e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-23585.
When You Must Win
SM&A
(Exact name of registrant as specified in its charter)
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Delaware
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33-0080929 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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4695 MacArthur Court, 8th Floor, Newport Beach, California
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92660 |
(Address of principal executive offices)
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(Zip Code) |
(949) 975-1550
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
Common Stock, $0.0001 par value18,813,821 shares outstanding as of April 30, 2008
2
CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain forward-looking statements as defined
within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, relating to revenue, revenue composition, earnings, projected
plans, performance, contract procurement, demand trends, future expense levels, trends in average
headcount and gross margins, and the level of expected capital expenditures. Such forward-looking
statements are based on the beliefs of, estimates made by, and information currently available to
SM&A (the Company) management and are subject to certain risks, uncertainties and assumptions.
Any statements contained herein (including without limitation statements to the effect that the
Company or management estimates, expects, anticipates, plans, believes, projects,
continues, may, will, could, or would or statements concerning potential or
opportunity or variations thereof or comparable terminology or the negative thereof) that are not
statements of historical fact should be construed as forward-looking statements. The actual results
of SM&A may vary materially from those expected or anticipated in these forward-looking statements.
The realization of such forward-looking statements may be impacted by certain important
unanticipated factors including those discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations, at pages 12-14. Because of these and other factors
that may affect SM&As operating results, past performance should not be considered as an indicator
of future performance, and investors should not use historical results to anticipate results or
trends in future periods. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers
should carefully review the risk factors described in this and other documents that SM&A files from
time to time with the Securities and Exchange Commission (SEC), including subsequent Current
Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
HOW TO OBTAIN SM&A SEC FILINGS
All reports filed by SM&A with the SEC are available free of charge via EDGAR through the SEC
website at www.sec.gov. In addition, the public may read and copy materials filed by the Company
with the SEC at the SECs public reference room located at 450 Fifth St., N.W., Washington, D.C.
20549. SM&A also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge
to investors upon request and makes electronic copies of its most recently filed reports available
through its website at www.smawins.com as soon as reasonably practicable after filing such material
with the SEC.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SM&A
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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March 31, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,251 |
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$ |
5,422 |
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Investments |
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7,455 |
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10,610 |
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Accounts receivable, net |
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22,373 |
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18,171 |
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Prepaid expenses and other current assets |
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2,772 |
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2,011 |
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Total current assets |
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35,851 |
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36,214 |
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Fixed assets, net |
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3,306 |
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3,399 |
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Goodwill |
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8,374 |
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8,278 |
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Intangibles, net |
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1,781 |
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1,892 |
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Other assets |
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1,369 |
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895 |
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$ |
50,681 |
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$ |
50,678 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,156 |
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$ |
1,925 |
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Accrued compensation and related benefits |
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4,992 |
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3,508 |
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Accrued contingent consideration |
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1,750 |
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Other current liabilities |
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138 |
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127 |
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Total current liabilities |
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7,286 |
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7,310 |
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Other liabilities |
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748 |
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785 |
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Total liabilities |
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8,034 |
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8,095 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock |
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Common stock |
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2 |
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2 |
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Additional paid-in capital |
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46,048 |
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45,450 |
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Treasury stock |
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(2,540 |
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(1,506 |
) |
Accumulated deficit |
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(863 |
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(1,363 |
) |
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Total stockholders equity |
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42,647 |
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42,583 |
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$ |
50,681 |
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$ |
50,678 |
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See accompanying notes to condensed consolidated financial statements.
4
SM&A
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(UNAUDITED)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Revenue |
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$ |
25,423 |
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$ |
23,624 |
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Cost of revenue |
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15,685 |
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14,417 |
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Gross margin |
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9,738 |
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9,207 |
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Selling, general and administrative expenses |
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8,957 |
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6,894 |
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Operating income |
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781 |
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2,313 |
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Interest income, net |
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95 |
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143 |
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Income before income taxes |
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876 |
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2,456 |
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Income tax expense |
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376 |
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1,005 |
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Net income |
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$ |
500 |
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$ |
1,451 |
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Net income per share: |
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Basic |
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$ |
0.03 |
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$ |
0.08 |
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Diluted |
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$ |
0.03 |
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$ |
0.08 |
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Shares used in calculating net income per share: |
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Basic |
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18,990 |
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18,609 |
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Diluted |
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19,100 |
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18,800 |
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See accompanying notes to condensed consolidated financial statements.
