect that the adoption of this updatewill have a material impact on its consolidated financial position or resultsof operations.

 

InOctober 2009, the FASB issued an update to *“Software—Multiple-Deliverable Revenue Arrangements.”*Thisupdate amends the existing accounting model for revenue arrangements that includeboth tangible products and software elements. Tangible products containingsoftware components and nonsoftware components that function together todeliver the tangible product’s essential functionality are no longer within thescope of software revenue guidance. In addition, this update provides guidanceon how to determine which software relating to the tangible product would beexcluded from the scope of the software revenue guidance. This update iseffective for arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010. The Company does not expect that theadoption of this update will have a material impact on its consolidatedfinancial position or results of operations.

 

InJanuary 2010, the FASB issued an update to “*Fair Value Measurements and Disclosures.”* This updaterequires new disclosures on the transfers of assets and liabilities betweenLevel 1 (quoted prices in active market for identical assets and liabilities)and Level 2 (significant other observable inputs) of the fair value measurementhierarchy, including the reasons for and the timing of the transfers. Thestandard does not change how fair values are measured; accordingly, thestandard will not have an impact on the Company’s consolidated financialstatements.  At June 25, 2010, the Company did not transfer anyassets or liabilities that are measured at fair value on a recurring basisbetween Levels 1 and 2, and did not have any transfers into and out of Level 3(significant unobservable inputs).

 

InApril 2010, the FASB issued an update to “*MilestoneMethod of Revenue Recognition.” *This update establishesauthoritative guidance permitting use of the milestone method of revenuerecognition for research or development arrangements that contain paymentprovisions or consideration contingent on the achievement of specified events.This guidance is effective for milestones achieved in fiscal years beginning onor after June 15, 2010 and allows for either prospective or retrospectiveapplication, with early adoption permitted. The Company is currently evaluatingthe impact that adoption of this guidance will have on its financial positionand results of operations.

 

***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 collectability is considered probable and can be reasonablyestimated. Revenue is earned under cost-plus-fee, fixed-price and time-and-materialscontracts. The Company uses a standard management process to determine whetherall required criteria for revenue recognition have been met, which includesregular reviews of the Company’s contract performance. This review covers,among other matters, progress against a schedule, outstanding action items,effort and staffing, quality, risks and issues, subcontract management, costsincurred, commitments, and customer satisfaction. During this review, theCompany determines whether the overall progress on a contract is consistentwith 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 

 

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revisionbecome known. The full amount of an anticipated loss on any type of contract isrecognized in the period in which it becomes probable and can be reasonablyestimated.

 

Under cost-plus-fee contracts, revenues are recognized as costs areincurred and include an estimate of applicable fees earned. For cost-plus-feecontracts that involve a level of effort, fixed fees are earned in proportionto the percentage of required effort delivered. For cost-plus-fee contractswhich do not involve a level of effort requirement, fixed fees are earned inproportion to the percentage of work completed. For time-and-materialscontracts, revenues are computed by multiplying the number of directlabor-hours expended in performance of the contract by the contractual billingrates and adding other billable direct and indirect costs. For fixed-pricecontracts, revenues are recognized as services are performed, using thepercentage-of-completion method, applying the cost-to-cost or units of deliverymethod, in accordance with Accounting Standards Codification (“ASC”) 605-35, *Construction-Type and Production-Type Contracts*.

 

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 perform the contract against atarget cost to perform the contract. The Company prepares periodic estimates tocomplete the contract and adjusts the incentive fee as required based on thecontract 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 uses a formal internal reviewand management approval process prior to commencement of any such 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 customers, previous experiences with the customer,communications with the customer regarding funding status, and its 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 the Company’s business due to eventssuch as delays, changes in contract specifications, and questions of costallowability or collectability. Such matters, whether claims or unapprovedchange orders in the process of negotiation, are recorded at the lesser oftheir estimated net realizable value or actual costs incurred, and only whenrealization is probable and can be reliably estimated.

 

The Company must categorize its contract costs as either direct orindirect and allowable or unallowable. Direct costs are those costs that areidentified with specific contracts. Indirect costs are those costs notidentified with specific contracts. The allowability of certain costs undergovernment contracts is subject to audit by the government. Certain indirectcosts are charged to contracts using provisional or estimated indirect rates,which are subject to later revision based on government audits of those costs.The Company’s unallowable costs include a portion of its executivecompensation, interest expense, federal income tax expense, certain employeemorale activities, certain types of legal and consulting costs, theamortization of identified purchased intangible assets, and substantially allof the merger and integration related charges among others. Management is ofthe opinion that costs subsequently disallowed, if any, would not besignificant.

 

***Merger and Integration RelatedCharges and Other —***The Company incurred incremental costsassociated with the proposed acquisition of the Company by CGI Group, Inc.in the three months ended June 25, 2010.  These costs include legalfees associated with the negotiation and execution of the merger agreement andsatisfaction of regulatory conditions, investment banking fees, consultingservices, and other incremental merger and integration related costs.

 

***Concentration of Risk***—Contractsfunded by federal government agencies account for substantially all of theCompany’s revenues. For the three months ended June 25, 2010 andJune 26, 2009, the Company derived approximately 77% and 75% of itsrevenues, respectively, from the Department of Defense, including agencieswithin the intelligence community, and approximately 23% and 25% of itsrevenues, respectively, from federal civilian government agencies. For thethree months ended June 25, 2010, no one contract accounted for more than10% of the Company’s revenues.

 

***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 $1.5 million and$1.3 million for the three months ended June 25, 2010 and June 26,2009, respectively.

 

***Goodwill and Intangible Assets****—* Goodwillrepresents the excess of cost over the fair value of net tangible andidentifiable intangible assets of acquired companies. The Company does notamortize goodwill; rather it tests goodwill for impairment at least on 

 

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anannual basis. Testing for impairment is a two-step process. The first step is atest for potential impairment, while the second step measures the amount ofimpairment, if any. The Company is required to perform an impairment test atleast on an annual basis at any time during the fiscal year, provided that thetest is performed at the same time every year. An impairment loss would berecognized when the assets’ fair value is below their carrying value. Stanleyhas elected the last day of its third fiscal quarter as its testing date. Basedon the testing performed as of December 25, 2009, the Company determinedthat no impairments existed. Intangible assets are amortized over theirestimated useful lives. 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.

 

***Impairment of Long-Lived Assets***—When events orchanges in circumstances indicate that the carrying amount of long-lived assetsmay not be fully recoverable, Stanley evaluates the probability that futureundiscounted net cash flows, without interest charges, will be less than thecarrying amount of the assets. If any impairment were indicated as a result ofthis review, Stanley would recognize a loss based on the amount by which thecarrying amount exceeds the estimated fair value. Management believes that noimpairments existed as of June 25, 2010.

