SM&A
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 June 30, 2006
OR
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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.
SM&A
(Exact name of registrant as specified in its charter)
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California
(State or other jurisdiction of incorporation or organization)
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33-0080929
(I.R.S. Employer Identification No.) |
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4695 MacArthur Court, 8th Floor, Newport Beach, California
(Address of principal executive offices)
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92660
(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,
or a non-accelerated filer. (See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act). (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
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, no par value18,707,209 shares outstanding as of June 30, 2006
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 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 Risk Factors under Item 1A, and Managements Discussion and
Analysis of Financial Condition and Results of Operations, at pages 12-16. 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
SM&A
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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As Restated |
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June 30, |
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December 31, |
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2006 |
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2005 |
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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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$ |
10,728 |
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$ |
19,103 |
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Investments |
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5,050 |
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4,950 |
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Accounts receivable, net |
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14,940 |
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10,435 |
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Prepaid expenses and other current assets |
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698 |
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380 |
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Prepaid income taxes |
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924 |
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Deferred income taxes |
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411 |
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319 |
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Total current assets |
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31,827 |
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36,111 |
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Fixed assets, net |
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3,309 |
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2,571 |
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Other assets |
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53 |
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60 |
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$ |
35,189 |
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$ |
38,742 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
702 |
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$ |
762 |
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Accrued compensation and related benefits |
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2,413 |
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2,129 |
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Income taxes payable |
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368 |
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Net liabilities of discontinued operations |
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201 |
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396 |
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Total current liabilities |
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3,684 |
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3,287 |
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Deferred income taxes |
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56 |
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Other liabilities |
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552 |
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539 |
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Total liabilities |
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4,236 |
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3,882 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock |
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Common stock, no par value |
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39,760 |
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46,126 |
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Accumulated deficit |
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(8,807 |
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(11,266 |
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Total shareholders equity |
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30,953 |
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34,860 |
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$ |
35,189 |
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$ |
38,742 |
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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 data)
(UNAUDITED)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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As Restated |
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As Restated |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenue |
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$ |
18,277 |
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$ |
20,261 |
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$ |
35,992 |
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$ |
40,506 |
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Cost of revenue |
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10,268 |
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11,583 |
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20,842 |
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23,106 |
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Gross margin |
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8,009 |
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8,678 |
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15,150 |
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17,400 |
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Selling, general and administrative expenses |
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6,086 |
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6,783 |
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11,414 |
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11,803 |
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Operating income |
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1,923 |
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1,895 |
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3,736 |
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5,597 |
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Interest income, net |
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252 |
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118 |
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444 |
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203 |
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Income before income taxes |
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2,175 |
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2,013 |
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4,180 |
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5,800 |
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Income tax expense |
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895 |
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823 |
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1,721 |
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2,073 |
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Net income |
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$ |
1,280 |
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$ |
1,190 |
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$ |
2,459 |
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$ |
3,727 |
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Net income per share: |
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Basic |
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$ |
0.07 |
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$ |
0.06 |
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$ |
0.13 |
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$ |
0.18 |
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Diluted |
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$ |
0.07 |
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$ |
0.06 |
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$ |
0.12 |
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$ |
0.18 |
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Shares used in calculating net income per
share: |
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Basic |
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19,170 |
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20,370 |
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19,492 |
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20,317 |
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Diluted |
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19,372 |
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20,879 |
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19,706 |
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20,980 |
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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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Six Months Ended |
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June 30, |
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As Restated |
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2006 |
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2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
2,459 |
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$ |
3,727 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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377 |
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278 |
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Deferred income taxes |
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(148 |
) |
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244 |
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Excess tax benefits from stock-based compensation |
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1,603 |
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Stock-based compensation expense |
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629 |
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1,346 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(4,505 |
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(2,482 |
) |
Prepaid income taxes |
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924 |
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(732 |
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Prepaid expenses and other assets |
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(311 |
) |
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(98 |
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Accounts payable |
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(60 |
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(641 |
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Accrued compensation and related benefits |
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284 |
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2,809 |
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Income taxes payable |
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368 |
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(565 |
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Other liabilities |
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13 |
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124 |
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Net cash provided by operating activities |
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30 |
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5,613 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of investments |
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(100 |
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Purchases of fixed assets |
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(1,115 |
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(1,121 |
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Net cash used in investing activities |
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(1,215 |
) |
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(1,121 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock |
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264 |
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1,413 |
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Excess tax benefits from stock-based compensation |
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3 |
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Payment for repurchase of shares |
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(7,262 |
) |
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(3,481 |
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Net cash used in financing activities |
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(6,995 |
) |
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(2,068 |
) |
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Net increase in cash and cash equivalents from continued operations |
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(8,180 |
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2,424 |
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Net cash used in discontinued operations by operating activities |
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(195 |
) |
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(271 |
) |
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Net increase in cash and cash equivalents |
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(8,375 |
) |
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2,153 |
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Cash and cash equivalents at beginning of period |
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19,103 |
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22,148 |
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Cash and cash equivalents at end of period |
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$ |
10,728 |
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$ |
24,301 |
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See accompanying notes to condensed consolidated financial statements
6
SM&A
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
Note 1. Basis of Presentation and Significant Accounting Policies
The condensed consolidated financial statements included herein are unaudited; however, they
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 June 30, 2006, the
consolidated results of operations for the three and six months ended June 30, 2006 and 2005, and
cash flows for the six months ended June 30, 2006 and 2005. Comprehensive income is equivalent to
net income for the three and six month periods ended June 30, 2006 and 2005, respectively.
It should be understood that accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. The results of operations for the three and six
months ended June 30, 2006 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
condensed consolidated financial statements and notes thereto for the year ended December 31, 2005,
included in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on
May 15, 2006.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting
Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN 48
is an interpretation of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
an enterprises tax return. This interpretation also provides guidance on the derecognizing,
classification, interest and penalties, accounting in interim periods, disclosure, and transition
of tax positions. The recognition threshold and measurement attribute is part of a two step tax
position evaluation process prescribed in FIN 48. FIN 48 is effective after the beginning of an
entitys first fiscal year that begins after December 15, 2006. We will adopt FIN 48 as of January
1, 2007, and are currently evaluating the impact to our condensed consolidated financial
statements.
Significant Accounting Policies
Revenue Recognition. We recognize revenue from services rendered when the following four
revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or determinable, and collection
is reasonably assured. The majority of our services are provided under time and expenses billing
arrangements and revenue is recognized on the basis of hours worked plus other reimbursable
contract costs incurred during the period. Revenue is directly related to the total number of
hours billed to clients and the associated hourly billing rates. A limited amount of revenue is
also derived from success fees, offered to clients as a pricing option, and recorded as revenue
only upon attainment of the specified incentive criteria. Success fees are not billable and
revenue is not recorded until the client wins a contract.