5
SM&A
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
500 |
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$ |
1,451 |
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Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
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289 |
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274 |
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Loss on disposal of assets |
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32 |
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Stock-based compensation expense |
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421 |
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400 |
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Deferred income taxes |
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(489 |
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(49 |
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Changes in operating assets and liabilities, net of business acquisitions: |
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Accounts receivable |
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(4,202 |
) |
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(7,877 |
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Prepaid expenses and other assets |
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(746 |
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(64 |
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Accounts payable |
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231 |
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432 |
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Accrued compensation and related benefits |
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1,484 |
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2,749 |
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Other liabilities |
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(1,776 |
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(2 |
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Net cash used in operating activities |
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(4,256 |
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(2,686 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of fixed assets |
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(117 |
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(402 |
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Purchases of marketable securities |
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(3,355 |
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(6,000 |
) |
Proceeds from sale of marketable securities |
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6,510 |
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2,000 |
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Cost of acquisitions, net of cash acquired |
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(96 |
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(2,674 |
) |
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Net cash provided by (used in) investing activities |
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2,942 |
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(7,076 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock |
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177 |
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148 |
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Payment for repurchase of shares |
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(1,034 |
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(842 |
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Net cash used in financing activities |
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(857 |
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(694 |
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Net decrease in cash and cash equivalents from continued operations |
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(2,171 |
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(10,456 |
) |
Net cash used in discontinued operations by operating activities |
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(42 |
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Net decrease in cash and cash equivalents |
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(2,171 |
) |
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(10,498 |
) |
Cash and cash equivalents at beginning of period |
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5,422 |
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15,143 |
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Cash and cash equivalents at end of period |
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$ |
3,251 |
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$ |
4,645 |
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SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: |
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Common stock issued for an acquisition |
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$ |
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$ |
2,213 |
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Common stock issued to non-employee directors |
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$ |
39 |
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$ |
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See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2008 and 2007
(UNAUDITED)
Note 1. Basis of Presentation
The condensed consolidated financial statements included herein are unaudited; such financial
statements contain all normal recurring accruals and adjustments that, in the opinion of
management, are necessary to present fairly the consolidated financial position of SM&A at March
31, 2008, the consolidated results of operations for the three months ended March 31, 2008 and
2007, and cash flows for the three months ended March 31, 2008 and 2007, respectively.
Comprehensive income is equivalent to net income for the three month periods ended March 31, 2008
and 2007, respectively.
Accounting measurements at interim dates inherently involve greater reliance on estimates than
at year-end. The results of operations for the three months ended March 31, 2008 are not
necessarily indicative of the results to be expected for the full fiscal year.
The accompanying unaudited condensed consolidated financial statements do not include
footnotes and certain financial presentations normally required under generally accepted accounting
principles. Therefore, these financial statements should be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended December 31, 2007, included
in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7,
2008.
Recent Accounting Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133, which requires additional disclosures about the objectives of the derivative instruments
and hedging activites, the method of accounting for such instruments under SFAS 133 and its related
interpretations, and a tabular disclosure of the effects of such instruments and related hedged
items on our financial position, financial performance, and cash flows. SFAS 161 is effective for
us beginning January 1, 2009. The adoption of SFAS 161 is not expected to have a material impact
on our financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines fair
value, establishes guidelines for measuring fair value and expands disclosures regarding fair value
measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective
for fiscal years beginning after November 15, 2007. However, on February 12, 2008, the FASB issued
proposed FASB Staff Position (FSP) SFAS No. 157-2, Effective Date of FASB Statement No. 157,
which defers the effective date for adoption of fair value measurements for nonfinancial assets and
liabilities to fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 on
January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities
as noted in proposed FSP No. 157-2. The adoption of SFAS No. 157 did not have a material impact on
the Companys financial position, results of operations or cash flows.
Note 2. Net Income Per Share
The following table illustrates the number of shares used in the computation of basic and
diluted net income per share (in thousands):
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
Denominator for basic income per common share: |
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Weighted-average shares outstanding during the period |
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18,990 |
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18,609 |
|
Incremental shares attributable to dilutive outstanding stock options |
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110 |
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191 |
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Denominator for diluted income per share |
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19,100 |
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18,800 |
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Anti-dilutive shares excluded from the foregoing reconciliation |
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2,136 |
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1,329 |
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7
Note 3. Investments in Marketable Securities
During the three months ended March 31, 2008, the Company purchased additional short-term
state issued variable rate demand note securities for $3.4 million and sold $6.5 million of its
marketable securities for investment activities. There were no unrealized gains or losses at March
31, 2008. For the three months ended March 31, 2008 and 2007, our interest income on these
investments was approximately $64,000 and $32,000, respectively.