 

***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 common stock. Shares that are anti-dilutive are not included in thecomputation of diluted earnings per share. For the three months ended June 25,2010, the Company did not have anti-dilutive shares. For the three months endedJune 26, 2009, the Company had 885,663 shares not included in the computationof diluted earnings per share calculation, because to do so would have beenanti-dilutive. The weighted-average number of common shares outstanding iscomputed as follows:

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **June 25, 2010**           | ** ** | **June 26, 2009** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**               | ** ** |
| Basic weighted-average common shares outstanding              |       | 23,530                           |       | 23,172 |   |
| Effect of stock options and unvested restricted  stock grants |       | 737                              |       | 672 |   |
| Diluted weighted-average common shares outstanding            |       | 24,267                           |       | 23,844 |   |

 

***Derivative Instruments and HedgingActivities***—Stanley entered into an interest rate swapagreement on October 27, 2006 with a maturity date of January 31,2012, an annual fixed rate of 5.28% and a notional amount of$19.0 million. The Company designated this swap agreement, at its inception,as a qualifying cash flow hedge. The fair value of the swap at June 25,2010 of $1.3 million has been reported in “Accrued expenses and otherliabilities” with an offset, net of tax, included in “Accumulated othercomprehensive loss” in the accompanying unaudited condensed consolidatedbalance sheets. None of the $1.3 million unrealized loss was recognized inearnings during the three months ended June 25, 2010 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 chief operatingdecision maker, or decision making group, in deciding how to allocate resourcesand assess performance. The Company currently has one reportable segment forfinancial reporting purposes, which represents the Company’s core business ofproviding information technology solutions and services for federal governmentcustomers.

 

***Use of Estimates***—Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring 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.

 

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

 

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

 

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Level1: Quoted prices for identical instruments in active markets.

 

Level2: Quoted prices for similar instruments in active markets; quoted prices foridentical or similar instruments in markets that are not active; andmodel-driven valuations whose inputs are observable or whose significant valuedrivers are observable.

 

Level3: Significant inputs to the valuation model are unobservable.

 

Asof June 25, 2010, the financial liability measured at fair value consistedof an interest rate swap agreement. The value is based on model-drivenvaluations whose inputs are observable. The following table summarizes thefinancial liability measured at fair value on a recurring basis and the levelwithin the fair value hierarchy:

 
| ** **         | ** ** | **Fair Value Measurement as of June 25, 2010 Using:**           | ** ** | ** **                                         | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Total** | ** ** |
| ** **         | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)**                                 | ** ** | **(Level 3)** | ** ** | **June 25, 2010** | ** ** |
| Liabilities:       |       |                                                                                |       |                                               |       |   |   |   |   |
| Interest rate swap |       | $                                                                                   | —     |                                               | $          | 1,251 |   | $ | — |   | $ | 1,251 |   |
|                    |            |                                                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 
| ** **         | ** ** | **Fair Value Measurement as of March 31, 2010 Using:**               | ** ** | ** **                                         | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Total** | ** ** |
| ** **         | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)**                                 | ** ** | **(Level 3)** | ** ** | **March 31, 2010** | ** ** |
| Liabilities:       |       |                                                                                |       |                                               |       |   |   |   |   |
| Interest rate swap |       | $                                                                                   | —     |                                               | $          | 1,381 |   | $ | — |   | $ | 1,381 |   |
|                    |            |                                                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 

**3.  ACCOUNTS RECEIVABLE**

 

Accountsreceivable consists of the following:

 
| ** **                                      | ** ** | **As of**         | ** ** | **As of**          | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **June 25, 2010** | ** ** | **March 31, 2010** | ** ** |
| Billed receivables                              |       | $                      | 134,741    |                    | $          | 139,035 |   |
| Unbilled receivables:                           |       |                   |       |                    |       |
| Amounts billable                                |       | 33,747                 |       | 34,048                  |       |
| Revenues recorded in excess of contract funding |       | 10,889                 |       | 9,710                   |       |
| Retainage and contract fee withholding          |       | 393                    |       | 390                     |       |
| Allowance for doubtful accounts                 |       | (1,406                 | )          | (1,359                  | )          |
| Total                                           |       | $                      | 178,364    |                    | $          | 181,824 |   |

 

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 receivables at June 25,2010 are expected to be billed and collected within one year except for the$0.4 million related to retainage and fee withholding.

 

**4.  PROPERTY AND EQUIPMENT**

 

Propertyand equipment consists of the following:

 
| ** **                                                                               | ** ** | **As of**         | ** ** | **As of**          | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                               | ** ** | **June 25, 2010** | ** ** | **March 31, 2010** | ** ** |
| Computers and peripherals                                                                |       | $                      | 7,394      |                    | $          | 6,863 |   |
| Software                                                                                 |       | 4,481                  |       | 4,379                   |       |
| Furniture and equipment                                                                  |       | 6,965                  |       | 6,735                   |       |
| Leasehold improvements                                                                   |       | 16,813                 |       | 16,483                  |       |
|                                                                                     |       | 35,653                 |       | 34,460                  |       |
|                                                                                     |       |                   |       |                    |       |
| Less: Accumulated depreciation and amortization                                          |       | (16,493                | )          | (15,132                 | )          |
| Property and equipment — net                                                        |       | $                      | 19,160     |                    | $          | 19,328 |   |
| Property and equipment included above that are  under capital lease obligations include: |       |                   |       |                    |       |
| Software                                                                                 |       | $                      | 536        |                    | $          | 536 |   |
| Furniture and equipment                                                                  |       | 89                     |       | 143                     |       |
| Less: Accumulated depreciation                                                           |       | (543                   | )          | (565                    | )          |
| Total                                                                                    |       | $                      | 82         |                    | $          | 114 |   |

 

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**5.  ACCRUED EXPENSES AND OTHER LIABILITIES**

 

Accruedexpenses and other liabilities consist of the following:

 
| ** **             | ** ** | **As of**         | ** ** | **As of**          | ** ** |
|------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **             | ** ** | **June 25, 2010** | ** ** | **March 31, 2010** | ** ** |
| Accrued payroll costs  |       | $                      | 25,576     |                    | $          | 27,483 |   |
| Accrued contract costs |       | 31,622                 |       | 32,502                  |       |
| Accrued indirect costs |       | 8,138                  |       | 5,488                   |       |
| Other payables         |       | 9,547                  |       | 9,821                   |       |
| Total accrued expenses |       | $                      | 74,883     |                    | $          | 75,294 |   |

 

**6.  DEBT**

 

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

 