Cash and Cash Equivalents. The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
Investments. Securities investments that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities. Investments held to maturity
mature between one and twelve months and are reported at amortized cost.
Stock-Based Compensation. On January 1, 2006, the Company adopted SFAS 123(R) which requires
the measurement and recognition of compensation expense for all share-based payment awards made to
employees and directors, including employee stock options and employee stock purchases related to
the Employee Stock Purchase Plan (employee stock purchases), based on estimated fair values.
SFAS 123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations, as
permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), for periods
7
beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the first day of the
Companys fiscal year 2006. Under the modified prospective transition method, recognized
compensation cost for the three and six months ended June 30, 2006 includes 1) compensation cost
for all share-based payments granted prior to, but not yet vested as of, December 31, 2005, based
on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and
2) compensation cost for all share-based payments granted on or after January 1, 2006, based on the
grant date fair value estimated in accordance with SFAS 123(R). In accordance with the modified
prospective method, the Company has not restated prior period results.
Prior to the adoption of SFAS 123(R), the Company presented all tax benefits resulting from
the exercise of stock options as operating cash inflows in the condensed consolidated statements of
cash flows, in accordance with the provisions of the Emerging Issues Task Force (EITF) Issue No
00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a
Company upon Exercise of a Nonqualified Employee Stock Option. SFAS 123(R) requires the benefits
of tax deductions in excess of the compensation costs recognized for those options to be classified
as financing cash inflows rather than operating cash inflows, on a prospective basis. This amount
is shown as Excess tax benefits from stock-based compensation on the condensed consolidated
statement of cash flows.
Concentrations of Credit Risk and Major Customers. Financial instruments that potentially
subject the Company to concentrations of credit risk consist of accounts receivable. The Companys
accounts receivable are derived from revenue earned from customers primarily in the United States.
The majority of the Companys receivables are from large companies in the aerospace and defense
industries. The Company controls credit risk through credit approvals and monitoring procedures
and, generally, does not require collateral or other security to support financial instruments
subject to credit risk. Management must make historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends, and changes in its customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. Credit losses have historically
been within managements expectations.
For the six months ended June 30, 2006, three customers represented more than 10% of the
Companys revenue and accounts receivable. As of June 30, 2006 and 2005, these three customers
account for 58% and 66% of revenues and 66% and 70% of accounts receivable, respectively.
Note 2. Restatement of Financial Statements
The Companys condensed consolidated financial statements for the three and six months ended
June 30, 2005 have been restated to reflect a non-cash charge of $1.3 million and $1.3 million, net
of tax, respectively, in its consolidated statements of operations for additional compensation
expense resulting from the accounting for certain share repurchase transactions.
Note 3. 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 |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Denominator for basic income per share: |
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|
|
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|
|
|
|
|
|
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|
weighted average shares outstanding
during the period |
|
|
19,170 |
|
|
|
20,370 |
|
|
|
19,492 |
|
|
|
20,317 |
|
Incremental shares attributable to
dilutive outstanding stock options |
|
|
202 |
|
|
|
509 |
|
|
|
214 |
|
|
|
663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income per share: |
|
|
19,372 |
|
|
|
20,879 |
|
|
|
19,706 |
|
|
|
20,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from the foregoing reconciliation are 1,365,077, 588,850,
1,322,250 and 716,100 for the three and six months ended June 30, 2006 and 2005, respectively.
8
Note 4. Investments in Marketable Securities
In November 2005, the Company purchased short-term state issued securities for $5.0 million. As
of June 30, 2006, our short-term state issued debt securities amortized cost was $5.1 million
and interest income was approximately $79,000. There were no realized or unrealized gains or
losses at June 30, 2006.
Note 5. Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS 123(R). Prior to the adoption of SFAS 123(R),
the Company provided the disclosures required under SFAS 123, as amended by SFAS 148, Accounting
for Stock-Based Compensation Transition and Disclosures. The Company did not recognize
stock-based compensation expense in its statement of operations for periods prior to the adoption
of SFAS 123(R) as the options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. The pro forma effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation for the three and six months ended June 30, 2005 would have been (in
thousands except for per share information):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Net income, as reported |
|
$ |
1,190 |
|
|
$ |
3,727 |
|
Stock-based compensation expense related to
share buyback of $2.1 million and $2.2
million, respectively, net of tax |
|
|
1,254 |
|
|
|
1,346 |
|
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards |
|
|
(1,734 |
) |
|
|
(2,515 |
) |
Tax benefit |
|
|
711 |
|
|
|
1,031 |
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense |
|
|
(1,023 |
) |
|
|
(1,484 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
1,421 |
|
|
$ |
3,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.06 |
|
|
$ |
0.18 |
|
Basic pro forma |
|
$ |
0.07 |
|
|
$ |
0.18 |
|
Diluted as reported |
|
$ |
0.06 |
|
|
$ |
0.18 |
|
Diluted pro forma |
|
$ |
0.07 |
|
|
$ |
0.17 |
|
The Company uses the Black-Scholes option-pricing model as its method of valuation for
share-based awards. The Companys determination of fair value of share-based payment awards on the
date of grant using an option-pricing model is affected by the Companys stock price as well as
assumptions regarding a number of highly complex and subjective variables. These assumptions
include, the Companys expected stock price volatility over a period greater than the expected term
of the awards, actual and projected employee stock option exercise behaviors, and expected
forfeitures based on the awards that will ultimately not complete their vesting requirements.