Note 4. Stock-Based Compensation
The fair value of each stock option is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for the three months ended
March 31, 2008 and 2007:
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
Expected life (in years) |
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2.6 |
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3.8 |
|
Stock price volatility |
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34.0 |
% |
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78.6 |
% |
Risk-free interest rate |
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2.5 |
% |
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4.9 |
% |
Forfeiture rate |
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10.6 |
% |
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9.8 |
% |
Stock dividend yield |
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N/A |
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N/A |
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Weighted-average fair value per option granted |
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$ |
1.36 |
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$ |
3.67 |
|
The following table summarizes stock option activity for the three months ended March 31,
2008:
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Weighted- |
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Weighted- |
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Average |
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Aggregate |
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Average |
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Fair Value of |
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Intrinsic |
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Shares |
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Exercise Price |
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Options Granted |
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Value |
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Outstanding at December 31, 2007 |
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2,272,448 |
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$ |
7.43 |
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Granted |
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450,428 |
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|
5.58 |
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$ |
1.36 |
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Exercised |
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Cancelled, Forfeited or Expired |
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(135,750 |
) |
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8.19 |
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Outstanding at March 31, 2008 |
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2,587,126 |
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|
7.07 |
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$ |
361,000 |
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Exercisable at March 31, 2008 |
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1,298,676 |
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$ |
7.70 |
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$ |
361,000 |
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The total intrinsic value of options exercised during the three months ended March 31, 2008
and 2007 was $0 and $18,000, respectively.
The Company recorded $421,000 and $400,000 in stock-based compensation expense before income
tax benefit for stock options in its results of operations for the three months ended March 31,
2008 and 2007, respectively. As of March 31, 2008, there was $3.1 million of total unrecognized
compensation cost related to unvested awards which will be amortized to expense over the
weighted-average period of 2.5 years.
The Company received $0 and $30,000 in cash from option exercises during the three months
ended March 31, 2008 and 2007, respectively. The Company received $138,000 and $118,000 from the
purchase of shares under the employee stock purchase plan (ESPP) during the three months ended
March 31, 2008 and 2007, respectively. Upon the exercise of options and stock purchase shares
granted under the ESPP, the Company issues new common stock from its authorized shares.
Note 5. Acquisitions
Project Planning, Incorporated.
On February 9, 2007, the Company completed an acquisition of Project Planning, Incorporated.
(PPI) pursuant to a Stock Purchase Agreement, as amended. As part of the agreement, as amended,
the Company could pay up to an additional $9.5 million over a three year period upon satisfaction
of certain revenue goals. As of March 31, 2008, the selling shareholder of PPI earned
approximately $3.7 million of the remaining cash portion of the purchase price, which $876,000 was
recorded as a selling, general and administrative expense during the three months ended March 31,
2008.
8
Performance Management Associates, Inc.
On September 14, 2007, the Company completed an acquisition of Performance Management
Associates, Inc. (PMA) pursuant to a Stock Purchase Agreement, as amended. As part of the
agreement, as amended, the Company could pay up to an additional $1.3 million over a three year
period upon satisfaction of certain revenue goals. If earned, the additional payment will be
allocated to goodwill. No amount was earned as of March 31, 2008.
Unaudited Pro Forma Financial Information
The pro forma combined results set forth below are not necessarily indicative of the results
that actually would have occurred if the acquisitions had been completed as of the beginning of
2007, nor are they necessarily indicative of future consolidated results. The following presents
the unaudited pro forma combined results of operations of the Company with the acquisitions.
|
|
|
|
|
|
|
Three Months
Ended |
(in thousands, except for share information) |
|
March 31, 2007 |
|
Revenue |
|
$ |
25,509 |
|
Net income |
|
$ |
1,445 |
|
Pro forma net income per common share: |
|
|
|
|
Basic |
|
$ |
0.08 |
|
Diluted |
|
$ |
0.08 |
|
Note 6. Intangible Assets and Goodwill
Intangible Assets
The Company recorded amortization expense related to the acquired amortizable intangibles of
$111,000 and $27,000 during the three months ended March 31, 2008 and 2007, respectively.
Goodwill
The Company recorded $96,000 of additional goodwill related to the PPI earn-out provision
during the three months ended March 31, 2008.
Note 7. Income Taxes
Our effective income tax rates for the three months ended March 31, 2008 and 2007 were 42.9%
and 40.9%, respectively. The increase in the income tax rate for the three months ended March 31,
2008 was related to the cost of stock-based compensation and the timing of recognizing the related tax
benefits.