AtJune 25, 2010, the lenders’ aggregate commitment under the Senior CreditFacility was $276.1 million, which consisted of a $241.6 million revolving lineof credit (“Revolver”) and a $34.5 million term loan (“Term Loan”), and theCompany had outstanding indebtedness of $34.5 million on the Term Loan and$62.0 million on the Revolver, with a weighted-average interest rate ofapproximately 1.20% and 1.87% for the three months ended June 25, 2010 andJune 26, 2009, respectively.  At June 25,2010, the Company’s borrowing availability under the Senior Credit Facility was$179.5 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; salesof assets; investments and acquisitions; indebtedness and liens; repurchases ofshares of capital stock and options to purchase shares of capital stock;transactions with affiliates; sale and leaseback transactions; and restrictedpayments.In addition, the Amended Credit Agreement requires the Company to meetthe following financial covenants:

 

·                  a fixed charge coverage ratio as of the endof any fiscal quarter of not less than 1.35 to 1.00, based upon the ratio of(i) consolidated EBITDA (as defined in the Amended Credit Agreement) lessthe actual amount paid by the Company and its subsidiaries in cash on accountof capital expenditures and taxes to (ii) consolidated interest expensefor such period, scheduled principal payments required to be made onconsolidated total debt during such period and certain restricted payments paidduring such period, in each case measured for the four consecutive fiscalquarters ending on or immediately prior to such date; and

 

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

 

AtJune 25, 2010, the Company was in compliance with all covenants under itsSenior Credit Facility. The obligations under the Senior Credit Facility areunconditionally guaranteed by each of the Company’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.  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.

 

Stanleymay elect to repurchase shares of outstanding common stock from employees inorder to satisfy tax obligations upon the vesting of restricted stock or uponthe exercise of stock options. Stanley did not repurchase shares of commonstock for the three months ended June 25, 2010.

 

***Equity Compensation***

 

Underthe Amended and Restated 2006 Omnibus Incentive Compensation Plan (the “OmnibusPlan”), Stanley is authorized to provide awards for a maximum of 4,500,000shares of common stock to directors, officers, employees or consultants. TheOmnibus Plan allows for cash awards, restricted stock awards, restricted stockunits, stock appreciation rights, performance units, fully vested shares, optionawards and other equity-related awards. Vesting periods of these awards vary.Except as otherwise determined by the board of directors, the option awards maynot have an exercise price less than the fair market value of the common stockon the date the option is granted.

 

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 is based on historical volatilityof the Company’s stock price. The expected term of options granted is derivedusing the simplified method and represents the period of time that optionsgranted are expected to be outstanding. Options granted meet the criteria of “plainvanilla” for purposes of applying the simplified method. This method was usedas the Company did not have sufficient historical exercise data to provide areasonable basis upon which to estimate expected term due to the limited periodof time the shares have been publicly traded. The risk-free rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant. The Company has not issued dividends inthe past nor does it currently intend to issue dividends in the near future.

 

Duringthe three months ended June 25, 2010, the Company did not grant stockoption awards. The weighted-average fair value of stock option awards grantedduring the three months ended June 26, 2009, as determined by theBlack-Scholes-Merton closed-form option-pricing model, was $7.66. The stockoption awards that vested during the three months ended June 25, 2010 and June 26,2009 had a combined fair value of $2.7 million and $1.8 million, respectively.

 

Asummary of option activity for the year ended March 31, 2010, and thethree months ended June 25, 2010 is presented below.

 
| **Options**                       | ** ** | **Number of  Underlying Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Aggregate Intrinsic  Value (in thousands)** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|
| Outstanding at April 1, 2009 |       | 1,604,399                                  |       | $                                         | 14.38      |                                                         |       |   |
| Granted                           |       | 461,226                                    |       | $                                         | 25.22      |                                                         |       |   |
| Exercised                         |       | (237,844                                   | )          | $                                         | 8.40       |                                                         | $          | 4,779 |   |
| Forfeited                         |       | (96,260                                    | )          | $                                         | 19.32      |                                                         |       |   |
| Outstanding at April 1, 2010 |       | 1,731,521                                  |       | $                                         | 17.82      |                                                         |       |   |
| Granted                           |       | —                                     |       | $                                         | —     |                                                         |       |   |
| Exercised                         |       | (49,790                                    | )          | $                                         | 19.83      |                                                         | $          | 770 |   |
| Forfeited                         |       | (18,201                                    | )          | $                                         | 27.29      |                                                         |       |   |
| Outstanding at June 25, 2010 |       | 1,663,530                                  |       | $                                         | 17.65      |                                                         | $          | 32,850 |   |

 

Asummary of nonvested stock option activity for the three months ended June 25,2010 is presented below.

 
| **Nonvested Options**        | ** ** | **Number of  Underlying Shares** | ** ** | **Weighted-Average  Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| Outstanding at April 1, 2010 |       | 1,012,428                                  |       | $                                     | 6.43       |   |
| Granted                           |       | —                                     |       | $                                     | —     |   |
| Vested                            |       | (458,784                                   | )          | $                                     | 5.82       |   |
| Forfeited                         |       | (18,201                                    | )          | $                                     | 7.90       |   |
| Outstanding at June 25, 2010 |       | 535,443                                    |       | $                                     | 6.91       |   |

 

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Asummary of vested stock options at June 25, 2010, 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                      |       | 1,128,087                              |       | $                                       | 15.20      |                                                            | 3.2        |                                                 | $          | 25,042 |   |
| Expected to vest                 |       | 495,285                                |       | $                                       | 22.82      |                                                            | 3.7        |                                                 | $          | 7,222 |   |
| Exercisable and expected to vest |       | 1,623,372                              |       |                                    |       |                                                            |       |                                                 |       |

 

Duringthe three months ended June 25, 2010, the Company granted 166,700restricted stock awards at a weighted-average fair value of $29.02 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 was $25.22. The restricted stock awards that vested during the threemonths ended June 25, 2010 and June 26, 2009 had a combined fairvalue of $1.1 million and $0.9 million, respectively.

 

Asummary of restricted stock activity for the three months ended June 25,2010 is presented below.

 
| **Restricted Stock**         | ** ** | **Number of Shares** | ** ** | **Weighted-Average  Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|
| Outstanding at April 1, 2010 |       | 612,444                        |       | $                                     | 24.73      |   |
| Granted                           |       | 166,700                        |       | $                                     | 29.02      |   |
| Vested                            |       | (57,954                        | )          | $                                     | 19.52      |   |
| Forfeited                         |       | (350                           | )          | $                                     | 21.54      |   |
| Outstanding at June 25, 2010 |       | 720,840                        |       | $                                     | 26.14      |   |

 

Duringthe three months ended June 25, 2010 and June 26, 2009, the Companyrecognized $2.0 million and $1.8 million of share-based compensation costs,respectively. As of June 25, 2010, there was $14.6 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 1.8 years.