Option-pricing models were developed for use in estimating the value of traded options that have no
vesting or hedging restrictions and are fully transferable. Because the Companys employee stock
options have certain characteristics that are significantly different from traded options, and
because changes in the subjective assumptions can materially affect the estimated value, in
managements opinion, the existing valuation models may not provide an accurate measure of the fair
value of the Companys employee stock options. Although the fair value of employee stock options is
determined in accordance with SFAS 123(R) and SAB 107 using an option-pricing model, that value may
not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
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 and six months
ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Stock price volatility |
|
|
82.09 |
% |
|
|
87.56 |
% |
|
|
82.49 |
% |
|
|
88.41 |
% |
Risk-free interest rate |
|
|
4.95 |
% |
|
|
3.69 |
% |
|
|
4.88 |
% |
|
|
3.83 |
% |
Expected life (in years) |
|
|
3.13 |
|
|
|
3.05 |
|
|
|
3.11 |
|
|
|
3.15 |
|
Forfeiture rate |
|
|
12.18 |
% |
|
|
12.83 |
% |
|
|
12.29 |
% |
|
|
11.86 |
% |
Stock dividend yield |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Weighted-average fair value per option granted |
|
$ |
3.59 |
|
|
$ |
5.13 |
|
|
$ |
4.28 |
|
|
$ |
5.02 |
|
9
The following table summarizes stock option activity for the six months ended June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted-Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Fair Value of |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Options Granted |
|
|
Value |
|
|
|
|
Outstanding at of December 31, 2005 |
|
|
1,538,898 |
|
|
$ |
7.56 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
237,227 |
|
|
|
7.53 |
|
|
$ |
4.28 |
|
|
|
|
|
Exercised |
|
|
(6,750 |
) |
|
|
1.49 |
|
|
|
|
|
|
|
|
|
Cancelled, Forfeited or Expired |
|
|
(37,500 |
) |
|
|
9.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
1,731,875 |
|
|
|
7.54 |
|
|
|
|
|
|
$ |
1,257,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
1,036,686 |
|
|
$ |
7.40 |
|
|
|
|
|
|
$ |
1,207,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, there was $2.7 million of total unrecognized compensation cost related to
unvested awards which will be amortized to expense over the weighted-average period of 4.0 years.
Note 6. Revolving Line of Credit
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 April
30th 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, restricts 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. At June 30, 2006, the Company was in compliance with its covenants and had
no outstanding borrowings under the line of credit, the bank had issued a letter of credit for
$64,000 and $9.9 million was available.
Note 7. Income Taxes
The Companys effective income tax rates for the three and six months ended June 30, 2006 and
2005 were 41%, 41%, 41% and 36%, respectively. In the first quarter ended March 31, 2005, the
Company completed and filed its federal and state income tax returns for the calendar year ended
December 31, 2004. Based on the income tax returns filed, the Company recorded an adjustment to
its effective tax rate in the first quarter of 2005 resulting in a reduction of income tax expense
of approximately $208,000, or $0.01 per diluted share.
Note 8. Stockholders Equity
In May 2004, the Companys Board of Directors authorized a plan to repurchase up to $7.0
million of the Companys common stock. In April and October 2005, the Companys Board of Directors
authorized an increase of an additional $5.0 million and $8.0 million, respectively, increasing the
total authorization to repurchase the Companys common stock to $20.0 million. In January 2006,
the Companys Board of Directors authorized an increase of an additional $10.0 million increasing
the total authorization to repurchase the Companys common stock to $30.0 million. The Company
intends to repurchase shares from time to time, at prevailing prices, in the open market.
The timing and amount of the share repurchases will be at the discretion of management and
will be based on such factors as the stock price, general economic and market conditions, and other
factors. The share repurchase plan may be suspended or discontinued at any time. Shares
repurchased under the plan are cancelled. For the six months ended June 30, 2006 and 2005, the
Company repurchased 1,153,900 shares at a total cost of $7.3 million and 424,995 shares at a total
cost of $3.4 million, respectively. Since the inception of the share repurchase plan, the Company
has repurchased 2,967,066 shares at a total cost of $21.9 million.
Note 9. Related Parties
The Company periodically leases aircraft from SummitJets, Inc., which is owned by the
Companys Chairman and Chief Executive Officer. The lease rate was determined through a review of
prevailing market rates for such services. During the three and six months ended June 30, 2006 and
2005, the Company recorded an expense of $27,000, $89,000, $15,000 and $35,000, respectively. The
expense is included in selling, general and administrative expenses.
10
Note 10. Discontinued Operations
Prior to fiscal year 2003, the Company sold and dissolved two of its business segments. The
balance accrued at June 30, 2006 of $201,000 represents the remaining office lease commitments, net
of subleases, over the remaining terms of the leases. During the six months ended June 30, 2006,
the Company paid $195,000 net of sublease receipts, related to the leased property.
Note 11. Commitment and Contingencies
The Company entered into employment agreements with its Chairman and Chief Executive Officer
and its President and Chief Operating 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 six months to two years 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 a change of control provisions that
may require the Company to pay up to twelve months of current annual base salary and up to eighteen
months of health and life insurance benefits.
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 300 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, and engineering sectors. Since 1982, we have
managed more than 1,000 proposals worth more than $340 billion for our clients and have achieved an
85% win rate on awarded contracts.
Results of Operations
The following table sets forth certain historical operating results (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2006 |
|
2005 |
|
Change |
|
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
|
|
|
|
|
|
Revenue |
|
$ |
18.3 |
|
|
|
100.0 |
|
|
$ |
20.3 |
|
|
|
100.0 |
|
|
($ |
2.0 |
) |
|
|
(9.9 |
) |
Cost of revenue |
|
|
10.3 |
|
|
|
56.3 |
|
|
|
11.6 |
|
|
|
57.1 |
|
|
|
(1.3 |
) |
|
|
(11.2 |
) |
|
|
|
|
|
|
|
Gross margin |
|
|
8.0 |
|
|
|
43.7 |
|
|
|
8.7 |
|
|
|
42.9 |
|
|
|
(0.7 |
) |
|
|
(8.0 |
) |
Selling, general and administrative expenses |
|
|
6.1 |
|
|
|
33.3 |
|
|
|
6.8 |
|
|
|
33.5 |
|
|
|
(0.7 |
) |
|
|
(10.3 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
1.9 |
|
|
|
10.4 |
|
|
|
1.9 |
|
|
|
9.4 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Interest income |
|
|
0.3 |
|
|
|
1.6 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
200.0 |
|
Income tax expense |
|
|
0.9 |
|
|
|
4.9 |
|
|
|
0.8 |
|
|
|
3.9 |
|
|
|
0.1 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1.3 |
|
|
|
7.1 |
|
|
$ |
1.2 |
|
|
|
5.9 |
|
|
$ |
0.1 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Revenue. Revenue decreased $2.0 million, or 10%, to $18.3 million for the three months ended
June 30, 2006 compared to $20.3 million for the same period of the prior year. The decrease in our
revenue was realized in our non- aerospace and defense business and due primarily to one client who
reduced our service levels due to their internal budget pressures. We expect to increase our
service levels with this client towards the end of the third quarter calendar quarter of 2006 as
the customer enters their new fiscal year. This reduction accounted for a decrease of $2.3 million
compared to the same period of the prior year. Total non-aerospace and defense revenue declined
$1.9 million, or 33% to $3.8 million as compared to $5.7 million for the same period of the prior
year. Total aerospace and defense revenue declined slightly to $14.5 million compared to $14.6
million during the three months ended June 30, 2006 and 2005, respectively.