Note 8. Credit Facility
The Company has a revolving credit agreement which allows for borrowings up to $10.0 million
at the prime rate minus one half of one percent (-0.50%) per annum or LIBOR plus two and one
quarter percent (2.25%) per annum. The revolving credit agreement is renewable annually on May 1st
of each year. Borrowings under the revolving credit agreement are unsecured. The agreement
requires the Company to comply with certain financial covenants pertaining to its tangible net
worth, ratio of total liabilities to tangible net worth, and ratio of current assets to current
liabilities (as defined in the agreement). The agreement also contains certain negative covenants
which, among other things, restrict the Companys ability to incur additional indebtedness of more
than $1.0 million in excess of the $10.0 million limit set forth in the credit agreement and make
capital expenditures in excess of $3.0 million without the prior written approval of the lender.
On May 1, 2008 the credit line was renewed and the financial institution required the following
provision; in the event of default whereby the individuals who, as the date of the agreement,
constitute the Companys Board of Directors; (the incumbent Board) cease for any reason to
constitute at least 75 percent of the Board of Directors; provided, however, that any individual
who becomes a director subsequent to the date of this agreement whose election, or nomination for
election by the Companys stockholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such individual was a
member of the Incumbent Board. At March 31, 2008, the Company was in compliance with its covenants
and had no outstanding borrowings under the line of credit and $10.0 million was available.
9
Note 9. Stockholders Equity
The Companys Board of Directors (Board) has previously authorized a plan to repurchase up
to $30.0 million of the Companys common stock. For the three months ended March 31, 2008 and
2007, the Company repurchased 241,200 shares at a total cost of $1.0 million and 139,417 shares at
a total cost of $842,000, respectively. Since the inception of the share repurchase plan, the
Company has repurchased 3,596,060 shares at a total cost of $25.2 million. The Company intends to
repurchase shares from time to time, at prevailing prices, in the open market. The share
repurchase plan may be suspended or discontinued at any time. The Company currently has
approximately $4.8 million remaining in share repurchase authorization.
The Companys stockholders equity activity for the three months ended March 31, 2008 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid-In |
|
|
Treasury |
|
|
Accumulated |
|
|
Stockholders |
|
(in thousands, except share data) |
|
Shares |
|
|
Capital |
|
|
Stock |
|
|
Deficit |
|
|
Equity |
|
|
Balances at December 31, 2007 |
|
|
18,998,110 |
|
|
$ |
45,452 |
|
|
$ |
(1,506 |
) |
|
$ |
(1,363 |
) |
|
$ |
42,583 |
|
Proceeds from the issuance of
common stock |
|
|
31,911 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
177 |
|
Stock-based compensation expense |
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
421 |
|
Repurchased treasury shares |
|
|
(241,200 |
) |
|
|
|
|
|
|
(1,034 |
) |
|
|
|
|
|
|
(1,034 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2008 |
|
|
18,788,821 |
|
|
$ |
46,050 |
|
|
$ |
(2,540 |
) |
|
$ |
(863 |
) |
|
$ |
42,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, the Companys Compensation Committee approved the Executive Incentive Plan (the
Plan) which includes a long-term incentive based compensation component titled Long Term
Incentive Plan (LTIP). This Plan is designed to drive behavior to reach revenue, net income, and
earnings per share targets established by the Compensation Committee. The LTIP will reward
sustained performance over a three-year period that substantially increases shareholder value and
will cover the calendar period 2008 through 2010. The Compensation Committee intends to issue
performance stock on an annual basis with successive three-year performance periods. The criteria
in the LTIP will be the achievement of $0.79 earnings per share (EPS), over a twelve month
period, on or before December 31, 2010. If the $0.79 EPS is met prior to December 31, 2010, the
performance stock will be issued within 30 days of reaching the maximum target. Determination that
the EPS target has been achieved will be by Audit Committee of the Board. If the criteria are not
met by December 31, 2010, the number of shares granted will be determined in accordance with a
predetermined sliding scale. EPS performance below $0.54 a share will receive no award. There was
no expense recorded as of March 31, 2008.
Note 10. Commitment and Contingencies
From time to time, the Company may be involved in legal proceedings and claims that arise in
the ordinary course of business. The Company is currently unaware of any legal proceedings or
claims against it that management believes will have, individually or in the aggregate, a
materially adverse effect on its business, financial condition, or operating results.