 

**8.  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 March 31, 2006 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***—***S.C. Diamond Litigation, Virginia Beach Circuit Court**** —* On April 2, 2009, SC Diamond Associates,L.P. (“S.C. Diamond”) filed a lawsuit in Virginia Beach Circuit Court againstStanley and Allied Technology Group, Inc. (“Allied”). S.C. Diamond is theowner of a warehouse property in Virginia Beach, Virginia in which Stanleysubleased a portion of the facility. In March 2008, the warehouse caughtfire, allegedly as a result of an exploded high-intensity metal halide bulb,which is alleged to have been manufactured by Philips Electronics N.A.Corporation, d/b/a Philips Lighting Company (“Philips”). S.C. Diamond suedAllied, as its tenant, and Stanley, as sub-lessee, alleging breach ofcontract and negligence against Allied, and negligence, negligence per se andnuisance against Stanley.  S.C. Diamond also suedPhilips. Travelers Indemnity Company, which insured S.C. Diamond,intervened in the lawsuit on September 15, 2009, making subrogation claimsagainst Stanley and Philips, seeking to recover approximately $8 million ininsurance proceeds previously paid to S.C. Diamond. In July 2010, whileexpressly disavowing liability, Stanley’s insurance carrier reached asettlement in principle with S.C. Diamond and Travelers. Allied, who remains inlitigation with S.C. Diamond, has indicated its intent to make aclaim for indemnification against Stanley and Philips. S.C. Diamond is seekingdamages from Allied of approximately $14 million.

 

Stanley disputesthat it has any liability to Allied. Trial is scheduled to commence in October 2010. Inmanagement’s opinion, the disposition of this litigation is not expected tohave a material adverse effect on the Company’s financial position, results ofoperations or liquidity.

 

***Continuum Capital Litigation —Arlington Circuit Court****—*On May 27, 2010,Continuum Capital, alleging itself to be a stockholder of the Company, filed apurported shareholder class action complaint in the Circuit Court for theCounty of Arlington, Virginia, captioned Continuum Capital v. Philip O. Nolanet al., Case No. 10-646, in connection with the tender offer by CGIFairfax Inc. (the “Offeror”), an indirect wholly-owned subsidiary of CGI Group, Inc.(“CGI”) and a direct wholly-owned subsidiary of CGI Federal Inc. (“CGI Federal”),to acquire all of the outstanding shares of its common stock, par value $0.01per share, at a price of 

 

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$37.50per share (the “Offer”) and the proposed subsequent merger of the Offeror withand into the Company (the “Merger”). The complaint names as defendants theCompany, the members of its board of directors, CGI Federal andthe Offeror. The suit alleges that the Company and the members of itsboard of directors breached their fiduciary duties to the Company’sshareholders in connection with the sale of the Company and that CGI Federaland the Offeror aided and abetted the purported breaches of fiduciary duties.

 

Thesuit seeks various equitable relief related to the Offer and the Merger andalso seeks the costs of the action, including interest, attorneys’ fees,experts’ fees and other costs. Stanley believes the allegations are withoutmerit and intend to defend vigorously the action. In management’s opinion, thedisposition of this litigation is not expected to have a material adverseeffect on the Company’s financial position, results of operations or liquidity.

 

***Other Litigation*** — Otherthan as set forth above, neither the Company, nor any of its subsidiaries, arecurrently subject to any material legal proceedings, nor, to its knowledge, isany material legal proceeding currently threatened against the Company.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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 AnnualReport on Form 10-K for the fiscal year ended March 31, 2010,**filedby us with the Securities and Exchange Commission on May 20, 2010**.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, 2010.**We caution 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 support,business process management 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 25, 2010, we had active contractual engagementsacross 59 federal government agencies. Our customers include all major agenciesof the Department of Defense, the Department of State, the Department ofHomeland Security, the Department of Transportation, the Department of theTreasury, NASA, the Department of Justice and the Department of Health andHuman Services.

 

**Proposed Merger with CGI Group Inc.**

 

OnMay 6, 2010, we entered into an Agreement and Plan of Merger (the “MergerAgreement”) with CGI Group, Inc., a corporation organized under the lawsof the Province of Québec, Canada (“CGI”), CGI Federal, Inc., a Delawarecorporation and an indirect wholly-owned subsidiary of CGI (“CGI Federal”), andCGI Fairfax Corporation, a Delaware corporation and a direct wholly-ownedsubsidiary of CGI Federal (“Merger Sub”), pursuant to which, among otherthings, Merger Sub agreed to commence a tender offer for all of the outstandingshares of our common stock, subject to the terms and conditions of the MergerAgreement.

 

Pursuantto the Merger Agreement, and upon the terms and subject to the conditionsthereof, Merger Sub has commenced a tender offer (the “Offer”) to acquire allof the outstanding shares of our common stock, par value $0.01 per share (“CommonStock”), at a price of $37.50 per share, net to the selling stockholders incash, without interest (the “Offer Price”). Following the consummation of theOffer, and subject to the satisfaction or waiver of certain conditions setforth in the Merger Agreement, Merger Sub will merge with and into us (the “Merger”)and we will become a wholly-owned subsidiary of CGI. At the effective time ofthe Merger, the shares of Common Stock not purchased pursuant to the Offer(other than shares held by us, CGI, CGI Federal, Merger Sub or by ourstockholders who have perfected their statutory rights of appraisal underDelaware law) will be converted into the right to receive an amount in cash,without interest, equal to the Offer Price.

 

Consummationof the Offer is subject to various conditions, including among others, approvalby the Committee on Foreign Investment in the United States, the receipt ofcertain other regulatory approvals and other customary closing conditions, eachas 

 

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describedin the Merger Agreement. In addition, it is also a condition to theconsummation of the Offer that at least a majority of the outstanding shares ofCommon Stock (determined on a fully diluted basis) shall have been validlytendered and not withdrawn in accordance with the terms of the Offer. Subjectto the terms of the Merger Agreement, we have granted Merger Sub an option topurchase that number of newly-issued shares of Common Stock that is equal toone share more than the amount needed to give Merger Sub ownership of 90% ofthe outstanding shares of Common Stock (determined on a fully-diluted basis(which assumes conversion or exercise of all derivative securities regardlessof the conversion or exercise price, the vesting schedule or the other termsand conditions thereof)) (the “Top-Up Option”). The Top-Up Option isexercisable only if Merger Sub acquires at least 80% of the outstanding sharesof Common Stock pursuant to the Offer or otherwise. Merger Sub will pay us theOffer Price for each share acquired upon exercise of the Top-Up Option.