The percentage of revenues from competition management and program services was 64% and 36%
for the three months ended June 30, 2006, respectively, compared to 50% and 50% for the same period
of the prior year. The percentage of revenue coming from our aerospace and defense clients was 79%
and 72% for the three months ended June 30, 2006 and 2005, respectively. During the three months
ended June 30, 2006, we were engaged by six new customers who
accounted for 4% of our total
revenue. This compares to nine new customers which accounted for 5% of our total revenue during
the same period of the prior year.
Gross Margin. Gross margin decreased $700,000, or 8%, to $8.0 million for the three months
ended June 30, 2006 compared to $8.7 million for the same period of the prior year. The decrease
in gross margin dollars is due to the decrease in sales as discussed above offset by an increase in
gross margin as a percentage of revenue. As a percentage of revenue, gross margin increased to 44%
for the three months ended June 30, 2006 compared to 43% for the same period of the prior year.
The increase was due to the level of success fees earned offset by increased wages, benefit and
travel expenses. We recorded success fees of $706,000 and $228,000 for the three months ended June
30, 2006 and 2005, respectively. We expect the gross margins to be between 41% and 42% for fiscal
year 2006.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
consist principally of salary and benefit costs for executive, sales and administrative personnel,
stock-based compensation expense, professional services and other general corporate activities. As
a result of adopting Statement 123(R) and the recording of stock-based compensation expense related
to the restatement discussed in footnote 2, we recorded stock-based compensation expense of
$314,000 and $2.1 million during the three months ended June 30, 2006 and 2005, respectively.
Excluding stock-based compensation expense, selling, general and administrative expenses increased
$1.1 million or 23% during the three months ended June 30, 2006 compared to the same period of the
prior year. With the creation of Practice Leader functions in late
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
calendar year 2005, which have the responsibility to create new service solutions and enhance our
overall service offerings, we incurred planned expenses of approximately $450,000 during the three
months ended June 30, 2006. No similar function existed during the three months ended June 30,
2005. Our general operating expenses increased by approximately $175,000 including $70,000 in
depreciation expense related to the deployment of our Enterprise Resource Planning (ERP) software
in June 2006. Lastly, we recorded $425,000 in non-routine expenses including $225,000 related to
the restatement discussed in footnote 2, and approximately $200,000 related to the post
implementation costs of our new ERP system which went live in June 2006.
Operating Income. Operating income of $1.9 million was consistent with the same period of the
prior year. As a percentage of revenue, operating income increased to 10% for the three months
ended June 30, 2006, as compared to 9% for the same period of the prior year.
Income Tax Expense. Our effective income tax rates for the three months ended June 30, 2006
and 2005 were 41% and 41%, respectively.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations
The following table sets forth certain historical operating results (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
2006 |
|
2005 |
|
Change |
|
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
|
|
|
|
|
|
Revenue |
|
$ |
36.0 |
|
|
|
100.0 |
|
|
$ |
40.5 |
|
|
|
100.0 |
|
|
|
($4.5 |
) |
|
|
(11.1 |
) |
Cost of revenue |
|
|
20.8 |
|
|
|
57.8 |
|
|
|
23.1 |
|
|
|
57.0 |
|
|
|
(2.3 |
) |
|
|
(10.0 |
) |
|
|
|
|
|
|
|
Gross margin |
|
|
15.2 |
|
|
|
42.2 |
|
|
|
17.4 |
|
|
|
43.0 |
|
|
|
(2.2 |
) |
|
|
(12.6 |
) |
Selling, general and administrative expenses |
|
|
11.4 |
|
|
|
31.7 |
|
|
|
11.8 |
|
|
|
29.1 |
|
|
|
(0.4 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
3.7 |
|
|
|
10.3 |
|
|
|
5.6 |
|
|
|
13.8 |
|
|
|
(1.9 |
) |
|
|
(33.9 |
) |
Interest income |
|
|
0.4 |
|
|
|
1.1 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
100.0 |
|
Income tax expense |
|
|
1.7 |
|
|
|
4.7 |
|
|
|
2.1 |
|
|
|
5.2 |
|
|
|
(0.4 |
) |
|
|
(19.0 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
2.5 |
|
|
|
6.9 |
|
|
$ |
3.7 |
|
|
|
9.1 |
|
|
|
($1.2 |
) |
|
|
(32.4 |
) |
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Revenue. Revenue decreased $4.5 million, or 11%, to $36.0 million for the six months ended
June 30, 2006 compared to $40.5 million for the same period of the prior year. The decrease in our
revenue was realized in our traditional aerospace and defense market. The decline in our aerospace
and defense market was due primarily to a client who is experiencing budget pressure on one of
their programs. This program contributed $1.6 million and $6.8 million or 4% and 17% of total
revenue for the six months ended June 30, 2006 and 2005, respectively. Total aerospace and defense
revenue declined by $4.2 million or 14% to $26.4 million compared to $30.1 million during the six
months ended June 30, 2006 and 2005, respectively. Our non-aerospace and defense revenue declined
by $282,000 or 3% to $9.6 for the six months ended June 30, 2006 compared to $9.9 million during
the same period of the prior year. The decrease in our non-aerospace and defense revenue was due
primarily to one client who temporarily reduced our service levels due to their internal budget
pressures. We expect to increase our service levels to this one client towards the end of the
third quarter calendar quarter of 2006 as the customer enters their new fiscal year.
The percentage of revenues from competition management and program services was 65% and 35%
for the six months ended June 30, 2006, respectively, compared to 55% and 45% for the same period
of the prior year. The percentage of revenue coming from our aerospace and defense clients was 73%
and 74% for the six months ended June 30, 2006 and 2005, respectively. During the six months ended
June 30, 2006, we were engaged by thirteen new customers who accounted for 3% of our total revenue.
This compares to fifteen new customers which accounted for 4% of our total revenue during the same
period of the prior year.
Gross Margin. Gross margin decreased $2.2 million, or 13%, to $15.2 million for the six months
ended June 30, 2006 compared to $17.4 million for the same period of the prior year. The decrease
in gross margin dollars is due to the decrease in sales as discussed above and the decrease in
gross margin as a percentage of revenue. As a percentage of revenue, gross margin decreased to 42%
for the six months ended June 30, 2006 compared to 43% for the same period of the prior year. The
decline was due to increased wages, benefit and travel expenses offset by an increase in the level
of success fees earned. We recorded success fees of $807,000 and $565,000 for the six months ended
June 30, 2006 and 2005, respectively. We expect the gross margins to be between 41% and 42% for
fiscal year 2006.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
consist principally of salary and benefit costs for executive, sales and administrative personnel,
stock-based compensation expense, professional services and other general corporate activities. As
a result of adopting Statement 123(R) and the recording of stock-based compensation expense related
to the restatement discussed in footnote 2, we recorded stock-based compensation expense of
$629,000 and $2.2 million during the six months ended June 30, 2006 and 2005, respectively.