The Company entered into employment agreements with its President and Chief Executive Officer
and its Chief Financial Officer and into benefit agreements with other executives of the Company
(collectively Agreements). Under the terms of each of the Agreements, the Company may be
obligated to pay a severance payment ranging from three months to one year of the respective
employees base salary, depending on the date of termination, if the employment is terminated by
the Company without cause. In addition, the Agreements have change of control provisions that may
require the Company to pay up to eighteen months of current annual base salary, target bonus and
health and life insurance benefits.
The Company has agreements whereby its officers and directors are indemnified for certain
events or occurrences while the officer or director is, or was, serving at our request in such
capacity. The maximum potential amount of future payments the Company could be required to make
under these indemnification agreements is unlimited. The Company believes the estimated fair value
of these indemnification agreements is minimal and has no liabilities recorded for these agreements
as of March 31, 2008.
The former Chairman of the Board and CEO of SM&A, who retired from the Company and the Board
in March 2007, is soliciting stockholders to vote for a dissident slate of four directors he is
recommending to replace four independent incumbent directors. The Board of Directors of SM&A are
opposed to the slate of directors presented by Mr. Myers.
10
This on-going proxy contest has demanded management time and corporate resources
diverting focus from core business activities. In addition, SM&A has retained a third party proxy
solicitor to assist the Company in the solicitation of proxies for a fee not to exceed $200,000,
plus reimbursement of out-of-pocket expenses. The Companys expenses related to the solicitation
in excess of those normally spent for an annual meeting with an uncontested director election are
estimated to be approximately $500,000, of which approximately $60,000 has been spent as of March 31, 2008. The
cost of the Companys solicitation of proxies will be borne by the Company.
11
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
SM&A is the worlds leading provider of Competition Management (business capture and proposal
development) services, and a leading provider of Program Services (post-award risk mitigation and
profit maximizing) services. Under these two service lines, our approximately 400 employees and
consultants provide strategy, proposal management, program management, systems engineering, program
planning, and other high-value technical support to major industrial customers in the defense,
homeland security, aerospace, information technology, healthcare and engineering sectors.
Results of Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
The following table sets forth certain historical operating results (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
Change |
|
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
Revenue |
|
|
25.4 |
|
|
|
100.0 |
|
|
|
23.6 |
|
|
|
100.0 |
|
|
|
1.8 |
|
|
|
7.6 |
|
Cost of revenue |
|
|
15.7 |
|
|
|
61.7 |
|
|
|
14.4 |
|
|
|
61.0 |
|
|
|
1.3 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
9.7 |
|
|
|
38.3 |
|
|
|
9.2 |
|
|
|
39.0 |
|
|
|
0.5 |
|
|
|
5.4 |
|
Selling, general and administrative expenses |
|
|
9.0 |
|
|
|
35.4 |
|
|
|
6.9 |
|
|
|
29.2 |
|
|
|
2.1 |
|
|
|
30.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
0.8 |
|
|
|
3.1 |
|
|
|
2.3 |
|
|
|
9.7 |
|
|
|
(1.5 |
) |
|
|
(65.2 |
) |
Interest income, net |
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
|
|
|
|
0.0 |
|
Income tax expense |
|
|
0.4 |
|
|
|
1.6 |
|
|
|
1.0 |
|
|
|
4.2 |
|
|
|
(0.6 |
) |
|
|
(60.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
0.5 |
|
|
|
2.0 |
|
|
|
1.4 |
|
|
|
5.9 |
|
|
|
(0.9 |
) |
|
|
(64.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue increased $1.8 million, or 7.6%, to $25.4 million for the three months ended
March 31, 2008 compared to $23.6 million for the same period of the prior year. The acquisitions
completed in fiscal 2007 contributed approximately $3.8 million or 15% of total revenue for the
three months ended March 31, 2008.
The following table is provided to display our revenue results compared to the same period of
the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
% Growth |
|
Revenues by Market Vertical |
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace and Defense (A&D) |
|
$ |
19.5 |
|
|
$ |
19.9 |
|
|
|
(2 |
%) |
Non Aerospace and Defense (SIIT) |
|
|
5.9 |
|
|
|
3.7 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25.4 |
|
|
$ |
23.6 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by Service Line |
|
|
|
|
|
|
|
|
|
|
|
|
Competition Management |
|
$ |
13.3 |
|
|
$ |
14.4 |
|
|
|
(8 |
%) |
Program Services |
|
|
12.1 |
|
|
|
9.2 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25.4 |
|
|
$ |
23.6 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
Total aerospace and defense client revenue was slightly down to
$19.5 million for the three months ended March 31, 2008 as compared to $19.9 million in the prior
year. Non-aerospace and defense client revenues increased 60% to $5.9 million from $3.7 million
for the three months ended March 31, 2008 and 2007, respectively. The Company is building momentum in the Program Services business in the non-A&D market, as well as
in its Competition Management business. The further diversification of revenues is attributable to
the Companys ongoing efforts to more fully implement its strategic business plan.