 

**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 ourbusiness. In monitoring this growth, we focus on both internal revenue growthand revenue growth through acquisitions. Our internal revenue growth is drivenprimarily by two factors. First, internal revenue growth is driven by addingnew customers. For example, over the past several years we have added theDepartment of Homeland Security’s Citizenship and Immigration Services, theDefense Information Systems Agency, the National Guard Bureau, the Office ofPersonnel Management, the Marine Corps Systems Command and agencies in theintelligence community as new customers. Second, internal revenue growth isdriven by increasing revenues with existing customers by adding new contractsor expanding existing contracts. For example, since the initial award of ourcontract with the Department of State for the provision of passport processingand support services, the scope of services provided by us, and the revenuesgenerated by those services, have grown significantly.

 

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          |

 

***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 25, 2010** | ** ** | **June 26, 2009** | ** ** |
| ** **    | ** ** | **(in millions)**      | ** ** |
| Backlog:      |       |                   |       |   |   |
| Funded        |       | $                      | 316.6      |   | $ | 351.4 |   |
| Unfunded      |       | 1,825.7                |       | 1,672.2 |   |
| Total Backlog |       | $                      | 2,142.3    |   | $ | 2,023.6 |   |

 

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.

 

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We define backlog as the amount of revenues we expect to realize(i) over the remaining base contract performance period and (ii) fromthe exercise by the customer of option periods that we reasonably believe willbe exercised, in each case from signed contracts in existence as of themeasurement date. We do not include, in our backlog calculation, contractceiling values, which represent the maximum amount of contract awards thatcould be awarded to all contractors, under GWACs or agency-specificmultiple-award ID/IQ contracts.

 

Wealso do not include in backlog (i) the expected amount of revenues thatwould be realized if, and when, we were successful in the re-compete of signed contractsin existence as of the measurement date, or (ii) the expected amount ofrevenues 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 provide us with a greater opportunity to generate highermargins and provide the customer with a fixed value for services provided.

 

Thefollowing table summarizes our historical contract mix, measured as apercentage of total revenues, for the periods indicated:

 
| ** **         | ** ** | **Three Months Ended** | ** ** |
|--------------------|------------|------------------------|------------|
| ** **         | ** ** | **June 25, 2010** | ** ** | **June 26, 2009** | ** ** |
| Cost-plus-fee      |       | 32                     | %          | 29 | % |
| Time-and-materials |       | 44                     | %          | 50 | % |
| Fixed-price        |       | 24                     | %          | 21 | % |

 

***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 tohire and deploy additional qualified employees is a key driver of our abilityto generate additional revenues, and our successful deployment of existingemployees on direct-billable jobs is a key driver of our profitability.

 

***Indirect Costs***

 

Indirect costs constitute a substantial portion of the costs associatedwith our performance of contracts. We carefully monitor the amount by which ouractual indirect costs under our contracts vary from those expected to beincurred, which we refer to as indirect expense variance. Increased indirectrates can adversely affect our ability to achieve attractive contract pricing,our profitability, and our competitive position, by resulting in unexpectedincreased costs.

 

***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 25, 2010, we reportedDSO of 77 days, 

 

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adecrease from 78 days for the year ended March 31, 2010. The decrease inDSO was primarily the result of lower average receivables balance due toimproved collections.

 

***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 uponfinal execution of contracts, contract completion, milestones or completion ofrate negotiations. 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 subject to government funding. We providea reserve against our receivables for estimated losses that may result fromrate negotiations, audit adjustments and/or government funding availability. Tothe extent that actual adjustments due to rate negotiations, audit adjustmentsor government funding availability differ from our estimates, our revenue maybe impacted. Because substantially all of our receivables originate fromcontracts funded by the federal government, we believe that the likelihood of amaterial 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 collectability 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 satisfaction. During this review, we determinewhether the overall progress on a contract is consistent with the effortexpended.

 

Contractrevenue recognition inherently involves the use of estimates. Examples ofestimates include the contemplated level of effort to accomplish the tasksunder 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 type ofcontract is recognized in the period in which it becomes probable and can bereasonably estimated.

 

Under cost-plus-fee contracts, revenues are recognized as costs areincurred and include an estimate of applicable fees earned. We consider fixedfees under cost-plus-fee contracts to be earned in proportion to the allowablecosts actually incurred in performance of the contract for contracts thatinvolve a level of effort. For cost-plus-fee contracts which do not involve alevel of effort requirement, 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 contract 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 and Accounting StandardsCodification (“ASC”) 605-35, *Construction-Type andProduction-Type Contracts*.

 

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 

 

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performance,including any interim performance evaluations rendered by the customer. Forcost-plus-incentive fee type contracts, the method of calculating the incentivefee is specified in the contract and it is typically based on measuring actualcosts to perform the contract against a target cost to perform the contract. Weprepare periodic estimates to complete and adjust the incentive fee as requiredbased on the contract incentive fee formula.

 

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.

 

Disputes occasionally arise in the normal course of our business due toevents such as delays, changes in contract specifications, and questions ofcost allowability or collectability. Such matters, whether claims or unapprovedchange orders in the process of negotiation, are recorded at the lesser oftheir estimated net realizable value or actual costs incurred, and only whenthe realization is probable and can be reliably estimated. Claims against usare recognized where a loss is considered probable and can be reasonablyestimated in amount.

 

***Contract Cost Accounting***

 

As a contractor providing services primarily to the federal government,we must categorize our costs as either direct or indirect and allowable orunallowable. Direct costs are those costs that are identified with specificcontracts. These costs include labor, subcontractor and consultant services,third party materials we purchase under a contract and other non-labor costsincurred in support of a contract. Indirect costs are those costs notidentified with specific contracts. Rather, indirect costs are allocated tocontracts in accordance with generally accepted cost accounting practices andfederal government rules and regulations. These costs typically includecertain selling, general and administrative expenses, fringe benefit expenses,overhead expenses and depreciation and amortization costs. Direct and indirectcosts that are not allowable under the Federal Acquisition Regulation orspecific contract provisions cannot be considered for reimbursement under ourfederal government contracts. We must specifically identify these costs toensure we comply with these requirements. Our unallowable costs include aportion of our executive compensation, interest expense, federal income taxexpense, certain employee morale activities, certain types of legal andconsulting costs and the amortization of identified purchased intangibleassets, among others. A key element to our historical success has been ourability to manage indirect cost growth and unallowable costs.