Excluding stock-based compensation expense, selling, general and administrative expenses increased
$1.3 million or 14% during the six months ended June 30, 2006 compared to the same period of the
prior year. With the creation of Practice Leader functions in late
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
calendar year 2005, which have the responsibility to create new service solutions and enhance our
overall service offerings, we incurred planned expenses of approximately $750,000 during the six
months ended June 30, 2006. No similar function existed during the six months ended June 30, 2005.
Our general operating expenses increased by approximately $125,000 including $100,000 in
depreciation expense primarily related to the deployment of our Enterprise Resource Planning (ERP)
software in June 2006. Lastly, we recorded $425,000 in non-routine expenses including $225,000
related to the restatement discussed in footnote 2, and approximately $200,000 related to the post
implementation costs of our new ERP system which went live in June 2006.
Operating Income. Operating income decreased $1.9 million, or 34% to $3.7 million for the six
months ended June 30, 2006, compared to $5.6 million for the same period of the prior year. As a
percentage of revenue, operating income decreased to 10% for the six months ended June 30, 2006, as
compared to 14% for the same period of the prior year. Operating income primarily decreased due to
the increase in sales and gross profit offset by the planned increase in selling, general and
administrative expenses, as discussed above.
Income Tax Expense. Our effective income tax rates for the six months ended June 30, 2006 and
2005 were 41% and 36%, respectively. In the first quarter ended March 31, 2005, we completed and
filed our federal and state income tax returns for the calendar year ended December 31, 2004.
Based on the income tax returns filed, we recorded an adjustment to its effective tax rate in the
first quarter of 2005 resulting in a reduction of income tax expense of approximately $208,000, or
$0.01 per diluted share.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Capital Resources and Liquidity
Our working capital decreased to $28.1 million at June 30, 2006 from $32.8 million at December
31, 2005. In addition, our cash and cash equivalents plus investments decreased to $15.8 million
at June 30, 2006, from $24.1 million at December 31, 2005. The decrease in cash and cash
equivalents plus investments was due to the share buyback activity in which the Company repurchased
$7.3 million of common shares during the six months ended June 30, 2006. The reduction was also
due to the increase in the number of days sales outstanding discussed below. Cash flows from
operating activities of continuing operations provided $30,000 during the six months ended June 30,
2006, compared to $5.6 million for the same period during the prior year. The decrease in our cash
flows from operating activities is due primarily to the increase in our days sales outstanding, the
timing of our payroll cycles, and the difference in tax benefits from stock-based compensation.
The change in accounts receivable was due primarily to the timing of cash receipts related to
one of our largest customers. As significant portion of the past due balance as of June 30, 2006
was collected in July 2006. At June 30, 2006, our days sales outstanding (DSO) was 63 days
compared to our historical average of 65 days.
For the remaining fiscal year 2006, we plan to use approximately $500,000 of cash on hand to
implement two additional modules to our existing Enterprise Resource Planning Software.
In May 2004, the Companys Board of Directors authorized a plan to repurchase up to $7.0
million of the Companys common stock. In April and October 2005, the Companys Board of Directors
authorized an increase of an additional $5.0 million and $8.0 million, respectively, increasing the
total authorization to repurchase the Companys common stock to $20.0 million. In January 2006,
the Companys Board of Directors authorized an increase of an additional $10.0 million increasing
the total authorization to repurchase the Companys common stock to $30.0 million. The Company
intends to repurchase shares from time to time, at prevailing prices, in the open market. The
timing and amount of the share repurchases will be at the discretion of management and will be
based on such factors as the stock price, general economic and market conditions, and other
factors. The share repurchase plan may be suspended or discontinued at any time. Shares
repurchased under the plan are cancelled. For the six months ended June 30, 2006 and 2005, the
Company repurchased 1,153,900 shares at a total cost of $7.3 million and 424,995 shares at a total
cost of $3.4 million, respectively. Since the inception of the share repurchase plan, the Company
has repurchased 2,967,066 shares at a total cost of $21.9 million. Share repurchases are being
completed with cash on hand.
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 April
30th 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. At June 30, 2006, the Company was in compliance with its covenants and had
no outstanding borrowings under the line of credit, the bank had issued a letter of credit for
$64,000 and $9.9 million was available.
We believe we have sufficient working capital available under the line of credit and cash
generated by continuing operations will be sufficient to fund operations for at least the next
twelve months.
16
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.
17
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation incidental to the conduct of our business. There are
currently no material pending litigation proceedings to which we are a party or to which any of our
property is subject.
Item 1A. Risk Factors
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Quarterly Report on Form 10-Q, the following
factors should be considered carefully in evaluating our business and prospects.
Our business depends substantially on the defense industry.
Our competition management and program services services business depends substantially on
U.S. Government expenditures for defense products. Any decline in the future defense, information
technology or homeland security procurement expenditures could affect the opportunities available
to our clients and, indirectly, our business. A number of factors could contribute to such a
decline in opportunities, including:
|
|
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Loss of political support for current or increased levels of spending; |
|
|
|
|
Changes of presidential administration, particularly changes from one political party to
another, that typically result in a mass reordering of priorities that reduce new proposal
activity for up to a year; |
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|
Threat scenarios evolving away from global conflicts to regional conflicts; |
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|
Spending for ongoing operations, such as the war on terrorism, the occupation of Iraq,
downward pressure on spending for procurement of new systems and research and development
spending; and |
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|
Cancellation of programs or emphasis on government shifting programs. |
In the event expenditures for products of the type manufactured by our clients are reduced and
not offset by other new programs or products, there will be a reduction in the volume of contracts
or subcontracts to be bid upon by our clients and, as a result, a reduction in the volume of
proposals we manage. Unless offset, such reductions could materially and adversely affect our
business, operating results and financial condition.
We rely on a relatively limited number of clients.