Revenues from our Competition
Management and Program Services lines were 52.4% and 47.6%, respectively, for the three months
ended March 31, 2008 as compared to 61.0% and 39.0% in 2007. While the level of activity within Competition Management was solid in the first quarter, there
were fewer large Federal procurement opportunities in the first quarter of 2008 as compared to the
first quarter of 2007. Large Federal procurement opportunities have the tendency to drive higher
revenue levels due to the larger and more complex proposals that are required. Large Federal
procurement opportunities trends have been variable and have traditionally contributed to
inconsistent Competition Management revenue within SM&A. We recorded success fees of $226,000
and $0 for the three months ended March 31, 2008 and 2007, respectively.
During 2008, our Program Services revenue has been positively impacted by the acquisitions of Project Planning, Inc. (PPI) and Performance
Management Associates, Inc. (PMA) in 2007.
These acquisitions, along with our solution offerings, have generated consistent sequential
quarterly revenue growth. Our growth has also been generated by our Account Executives ability to
build valued long term relationships with our clients. Our clients repeatedly engage us for our
services as they understand how valuable we are in helping them pursue, win and profitably perform on their
competitive procurement projects.
Gross Margin. Gross margin increased $0.5 million, or 5.4%, to $9.7 million for the three
months ended March 31, 2008 compared to $9.2 million for the same period of the prior year. The
increase in gross margin dollars is due to the increase in sales as discussed above offset by a
decrease in gross margin as a percentage of revenue. As a percentage of revenue, gross margin
decreased to 38.3% for the three months ended March 31, 2007 compared to 39.0% for the same
12
period of the prior year. The decline was due to revenue mix and pricing structures offered
to some of our largest customers, which included client investments of $122,000 to secure future
services. We expect the gross margins to be approximately 39.5% for fiscal year 2008.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
(SG&A) consist principally of salary and benefit costs for executive, sales and administrative
personnel, stock-based compensation, depreciation and amortization, training and recruiting,
professional services and other general corporate activities. SG&A increased $2.1 million, or
30.4%, to $9.0 million for the three months ended March 31, 2008 compared to $6.9 million for the
same period of the prior year. Included in the SG&A increase was an earn-out amount earned by the
principal of PPI of $876,000, $1.1 million attributable to the Companys offsite training
conference held in March 2008 and approximately $60,000 of legal fees related to the proxy contest
as of March 31, 2008. Stock-based compensation included in SG&A was $421,000 and $400,000 for the
three months ended March 31, 2008 and 2007, respectively.
On March 31, 2007, the Companys Chairman and Chief Executive Officer, Steven S. Myers,
retired and on April 1, 2007, was replaced by Cynthia Davis as Chief Executive Officer, who
resigned in July 2007 and was replaced by Cathy McCarthy as President and Chief Executive Officer.
The expense associated with Mr. Myers transition to Ms. Davis, which includes a retirement payment
of $500,000 and legal and professional fees of approximately $200,000, are included in SG&A for the
three months ended March 31, 2007.
The following table is provided to display our SG&A results segregating these areas of cost
for comparison purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
% Growth |
|
SG&A before the segregated expenses below |
|
$ |
5.7 |
|
|
$ |
5.5 |
|
|
|
4 |
% |
Stock-based compensation |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0 |
|
PPI and PMA SG&A |
|
|
0.9 |
|
|
|
0.3 |
|
|
|
200 |
|
Earn-out amount earned by the principal of PPI |
|
|
0.9 |
|
|
|
|
|
|
|
100 |
|
Company-wide offsite training conference fees |
|
|
1.1 |
|
|
|
|
|
|
|
100 |
|
Management transition expenses |
|
|
|
|
|
|
0.7 |
|
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
Total SG&A |
|
$ |
9.0 |
|
|
$ |
6.9 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
Excluding the anticipated expenses including, stock-based compensation, acquisitions SG&A,
earn-out expenses, fees associated with our Company-wide offsite training conference, and
management transition expenses; SG&A was held primarily constant by slightly increasing $0.2 million or 4% over the prior year and as a percentage of revenue decreased to 22% for the three
months ended March 31, 2008, as compared to 23% for the same period of the prior year.