 

***Goodwill and Intangible Assets***

 

Goodwill represents the excess of cost over the fair value of nettangible and identifiable intangible assets of acquired companies. We do notamortize goodwill; rather, we test goodwill for impairment at least on anannual basis. Testing for impairment is a two-step process. The first step is atest for potential impairment, while the second step measures the amount ofimpairment, if any. We are required to perform an impairment test at least onan annual basis at any time during the fiscal year, provided that the test isperformed at the same time every year. An impairment loss would be recognizedwhen the assets’ fair value is below their carrying value. We have elected thelast day of the third fiscal quarter as our testing date. Based on the testingperformed as of December 25, 2009, we determined that no impairmentsexisted.

 

Identifiable intangible assets are amortized over their estimateduseful lives. Customer relationships are being amortized on a straight-linebasis over periods ranging from five to seven years. Non-competition agreementsare being amortized on a straight-line basis over three years. Backlog andcontracts are being amortized on a straight-line basis over periods rangingfrom two to five years.

 

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**Results of Operations**

 

Thefollowing unaudited tables set forth the results of operations expressed inthousands of dollars and as a percentage of revenues, for the periods below:

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| **Consolidated  Statements of Income Data**      | ** ** | **June 25, 2010** | ** ** | **June 26, 2009** | ** ** |
| Revenues                                         |       | $                      | 213,321    |   | $ | 208,747 |   |
| Operating costs and expenses:                    |       |                   |       |   |   |
| Cost of revenues                                 |       | 175,759                |       | 173,089 |   |
| Selling, general and administrative              |       | 15,806                 |       | 14,092 |   |
| Merger and integration related charges and other |       | 4,018                  |       | — |   |
| Depreciation and amortization                    |       | 2,990                  |       | 2,830 |   |
| Total operating costs and expenses               |       | 198,573                |       | 190,011 |   |
| Operating income                                 |       | 14,748                 |       | 18,736 |   |
| Other income (expense):                          |       |                   |       |   |   |
| Other income                                     |       | 15                     |       | 3 |   |
| Interest income                                  |       | 10                     |       | 37 |   |
| Interest expense                                 |       | (737                   | )          | (1,147 | ) |
| Total other expenses                             |       | (712                   | )          | (1,107 | ) |
| Income before taxes                              |       | 14,036                 |       | 17,629 |   |
| Provision for income taxes                       |       | (5,540                 | )          | (6,965 | ) |
| Net income                                       |       | $                      | 8,496      |   | $ | 10,664 |   |

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| **As a Percentage  of Revenues**                 | ** ** | **June 25, 2010** | ** ** | **June 26, 2009** | ** ** |
| Revenues                                         |       | 100.0                  | %          | 100.0 | % |
| Operating costs and expenses:                    |       |                   |       |   |   |
| Cost of revenues                                 |       | 82.4                   |       | 82.9 |   |
| Selling, general and administrative              |       | 7.4                    |       | 6.8 |   |
| Merger and integration related charges and other |       | 1.9                    |       | — |   |
| Depreciation and amortization                    |       | 1.4                    |       | 1.4 |   |
| Total operating costs and expenses               |       | 93.1                   |       | 91.0 |   |
| Operating income                                 |       | 6.9                    |       | 9.0 |   |
| Other income (expense):                          |       |                   |       |   |   |
| Other income                                     |       | —                 |       | — |   |
| Interest income                                  |       | —                 |       | — |   |
| Interest expense                                 |       | (0.3                   | )          | (0.5 | ) |
| Total other expenses                             |       | (0.3                   | )          | (0.5 | ) |
| Income before taxes                              |       | 6.6                    |       | 8.4 |   |
| Provision for income taxes                       |       | (2.6                   | )          | (3.3 | ) |
| Net income                                       |       | 4.0                    | %          | 5.1 | % |

 

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.

 

Ourmost significant expense is cost of revenues, which includes the costs ofdirect labor, subcontractors, materials, equipment, travel and an allocation ofindirect costs (other than selling, general and administrative expenses anddepreciation). Indirect costs consist primarily of fringe benefits, applicablefacility and information technology infrastructure costs, business insurance,recruiting, training, other overhead and certain other non-direct costs thatare necessary to support direct labor. The number and types of personnel, theirsalaries and other costs, can have a significant impact on our cost ofrevenues.

 

Ourselling, general and administrative expenses include costs not directlyassociated with performing work for our customers. These costs include wagesplus associated fringe benefits, stock-based compensation charges, rent, traveland insurance. Among the functions covered by these expenses are sales,business development, contract administration, legal, finance, accounting, 

 

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humanresources, information technology and general management. Most of these costsare allowable costs under the cost accounting standards for contracting withthe federal government and are recoverable under cost-plus-fee contracts.

 

Ourdepreciation and amortization expenses include the amortization of purchasedintangibles in connection with acquisitions, the amortization of leaseholdimprovements and the depreciation of property and equipment purchased in theordinary course of our business.

 

Certainrevenues and payments we receive are based on provisional billings and paymentsthat are subject to adjustment after audit. Federal government agencies havethe right to challenge our cost estimates and allocation methodologies withrespect to government contracts. In addition, contracts with these agencies aresubject to audit and possible adjustment to give effect to unallowable costsunder cost-plus-fee contracts or to other regulatory requirements affectingboth cost-plus-fee and fixed-price contracts.

 

***Comparison of Results of Operationsfor the Three Months Ended June 25, 2010 and June 26, 2009***

 

***Revenues.***  Ourconsolidated revenues increased $4.6 million, or 2.2%, from $208.7 million for thethree months ended June 26, 2009, to $213.3 million for the three monthsended June 25, 2010. The increase was primarily due to increased servicesfor information technology solutions for the Defense Information SystemsAgency, increased biometric software development, training, and support for theU.S. Army and increased management and support services for the U.S. ArmySustainment Command, offset partially by reduced revenues associated with thecompletion of certain of the Company’s contracts, including services providedto the U.S. Army Program Executive Office for Simulation, Training andInstrumentation (PEO STRI).

 

***Cost of Revenues.***  Our cost of revenues increased $2.7 million,or 1.6%, from $173.1 million for the three months ended June 26, 2009, to $175.8million for the three months ended June 25, 2010. This increase wasprimarily the result of additional costs attributable to revenues associatedwith the increased services referred to above. Cost of revenues represented82.4% of revenues for the three months ended June 25, 2010, as compared to82.9% of revenues for the three months ended June 26, 2009. This decreasewas primarily the result of a greater percentage of more profitable fixed pricecontracts.

 

***Selling, General and Administrative.***  Our selling, general and administrativeexpense increased $1.7 million, or 12.1%, from $14.1 million for the threemonths ended June 26, 2009, to $15.9 million for the three months ended June 25,2010. This increase was primarily due to increased labor costs related to theproposed merger with CGI Group, Inc., and an increase in businessdevelopment costs. Selling, general and administrative expense represented 7.4%of revenues for the three months ended June 25, 2010, as compared to 6.8%of revenues for the three months ended June 26, 2009.