We derive a significant portion of revenue from continuing operations from a relatively
limited number of clients. Our seven largest customers accounted for 80% and 84% of our revenue
for 2005 and 2004, respectively. Clients typically retain our services as needed on an engagement
basis rather than pursuant to long-term contracts, and a client can usually terminate the
engagement at any time without a significant penalty. Moreover, there can be no assurance that
existing clients will continue to engage us for additional assignments or do so at the same revenue
levels. The loss of any significant client could materially and adversely affect our business,
financial condition and results of operations. In addition, the level of services required by an
individual client may diminish over the life of the relationship, and there can be no assurance we
will be successful in establishing relationships with new clients as this occurs.
The markets in which we operate are highly competitive.
The market for competition management services in the procurement of government and commercial
contracts for aerospace and defense work is a niche market with a number of competitors. We are
the largest provider of such services and principally compete with the in-house capability of our
clients. In addition, numerous smaller proposal management companies compete in this highly
specialized industry. With sufficient resources in the form of money and excellent talent with
current security clearances, our competitors could erode our current market share and such a
reduction could materially and adversely affect our business, operating results and financial
condition.
18
Item 1A. Risk Factors (continued)
We rely heavily upon our key senior management personnel and our ability to recruit and maintain
skilled professionals.
Our success is highly dependent upon the efforts, abilities, and business generation
capabilities and project execution of our strategic account managers and account executives. In
addition, Steven S. Myers, our Chief Executive Officer and Chairman of the Board, has a significant
role in our success. The loss of the services of these individuals, for any reason, could
materially and adversely affect our business, operating results and financial condition.
Our business involves the delivery of professional services and is highly labor-intensive.
Our success depends largely on our general ability to attract, develop, motivate and retain highly
skilled professionals. The loss of some or a significant number of our professionals or the
inability to attract, hire, develop, train and retain additional skilled personnel could have a
serious negative effect on us, including our ability to obtain and successfully complete important
engagements and thus maintain or increase our revenue.
Quarterly results may fluctuate.
We may experience fluctuations in future quarterly operating results due to a number of
factors, including the size, timing and duration of client engagements.
Our stock price is subject to significant volatility.
Our common stock was first publicly traded on January 29, 1998 after our initial public
offering at $12.00 per share. Between January 29, 1998 and June 30, 2006, the closing sale price
has ranged from a high of $31.13 per share to a low of $0.75 per share. The market price of our
common stock could continue to fluctuate substantially due to a variety of factors, including:
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Quarterly fluctuations in results of operations; |
|
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Adverse circumstances affecting the introduction, or market acceptance of new services we offer; |
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Announcements of new services by competitors; |
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Announcements of poor operating results by us or our competitors; |
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Loss of key employees; |
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Changes in the regulatory environment or market conditions affecting the defense and aerospace industry; |
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Changes in earnings estimates and ratings by analysts; |
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Lack of market liquidity resulting from a relatively small amount of public stock float; |
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Changes in generally accepted accounting principles; |
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Sales of common stock by existing holders; and |
|
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The announcement of proposed acquisitions and dispositions. |
We cannot guarantee that future acquisitions, mergers or investments in other companies will be
successful.
If appropriate opportunities present themselves, we may consider acquiring, merging with or
making investments in companies or assets that we believe will complement, enhance or expand our
current business or otherwise offer us growth opportunities. We will likely compete for such
opportunities with companies with greater financial and management resources than us. There can be
no assurance that suitable acquisition or other investment opportunities will be identified, that
any of these transactions can be consummated, or that, if acquired, the new businesses can be
integrated successfully and profitably into our operations. These acquisitions and investments may
also entail the following risks:
|
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the diversion of our managements attention from our existing business while evaluating
acquisitions, investments and other prospective business combinations and thereafter while
assimilating the operations and personnel of the new business; |
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adverse short-term effects on our operating results; |
|
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|
the inability to successfully and rapidly integrate the new businesses, personnel and
products with our existing business, including financial reporting, management and
information technology systems; |
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higher than anticipated costs of integration; |
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unforeseen operating difficulties and expenditures; |
|
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|
the need to manage a significantly larger business; |
|
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|
potential dilution to our shareholders to the extent we use our common stock as currency for an acquisition; |
19
Item 1A.Risk Factors (continued)
|
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the assumption of liabilities; |
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the use of a substantial amount of our available cash to consummate an acquisition; |
|
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|
difficulties inherent in the implementation and application of the provisions of the
Sarbanes-Oxley Act of 2002 to the operations of a privately-held entity acquired by the
Company; and |
|
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|
|
loss of employees of an acquired business, including employees who may have been
instrumental to the success or growth of that business. |
We may not be able to successfully integrate or operate profitably any new business we acquire
and we cannot assure you that any other investments we make, or strategic alliances we enter into,
will be successful.
Principal shareholder has significant control.
At June 30, 2006, Steven S. Myers, Chief Executive Officer and Chairman of the Board,
beneficially owned or controlled approximately 18% 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 shareholders. 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 shareholder resolutions and control our actions. Our board of
directors is currently comprised entirely of individuals nominated with the approval of Mr. Myers.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase of Equity Securities
Issuer Purchases of Equity Securities
Information about securities purchased under the Companys share repurchase program is
incorporated by reference to Note 7 to the condensed consolidated financial statements.
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Total Number |
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|
of Shares |
|
Approximate |
|
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|
|
|
|
|
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Purchased as |
|
Dollar Value of |
|
|
|
|
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|
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|
|
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Part of a |
|
Shares That |
|
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Total Number |
|
Average |
|
Publicly |
|
May Yet Be |
|
|
of Shares |
|
Price Paid |
|
Announced |
|
Purchased |
Period |
|
Purchased |
|
Per Share |
|
Plan |
|
Under The Plan |
|
Beginning balance |
|
|
1,813,166 |
|
|
$ |
8.10 |
|
|
|
1,813,166 |
|
|
$ |
5,317,099 |
|
January 1, 2006 to January 31, 2006 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
15,317,099 |
|
February 1, 2006 to February 28, 2006 |
|
|
1,700 |
|
|
|
6.93 |
|
|
|
1,814,866 |
|
|
|
15,305,320 |
|
March 1, 2006 to March 31, 2006 |
|
|
204,100 |
|
|
|
6.67 |
|
|
|
2,018,966 |
|
|
|
13,944,395 |
|
April 1, 2006 to April 30, 2006 |
|
|
199,800 |
|
|
|
6.41 |
|
|
|
2,218,766 |
|
|
|
12,663,859 |
|
May 1, 2006 to May 31, 2006 |
|
|
575,600 |
|
|
|
6.21 |
|
|
|
2,794,366 |
|
|
|
9,092,096 |
|
June 1, 2006 to June 30, 2006 |
|
|
172,700 |
|
|
|
6.00 |
|
|
|
2,967,066 |
|
|
|
8,056,006 |
|
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Total |
|
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2,967,066 |
|
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$ |
7.40 |
|
|
|
2,967,066 |
|
|
$ |
8,056,006 |
|
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|
|
Information about securities authorized for issuance under the Companys equity compensation
plans is incorporated by reference to Note 4 to the condensed consolidated financial statements.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
|
(a) |
|
The Annual Meeting of Shareholders was held on June 6 and June 20, 2006. |
|
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(b) |
|
Elected all of our Directors: |
|
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|
William C. Bowes, J. Christopher Lewis, Dwight L. Hanger, Steven S. Myers, Joseph B.