Operating Income. Operating income decreased $1.5 million, or 65.2% to $0.8 million for the
three months ended March 31, 2008, compared to $2.3 million for the same period of the prior year.
As a percentage of revenue, operating income decreased to 3.1% for the three months ended March 31,
2008, as compared to 9.7% for the same period of the prior year. Operating income primarily
decreased due to the increase in SG&A offset by an increase in sales and gross profit, as discussed
above.
Income Tax Expense. Our effective income tax rates for the three months ended March 31,
2008 and 2007 were 42.9% and 40.9%, respectively. The increase in the income tax rate for the
three months ended March 31, 2008 was related to the cost of stock-based compensation and the timing of
recognizing the related tax benefits. We estimate the tax rate for the full year 2008 will be
approximately 42 percent.
Capital Resources and Liquidity
Our working capital decreased to $28.6 million at March 31, 2008 from $28.9 million at
December 31, 2007. Cash and cash equivalents plus investments decreased to $10.7 million at March
31, 2008, from $16.0 million at December 31, 2007. The decrease in cash and cash equivalents plus
investments was primarily due to the $3.6 million payment on the earn-out amount earned by the
principal of PPI, the share buyback activity in which the Company repurchased $1.0 million of
common shares during the three months ended March 31, 2008, which approximated the daily maximum
volume limit under SEC rules during the quarter, and approximately $500,000 of expenses paid on the
total $1.1 million of fees related to the Companys offsite training event, offset by the increase
in the number of days sales outstanding (DSO) to 80 days from 69 days at March 31, 2008 and
December 31, 2007, respectively. The increase in DSOs at March 31, 2008, was primarily due to
approximately $2.0 million of the $4.5 million of unbilled revenue, included in net accounts
receivable, related to accrued
13
revenue on fixed price agreements, where the clients will be invoiced upon the passing of
time, and other isolated projects. Excluding these accruals, our DSOs are at our historical
average of 74 days. We expect to reduce our DSOs to a level at or below our historical average of
74 days before the end of this fiscal year.
We believe we have sufficient working capital available under the line of credit and that
cash generated by continuing operations will be sufficient to fund operations for at least the
next twelve months.
The former Chairman of the Board and CEO of SM&A, who retired from the Company and the Board
in March 2007, is soliciting stockholders to vote for a dissident slate of four directors he is
recommending to replace four independent incumbent directors. The Board of Directors of SM&A are
opposed to the slate of directors presented by Mr. Myers. This on-going proxy contest has
demanded management time and corporate resources diverting focus from core business activities.
In addition, SM&A has retained a third party proxy solicitor to assist the Company in the
solicitation of proxies for a fee not to exceed $200,000, plus reimbursement of out-of-pocket
expenses. The Companys expenses related to the solicitation in excess of those normally spent
for an annual meeting with an uncontested director election are estimated to be approximately
$500,000, of which approximately $60,000 has been spent as of March 31, 2008. The cost of the Companys
solicitation of proxies will be borne by the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently has no instruments that are sensitive to market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal
financial officer, has evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended) as of the end of the period covered by this quarterly report on Form 10-Q.
Based on this evaluation, our principal executive officer and principal financial officer
concluded that these disclosure controls and procedures are effective and designed to ensure that
the information required to be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the requisite time
periods.
While the Companys disclosure controls and procedures provide reasonable assurance that the
appropriate information will be available on a timely basis, this assurance is subject to
limitations inherent in any control system, no matter how well designed and administered.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in
connection with the evaluation of our internal control performed during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
14
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in ordinary routine litigation incidental to the conduct of our business.
There are currently no material pending legal proceedings to which we are a party or of which any
of our property is the subject.
Item 1A. Risk Factors
Principal stockholder has significant control and has initiated a proxy contest for the election of
directors.
As of April 30, 2008, Steven S. Myers, our former Chief Executive Officer and Chairman of the
Board, beneficially owned or controlled approximately 16% of our outstanding common stock and will
have the ability to control or significantly influence the election of directors and the results of
other matters submitted to a vote of stockholders. This concentration of ownership may have the
effect of delaying or preventing a change in control and may adversely affect the ability of other
holders of our common stock to pass stockholder resolutions and control our actions.
As previously announced by Mr. Myers and by the Company, Mr. Myers has provided notice that he
intends to nominate his own slate of four nominees for election as directors at our annual meeting
of our stockholders. Mr. Myers has solicited proxies for this purpose for use at our annual
meeting of our stockholders.