 

***Merger and Integration RelatedCharges and Other.***  Weincurred legal, banking, consulting and other merger and integration relatedexpenses of $4.0 million for the three months ended June 25, 2010, inconnection with our proposed merger with CGI Group, Inc.

 

***Depreciation and Amortization.***  Our depreciation and amortization expenseincreased $0.2 million, or 7.1%, from $2.8 million for the three months ended June 26,2009, to $3.0 million for the three months ended June 25, 2010. Theincrease in depreciation and amortization was primarily due to the depreciationexpense associated with capital expenditures and leasehold improvements.

 

***Interest Expense.***  Our interest expense decreased $0.4 millionfrom $1.1 million for the three months ended June 26, 2009, to $0.7million for the three months ended June 25, 2010. The decrease in interestexpense was primarily due to a lower overall borrowing rate and a lower averageoutstanding debt balance.

 

***Provision for Income Taxes. ***Our effective tax rate wasessentially unchanged at 39.5% for the three months ended June 26, 2009and June 25, 2010.

 

***Net Income.***  Our net income decreased $2.2 million, or20.6%, from $10.7 million for the three months ended June 26, 2009, to$8.5 million for the three months ended June 25, 2010. The decrease in netincome is primarily attributable to the $4.0 million merger related costs dueto the proposed merger with CGI Group Inc., partially offset by reducedinterest expense.

 

**Liquidity and Capital Resources**

 

***Short-Term Liquidity Requirements.***  We generally consider our short-termliquidity requirements to consist primarily of funds necessary to finance thecosts of operations pending the billing and collection of accounts receivable.We expect to meet our 

 

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short-termliquidity needs through existing cash balances and cash provided by ouroperations and, if necessary, from borrowings under our Senior Credit Facility(defined below).

*** ***

***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 25, 2010** | ** ** | **June 26, 2009** | ** ** |
| ** **                                | ** ** | **(in millions)**      | ** ** |
| Net cash provided by operating activities |       | $                      | 23.9       |   | $ | 9.4 |   |
| Net cash used in investing activities     |       | $                      | (1.3       | ) | $ | (1.5 | ) |
| Net cash used in financing activities     |       | $                      | (24.6      | ) | $ | (5.1 | ) |

 

Netcash provided by operating activities of $23.9 million for the three monthsended June 25, 2010 primarily reflected net income from plus depreciationand amortization expenses, a reduction in accounts receivable balances due toimproved collections, an increase in accounts payable due to the timing ofpayments to certain vendors, partially offset by costs related to the proposedmerger with CGI Group, Inc. Net cash provided by operating activities of$9.4 million for the three months ended June 26, 2009 primarily reflectedthe increased earnings as a result of the improved profitability of ourcontracts and the decrease in the amount of estimated tax payments, partiallyoffset by an increase in accounts receivable due to the timing of collections.

 

Netcash used in investing activities of $1.3 million and $1.5 million for thethree months ended June 25, 2010 and June 26, 2009, respectively,consisted primarily of purchases of office equipment and leasehold improvementsto support our continued growth in operations.

 

Netcash used in financing activities of $24.6 million for the three months ended June 25,2010 consisted primarily of $26.0 million in payments on our revolving portionof our Senior Credit Facility, partially offset by proceeds from the exerciseof stock options and tax benefits from stock transactions. Net cash used infinancing activities of $5.1 million for the three months ended June 26,2009 consisted primarily of $6.0 million in payments on our revolving portionof our Senior Credit Facility, partially offset by proceeds from the exerciseof stock options.

 

Asof June 25, 2010, we had approximately $1.9 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 25, 2010, the lenders’ aggregate commitment under the Senior CreditFacility was $276.1 million, which consisted of a $241.6 million revolving lineof credit (“Revolver”) and a $34.5 million term loan (“Term Loan”), and we hadoutstanding indebtedness of $34.5 million on the Term Loan and $62.0 million onthe Revolver, with a weighted-average interest rate of 

 

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approximately1.20 % and 1.87% for the three months ended June 25, 2010 and June 26,2009, respectively.  At June 25,2010, our borrowing availability under the Senior Credit Facility was $179.5million, including outstanding 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.

 

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 charge coverage ratio as of the endof any fiscal quarter of not less than 1.35 to 1.00, based upon the ratio of (i) consolidatedEBITDA (as defined in the Amended Credit Agreement) less the actual amount paidby us and our subsidiaries in cash on account of capital expenditures and taxesto (ii) consolidated interest expense for such period, scheduled principalpayments required to be made on consolidated total debt during such period andcertain restricted payments paid during such period, in each case measured forthe four consecutive fiscal quarters ending on or immediately prior to suchdate; and

 

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

 

AtJune 25, 2010, we were in compliance with all covenants under our SeniorCredit Facility. The obligations under the Senior Credit Facility areunconditionally guaranteed by each of our existing and subsequently acquired ororganized subsidiaries and are secured on a first-priority basis by securityinterests (subject to permitted liens) in substantially all assets owned by usand each of our subsidiaries, including the shares of capital stock of oursubsidiaries, subject to certain exceptions.

 

**Capital Expenditures**

 

Ourcapital expenditures were $1.3 million and $1.5 million for the three monthsended June 25, 2010 and June 26, 2009, respectively. Substantiallyall of these expenditures consisted of leasehold improvements and purchases ofoffice equipment.

 

**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofSEC Regulation S-K as of June 25, 2010.

 

**Accounting StandardsUpdates**

 

InOctober 2009, the FASB issued an update to*“Revenue Recognition — Multiple Deliverable Revenue Arrangements.”* This update removes theobjective-and-reliable-evidence-of-fair-value criterion from the separationcriteria used to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting, replaces references to “fairvalue” with “selling price” to distinguish from the fair value measurementsrequired under the “*Fair Value Measurementsand Disclosures”* guidance, provides a hierarchy that entities mustuse to estimate the selling price, eliminates the use of the residual methodfor allocation, and expands the ongoing disclosure requirements. This update iseffective for fiscal years beginning on or after June 15, 2010, and can beapplied prospectively or retrospectively. We do not expect that the adoption ofthis update will have a material impact on our consolidated financial positionor results of operations.

 

InOctober 2009, the FASB issued an update to *“Software—Multiple-Deliverable Revenue Arrangements.”*Thisupdate amends the existing accounting model for revenue arrangements that includeboth tangible products and software elements. Tangible products containingsoftware components and nonsoftware components that function together todeliver the tangible product’s essential functionality are no longer within thescope of software revenue guidance. In addition, this update provides guidanceon how to determine which software relating to the tangible product would beexcluded from the scope of the software revenue guidance. This update iseffective for arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010. We do not expect that the adoption ofthis update will have a material impact on our consolidated financial positionor results of operations.