Reagan, Robert Rodin, John P. Stenbit and Robert J. Untracht. |
20
Item 4. Submission of Matters to a Vote of Security Holders (continued)
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(c)(i) Election of eight directors as follows: |
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For |
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Withheld |
William C. Bowes |
|
|
18,133,906 |
|
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711,378 |
|
J. Christopher Lewis |
|
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18,435,087 |
|
|
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410,197 |
|
Dwight L. Hanger |
|
|
18,141,856 |
|
|
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703,428 |
|
Steven S. Myers |
|
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18,308,062 |
|
|
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537,222 |
|
Joseph B. Reagan |
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17,414,409 |
|
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1,430,875 |
|
Robert Rodin |
|
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18,435,087 |
|
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410,197 |
|
John P. Stenbit |
|
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18,138,718 |
|
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706,566 |
|
Robert J. Untracht |
|
|
18,141,856 |
|
|
|
703,428 |
|
|
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(c)(ii)To approve the amendment to the Amended & Restated Employee Stock Purchase Plan. |
|
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For: 14,986,112
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Against: 468,558
|
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Abstain: 14,341 |
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Broker Non-Vote: 3,376,273 |
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(c)(iii) To approve the reincorporation from California to Delaware. |
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For: 10,020,626
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Against: 5,445,889
|
|
Abstain: 2,496 |
|
|
Broker Non-Vote: 3,376,273 |
|
|
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|
Item 5. Other Information
The Company periodically leases aircraft from SummitJets, Inc., which is owned by the
Companys Chairman and Chief Executive Officer. The lease rate was determined through a review
of prevailing market rates for such services. During the three and six months ended June 30,
2006 and 2005, the Company recorded an expense of $27,000, $89,000, $15,000 and $35,000
respectively. The expense is included in selling, general and administrative expenses.
In August 2006, the Company will complete its reincorporation in Delaware under the name
SM&A Wins Corporation. The Company will continue to do business as SM&A.
21
Item 6. Exhibits
INDEX TO EXHIBITS
(Numbered in accordance with item 601 of Regulation S-K)
|
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2.1
|
|
Stock Purchase and Sale Agreement, by and among the Registrant, Steven Myers Holding Inc. and
L-3 Communications Corporation. (1) |
|
|
|
2.2
|
|
Amendment No.1 to Stock Purchase and Sale Agreement, by and among the Registrant, Steven
Myers Holding Inc. and L-3 Communications Corporation. (2) |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation. (3) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Registrant. (4) |
|
|
|
10.1
|
|
Amended and Restated 1997 Stock Option Plan and related form of Stock Option Agreement. (5) |
|
|
|
10.2
|
|
Second Amended and Restated Equity Incentive Plan. (6) |
|
|
|
10.3
|
|
Amended and Restated Employee Stock Purchase Plan. (7) |
|
|
|
10.4
|
|
Office Facility Lease. (8) |
|
|
|
10.5
|
|
Amendment No. 1 to Office Facility Lease. (9) |
|
|
|
10.6
|
|
Employment Agreement of Steven S. Myers. (10) |
|
|
|
10.7
|
|
Amendment No. 1 to Employment Agreement of Steven S. Myers. (11) |
|
|
|
10.8
|
|
Amendment No. 2 to Employment Agreement of Steven S. Myers. (12) |
|
|
|
10.9
|
|
Amendment No. 3 to Employment Agreement of Steven S. Myers. (13) |
|
|
|
10.10
|
|
Amendment No. 4 to Employment Agreement of Steven S. Myers. (14) |
|
|
|
10.11
|
|
Amendment No. 5 to Employment Agreement of Steven S. Myers. (15) |
|
|
|
10.12 |
|
Amendment No. 6 to Employment Agreement of Steven S. Myers. (16) |
|
|
|
10.13 |
|
Employment Agreement of Cathy L. Wood. (17) |
|
|
|
10.14
|
|
Amendment No. 1 to Employment Agreement of Cathy L. Wood. (18) |
|
|
|
10.15
|
|
Amendment No. 2 to Employment Agreement of Cathy L. Wood. (19) |
|
|
|
10.16
|
|
Amendment No. 3 to Employment Agreement of Cathy L. Wood. (20) |
|
|
|
10.17
|
|
Amendment No. 4 to Employment Agreement of Cathy L. Wood. (21) |
|
|
|
10.18
|
|
Amendment No. 5 to Employment Agreement of Cathy L. McCarthy (formerly Wood). (22) |
|
|
|
10.19
|
|
Employment Agreement of Bennett C. Beaudry. (23) |
|
|
|
10.20
|
|
Amendment No. 1 to Employment Agreement of Bennett C. Beaudry. (24) |
|
|
|
10.21
|
|
Amendment No. 2 to Employment Agreement of Bennett C. Beaudry. (25) |
|
|
|
10.22
|
|
Amendment No. 3 to Employment Agreement of Bennett C. Beaudry. (26) |
|
|
|
10.23
|
|
Accounts Receivable Loan Agreement dated January 10, 2002, by and between the Registrant and
City National Bank, a national banking association. (27) |
|
|
|
10.24
|
|
Commercial Guaranty dated January 10, 2002, executed by Steven Myers & Associates, Inc. in
favor of City National Bank, a national banking association. (28) |
|
|
|
10.25
|
|
Revolving Loan Agreement dated October 14, 2003, by and between the registrant and City
National Bank, a national association. (29) |
|
|
|
10.26
|
|
Revolving Note dated April 10, 2003, executed by SM&A, in favor of City National Bank. (30) |
|
|
|
10.27
|
|
Renewal of Revolving Note dated April 27, 2004, executed by SM&A, in favor of City National Bank. (31) |
|
|
|
10.28
|
|
Renewal of Revolving Note dated April 29, 2005, executed by SM&A, in favor of City National Bank. (32) |
22
Item 6. Exhibits (continued)
|
|
|
10.29
|
|
Renewal of Revolving Note dated April 24, 2006, executed by SM&A, in favor of City National Bank. (33) |
|
|
|
10.30
|
|
Consultant Agreement of Bowes Enterprises. (34) |
|
|
|
10.31
|
|
Consultant Agreement of Joseph B. Reagan. (35) |
|
|
|
21.1
|
|
Subsidiaries of the Registrant. (36) |
|
|
|
31.1
|
|
Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (37) |
|
|
|
31.2
|
|
Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (38) |
|
|
|
32
|
|
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.