Mr. Myers actions in this regard have resulted in the Company incurring significant legal and
other advisory expenses. Mr. Myers continued actions, and the Companys responses to those
actions, may:
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further divert the attention of our Board of Directors and management from the conduct
of the Companys business and enhancing stockholder value, |
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cause competitors to negatively use his filings against us in sales proposals, |
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cause employees to seek other employment outside the Company, |
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cause current customers to look for alternative vendors, |
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disrupt any strategic initiatives or transactions in which the Company is involved, |
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expose the Company to litigation, and |
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cause the Company to incur additional significant legal, advisory and other expenses. |
Accordingly, the continuation of Mr. Myers activities could materially and adversely affect
our business, operating results and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Information about securities purchased under the Companys share repurchase program is
incorporated by reference to Note 9 to the condensed consolidated financial statements.
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(d) Approximate |
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(c) Total number |
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dollar value of |
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(a) Total |
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(b) |
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of shares |
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shares that may |
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number of |
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Average |
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purchased as part |
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yet be purchased |
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shares |
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price paid |
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of a publicly |
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under the plan |
Period |
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purchased |
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per share |
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announced plan |
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(in thousands) |
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Beginning balance at January 1, 2008 |
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3,354,860 |
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$ |
7.21 |
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3,354,860 |
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$ |
5,797 |
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January 2008 |
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February 2008 |
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March 2008 |
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241,200 |
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4.29 |
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3,596,060 |
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4,763 |
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Total as of March 31, 2008 |
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3,596,060 |
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$ |
7.02 |
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3,596,060 |
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$ |
4,763 |
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Item 3. Defaults Upon Senior Securities
Not Applicable.
15
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
16
Item 6. Exhibits
INDEX TO EXHIBITS
Exhibits (numbered in accordance with Item 601 of Regulation S-K).
2.1 |
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Stock Purchase Agreement, by and among Project Planning, Inc., Richard Bowe, its Shareholder, and SM&A. |
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Filed on February 12, 2007 as Exhibit 99.2 to the registrants Current Report on Form 8-K and incorporated herein by
reference. |
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2.2 |
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Stock Purchase Agreement, by and among Performance Management Associates, Inc., James A.
Wrisley and Paulette Wrisley, its Shareholders, and SM&A. |
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Filed on September 19, 2007 as Exhibit 10.1 to the registrants Current Report on Form 8-K
and incorporated herein by reference. |
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2.3 |
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Amendment to Stock Purchase Agreement, by and among Performance Management Associates,
Inc., James A. Wrisley and Paulette Wrisley, its Shareholders, and SM&A. |
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Filed on March 7, 2008 as Exhibit 2.3 to the registrants Annual Report on Form 8-K and
incorporated herein by reference. |
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2.4 |
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Amendment to Stock Purchase Agreement, by and among Project Planning, Inc., Richard Bowe,
its Shareholder, and SM&A. |
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Filed herewith. |
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3.1 |
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Certificate of Incorporation of SM&A, a Delaware corporation. |
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Filed on December 6, 2006 as Exhibit 3.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
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3.2 |
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Bylaws of SM&A, a Delaware corporation. |
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Filed on December 6, 2006 as Exhibit 3.3 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
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3.3 |
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Agreement and Plan of Merger, between SM&A, a California corporation, and SM&A, a Delaware corporation. |
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Filed on December 6, 2006 as Exhibit 2.1 to the registrants Current Report on Form 8-K and incorporated herein by
reference. |
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10.28 |
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Amendment No. 1 to Employment Agreement of Cathy L. McCarthy. |
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Filed on January 17, 2008 as Exhibit 99.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
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10.29 |
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Employment Agreement of Peter Pace. |
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Filed on January 24, 2008 as Exhibit 99.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
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10.40 |
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Indemnification Agreements. |
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Filed on March 10, 2008 as Exhibit 10.1 to the registrants current
report on Form 8-K and incorporated herein by reference. |
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10.41 |
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Renewal of Revolving Note dated April 24, 2006, executed by SM&A, in favor of City
National Bank. |
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Filed on May 6, 2008 as Exhibit 10.1 to the registrants current report on Form 8-K and
incorporated herein by reference. |
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31.1 |
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Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Filed herewith. |
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31.2 |
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Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Filed herewith. |
17
32 |
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Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Filed herewith. |
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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SM&A |
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(Registrant)
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Dated: May 9, 2008 |
/s/ JAMES R. ECKSTAEDT
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James R. Eckstaedt |
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Executive Vice President, Finance and Chief Financial Officer |
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Dated: May 9, 2008 |
/s/ CATHY MCCARTHY
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Cathy McCarthy |
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President and Chief Executive Officer |
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19