 

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InJanuary 2010, the FASB issued an update to “*Fair Value Measurements and Disclosures.”* This updaterequires new disclosures on the transfers of assets and liabilities betweenLevel 1 (quoted prices in active market for identical assets and liabilities)and Level 2 (significant other observable inputs) of the fair value measurementhierarchy, including the reasons for and the timing of the transfers. The standarddoes not change how fair values are measured; accordingly, the standard willnot have an impact on our consolidated financial statements.  At June 25,2010, we did not transfer any assets or liabilities that are measured at fairvalue on a recurring basis between Levels 1 and 2, and did not have anytransfers into and out of Level 3 (significant unobservable inputs).

 

InApril 2010, the FASB issued an update to “*MilestoneMethod of Revenue Recognition.” *This update establishesauthoritative guidance permitting use of the milestone method of revenuerecognition for research or development arrangements that contain paymentprovisions or consideration contingent on the achievement of specified events.This guidance is effective for milestones achieved in fiscal years beginning onor after June 15, 2010 and allows for either prospective or retrospectiveapplication, with early adoption permitted. We are currently evaluating theimpact that adoption of this guidance will have on our financial position andresults of operations.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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 25, 2010, 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 $0.2million.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Asof June 25, 2010, under the supervision and with the participation of ourmanagement, including our chief executive officer and our chief financialofficer, we have evaluated the effectiveness of our disclosure controls andprocedures, as defined in Rule 13a-15(e) of the Securities ExchangeAct of 1934, as amended. Based on this evaluation, our chief executive officerand our chief financial officer have concluded that our disclosure controls andprocedures were effective, as of June 25, 2010, such that the informationthat is required to be disclosed in our reports filed with the SEC (i) isrecorded, processed, summarized and reported within the time periods specifiedin SEC rules and forms and (ii) is accumulated and communicated tomanagement, including our chief executive officer and our chief financialofficer, as appropriate to allow timely decisions regarding required disclosure.

 

**Changes in Internal Control over Financial Reporting**

 

Therehas not been any change in our internal control over financial reporting (asdefined in Rule 13a-15(f) of the Exchange Act) identified inconnection with the evaluation required by Rule 13a-15(d) under theExchange Act during the quarter ended June 25, 2010 that has materiallyaffected, or is reasonably likely to materially affect, those controls.

 

**PART II:OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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

 

OnApril 2, 2009, SC Diamond Associates, L.P., or S.C. Diamond, filed alawsuit in Virginia Beach Circuit Court against us and Allied TechnologyGroup, Inc., or Allied. S.C. Diamond is the owner of a warehouse propertyin Virginia Beach, Virginia in which we subleased a portion of the facility. InMarch 2008, the warehouse caught fire, allegedly as a result of anexploded high-intensity metal halide bulb, which is alleged to have beenmanufactured by Philips Electronics N.A. Corporation, d/b/a Philips LightingCompany, or Philips. S.C. Diamond sued Allied, as its tenant, and us, assub-lessee, alleging breach of contract and negligence against Allied, andnegligence, negligence per se and nuisance against us.  S.C. Diamondalso sued Philips. Travelers Indemnity Company, which insured S.C.Diamond, intervened in the lawsuit on September 15, 2009, makingsubrogation claims against us and Philips, seeking to recover approximately $8million in insurance proceeds previously paid to S.C. Diamond. In July2010, while expressly disavowing liability, our insurance carrier reached a settlement in principle with S.C. Diamondand Travelers. Allied, who remains in litigation with S.C.Diamond, has indicated its intent to make a claim forindemnification against us  and Philips.S.C. Diamond is seeking damages from Allied of approximately $14 million.

 

Wedispute that we have any liability to Allied. Trial is scheduled tocommence in October 2010. In management’s opinion, the disposition ofthis litigation is not expected to have a material adverse effect on theCompany’s financial position, results of operations or liquidity.

 

**Continuum Capital Litigation — Arlington Circuit Court**

 

OnMay 27, 2010, Continuum Capital, alleging itself to be a stockholder ofthe Company, filed a purported shareholder class action complaint in theCircuit Court for the County of Arlington, Virginia, captioned ContinuumCapital v. Philip O. Nolan et al., Case No. 10-646, in connection with thetender offer by CGI Fairfax Inc. (the “Offeror”), an indirect wholly-ownedsubsidiary of CGI Group, Inc. (“CGI”) and a direct wholly-owned subsidiaryof CGI Federal Inc. (“CGI Federal”), to acquire all of the outstanding sharesof our common stock, par value $0.01 per share, at a price of $37.50 per share(the “Offer”) and the proposed subsequent merger of the Offeror with and into us(the “Merger”). The complaint names as defendants the Company, the members ofour board of directors, CGI Federal and the Offeror. The suit alleges thatthe Company and the members of our board of directors breached their fiduciaryduties to the Company’s shareholders in connection with the sale of the Companyand that CGI Federal and the Offeror aided and abetted the purported breachesof fiduciary duties.

 

Thesuit seeks various equitable relief related to the Offer and the Merger andalso seeks the costs of the action, including interest, attorneys’ fees,experts’ fees and other costs. Stanley believes the allegations are withoutmerit and intend to defend vigorously the action. In management’s opinion, thedisposition of this litigation is not expected to have a material adverseeffect on the Company’s financial position, results of operations or liquidity.

 

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**Other Litigation**

 

Otherthan as set forth above, neither we, nor any of our subsidiaries, are currentlysubject to any material legal proceedings, nor, to our knowledge, is anymaterial legal proceeding currently threatened against us.

 

**ITEM 1A. RISK FACTORS**

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the risks discussed in “Part I, Item 1A. RiskFactors” in our Form 10-K for the fiscal year ended March 31, 2010.These risks and uncertainties have the potential to affect materially ourbusiness, financial condition, results of operation, cash flows and futureprospects.

 

Wedo not believe that there have been any material changes to the risk factorspreviously disclosed in our Form 10-K for the fiscal year ended March 31,2010.

 

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. [REMOVED AND RESERVED]**

 

**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)                                   |
|       | July 28,  2010                                              |
|       |                                                             |
|       |                                                             |
| ** ** | **/s/ BRIAN J. CLARK**                                           |
|       | Brian  J. Clark                                                  |
|       | Executive  Vice President, Chief Financial Officer and Treasurer |
|       | (Principal  Financial and Accounting Officer)                    |
|       | July 28,  2010                                              |

 

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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)                       |
|                 |       |                                                                                                                                                                                                          |
| 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

 

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