(39) |
Footnote #
|
|
|
(1) |
|
Filed on November 27, 2001as Exhibit 10.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
|
(2) |
|
Filed on December 14, 2001 as Exhibit 10.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
|
(3) |
|
Filed on March 15, 2002 as Exhibit 3.1 to the registrants Annual Report on Form 10-K and
incorporated herein by reference. |
|
(4) |
|
Filed on May 3, 2002 as Exhibit 3.2 to the registrants Quarterly Report on Form 10-Q and
incorporated herein by reference. |
|
(5) |
|
Filed on April 17, 2001 as Exhibit 10.1 to the registrants Annual Report on Form 10-K and
incorporated herein by reference. |
|
(6) |
|
Filed on February 24, 2006, as Exhibit 10.2 to the registrants Annual Report on Form 10-K and
incorporated herein by reference. |
|
(7) |
|
Filed on April 29, 2002 as Exhibit C to the registrants Annual Proxy Statement on Form 14A
and incorporated herein by reference. |
|
(8) |
|
Filed on November 21, 1997 as Exhibit 10.3 to the registrants Registration Statement
333-4075 on Form S-1 (Registration No. 333-4075) and incorporated herein by reference. |
|
(9) |
|
Filed on October 22, 2004 as Exhibit 10.25 to the registrants Quarterly Report on Form
10-Q and incorporated herein by reference. |
|
(10) |
|
Filed on April 17, 2001 as Exhibit 10.17 to the registrants Annual Report on Form 10-K and
incorporated herein by reference. |
|
(11) |
|
Filed on March 15, 2002 as Exhibit 10.7 to the registrants Annual Report on Form 10-K and
incorporated herein by reference. |
|
(12) |
|
Filed on May 3, 2002 as Exhibit 10.8 to the registrants Quarterly Report on Form 10-Q and
incorporated herein by reference. |
|
(13) |
|
Filed on March 11, 2003 as Exhibit10.7 to the registrants Annual Report on
Form 10-K and incorporated herein by reference. |
|
(14) |
|
Filed on February 6, 2004 as Exhibit 10.8 to the registrants Annual Report on Form 10-K
and incorporated herein by reference. |
|
(15) |
|
Filed on October 22, 2004 as Exhibit 10.21 to the registrants Quarterly Report on Form
10-Q and incorporated herein by reference. |
|
(16) |
|
Filed on April 21, 2006 as Exhibit 99.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
|
(17) |
|
Filed on March 15, 2002 as Exhibit 10.8 to the registrants Annual Report on Form 10-K and
incorporated herein by reference. |
|
(18) |
|
Filed on November 4, 2002 as Exhibit 10.10 to the registrants Quarterly Report on Form 10-Q
and incorporated herein by reference. |
|
(19) |
|
Filed on March 11, 2003 as Exhibit 10.10 to the registrants Annual Report on Form 10-K and
incorporated herein by reference. |
|
(20) |
|
Filed on February 6, 2004 as Exhibit 10.12 to the registrants Annual Report on Form 10-K
and incorporated herein by reference. |
|
(21) |
|
Filed on October 22, 2004 as Exhibit 10.22 to the registrants Quarterly Report on Form 10-Q
and incorporated herein by reference. |
|
(22) |
|
Filed on April 21, 2006 as Exhibit 99.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
|
(23) |
|
Filed on November 4, 2002 as Exhibit 10.11 to the registrants Quarterly Report on Form 10-Q
and incorporated herein by reference |
|
(24) |
|
Filed on March 11, 2003 as Exhibit 10.12 to the registrants Annual Report on Form 10-K
and incorporated herein by reference. |
|
(25) |
|
Filed on February 6, 2004 as Exhibit 10.15 to the registrants Annual Report on Form 10-K
and incorporated herein by reference. |
|
(26) |
|
Filed on October 8, 2004 as Exhibit 99.1 to the registrants current Report on Form 8-K and
incorporated herein by reference. |
|
(27) |
|
Filed on January 25, 2002 as Exhibit 99.2 to the registrants Current Report on Form 8-K and
incorporated herein by reference.
|
|
(28) |
|
Filed on January 25, 2002 as Exhibit 99.3 to the registrants Current Report on Form 8-K and
incorporated herein by reference. |
|
(29) |
|
Filed on February 6, 2004 as Exhibit 10.18 to the registrants Annual Report on Form 10-K
and incorporated herein by reference. |
|
(30) |
|
Filed on July 31, 2003 as Exhibit 10.16 to the registrants Quarterly Report on Form 10-Q and
incorporated herein by reference. |
|
(31) |
|
Filed on July 21, 2004 as Exhibit 10.20 to the registrants Quarterly Report on Form 10-Q
and incorporated herein by reference. |
|
(32) |
|
Filed on July 14, 2005 as Exhibit 10.25 to the registrants Quarterly Report on Form 10-Q
and incorporated herein by reference. |
|
(33) |
|
Filed on May 15, 2006 as Exhibit 10.29 to the registrants Quarterly Report on Form 10-Q
and incorporated herein by reference. |
|
(34) |
|
Filed on October 22, 2004 as Exhibit 10.23 to the registrants Quarterly Report on Form
10-Q and incorporated herein by reference. |
|
(35) |
|
Filed on October 22, 2004 as Exhibit 10.24 to the registrants Quarterly Report on Form 10-Q
and incorporated herein by reference. |
|
(36) |
|
Filed on March 11, 2003 as Exhibit 21.1 to the registrants Annual Report on Form 10-K and
incorporated herein by reference. |
|
(37) |
|
Filed herewith. |
|
(38) |
|
Filed herewith. |
|
(39) |
|
Filed herewith. |
23
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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|
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SM&A |
|
|
|
|
|
(Registrant) |
|
|
|
Dated: August 8, 2006
|
|
/s/ STEVE D. HANDY |
|
|
|
|
|
Steve D. Handy |
|
|
Senior Vice President, Chief Financial Officer and Secretary |
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Dated: August 8, 2006
|
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/s/ STEVEN S. MYERS |
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|
|
Steven S. Myers |
|
|
Chairman and Chief Executive Officer |
24