UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)

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4695 MacArthur Court,

8th Floor

Newport Beach, California 92660

(949) 975-1550

 

 

Notice of Annual Meeting of Stockholders

 

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of SM&A, a Delaware corporation (hereinafter, the “Company”), will be held on Friday, May 23, 2008 at 9:00 a.m. local time, at 4685 MacArthur Court, Suite 380, Newport Beach, California 92660, for the following purposes, as more fully described in the accompanying Proxy Statement:

 

 

Only stockholders of record at the close of business on April 9, 2008 are entitled to notice of and to vote at the Annual Meeting or any adjournment thereof.

 

Accompanying this Notice are a Proxy Statement and Proxy.

 

By Order of the Board of Directors,

 

Executive Vice President, Finance

Chief Financial Officer and Secretary

 

Newport Beach, California

April 18, 2008

YOUR VOTE IS IMPORTANT

 

All stockholders are cordially invited to attend the Annual Meeting. Whether or not you expect to attend the meeting in person, we urge you to complete, sign, date and return the enclosed WHITE proxy card as promptly as possible in the postage-paid envelope provided, or to vote by telephone or Internet. Telephone and Internet voting information is provided on the WHITE proxy card. If you are present at the meeting and desire to vote in person, your vote by proxy will not be counted.

 

Please note that Steven S. Myers, the former Chief Executive Officer and former Chairman of the Board of the Company who retired from all positions with the Company on March 31, 2007, has provided notice that he intends to nominate at the Annual Meeting, and to solicit proxies for use at the Annual Meeting to vote in favor of, his own slate of four nominees for election as directors, in opposition to Item 1 shown on the previous page. As discussed further in the proxy statement accompanying this notice, we do not believe that a proxy contest at this time is in the best interests of the Company or its stockholders. You may receive proxy solicitation materials from Mr. Myers. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE BOARD’S NOMINEES ON THE ENCLOSED WHITE PROXY CARD. THE BOARD OF DIRECTORS URGES YOU TO NOT SIGN OR RETURN ANY GOLD OR OTHER PROXY CARD SENT TO YOU BY MR. MYERS. Even if you have previously signed a proxy card sent by Mr. Myers, you have every right to change your vote by using the enclosed WHITE proxy card to vote by telephone, by Internet or by signing, dating and returning the enclosed WHITE proxy card in the postage-paid envelope provided. Only the latest dated proxy card you vote will be counted. We urge you to disregard any proxy card sent to you by Mr. Myers.

 

If you have any questions or require any assistance with voting your shares, please contact:

 

MACKENZIE PARTNERS, INC.

STOCKHOLDERS CALL TOLL FREE: (800) 322-2885

BANKS AND BROKERS CALL COLLECT: (212) 929-5500

 

Your vote is extremely important regardless of the number of shares you own. Please promptly use the enclosed WHITE proxy card to vote by telephone, by Internet, or by signing, dating and returning the WHITE proxy card in the postage-paid envelope provided.

 

TABLE OF CONTENTS

 

 

The Board of Directors (the “Board”) of SM&A, a Delaware corporation (the “Company”) is soliciting the enclosed proxy for use at the Annual Meeting of Stockholders of the Company (the “Annual Meeting”) to be held at 9:00 a.m. local time on Friday, May 23, 2008 at 4685 MacArthur Court, Suite 380, Newport Beach, California 92660. This proxy statement contains information about the matters to be voted on at the meeting and the voting process, as well as information about our directors and executive officers.

 

 

 

 

 

 

 

 

 

 

 

 

If you are a registered stockholder of record, there are four ways to vote:

 

 

Your shares will be voted as you indicate. If you do not indicate your voting preferences, the appointed proxies (Cathy L. McCarthy and James R. Eckstaedt) will vote your shares FOR items 1, 2 and 3. If your shares are owned in joint names, all joint owners must vote by the same method and if joint owners vote by mail, all of the joint owners must sign the WHITE proxy card.

 

If your shares are held in a brokerage account in your broker’s name (this is called street name), please follow the voting directions provided by your broker or nominee. You may sign, date and return a voting instruction card to your broker or nominee or, in most cases, submit voting instructions by telephone or the Internet to your broker or nominee. If you provide specific voting instructions by mail, telephone, or the Internet, your broker or nominee should vote your shares as you have directed.

 

At the Annual Meeting, we will pass out written ballots to anyone who wishes to vote in person. If you hold your shares in street name, you must request a legal proxy from your broker or other nominee to vote at the annual meeting.

 

 

 

 

 

 

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of shares held in street name. The proxy materials should be forwarded to you by your broker, bank or nominee who is considered, with respect to those shares, the stockholder of record. As the beneficial holder, you have the right to direct your broker, bank or nominee how to vote and are also invited to attend the Annual Meeting. However, since you are not a stockholder of record, you may not vote these shares in person at the Annual Meeting unless you bring with you a legal proxy from the stockholder of record. A legal proxy may be obtained from your broker or nominee. Your broker or nominee has enclosed a voting instruction card for you to use in directing the broker, bank or other nominee how to vote your shares.

 

 

 

 

If you are a beneficial owner of shares, you may submit new voting instructions by contacting your broker, bank or other nominee. You may also vote in person at the Annual Meeting if you obtain a legal proxy as described above.

 

The Board strongly urges you to revoke any gold or other proxy card you may have returned which you received from Steven S. Myers. Even if you have previously signed a proxy card sent by Mr. Myers, you have every right to change your vote by signing, dating and returning the enclosed WHITE proxy card in the postage-paid envelope provided, or by voting by telephone or by Internet following the instructions on the WHITE proxy card. Only the latest dated proxy card you vote will be counted.

 

 

 

 

 

 

 

 

 

THE BOARD URGES YOU NOT TO SIGN OR RETURN ANY GOLD OR OTHER PROXY CARD SENT TO YOU BY STEVEN S. MYERS. Even if you have previously signed a proxy card sent by Mr. Myers, you have every right to change your vote by signing, dating and returning the enclosed WHITE proxy card in the postage-paid envelope provided. Only the latest dated proxy card you vote will be counted. We urge you to disregard any proxy card sent to you by Mr. Myers.

 

 

 

 

 

 

 

 

 

MacKenzie Partners, Inc.

Stockholders Call Toll Free: (800) 322-2885

Banks and Brokers Call Collect: (212) 929-5500

 

MATTERS TO BE VOTED ON

 

 

In accordance with the Company’s bylaws, there are currently nine authorized directors of the Company and nine directors currently sit on the Board. The Board is not classified. Accordingly, nine directors will be elected at the Annual Meeting to hold office until the next Annual Meeting of Stockholders in 2009, or until their successors are elected and qualified.

 

Each of the director nominees listed in this proxy statement consents to being named in this proxy statement and to serve on the Board if elected. If for any reason a nominee should, prior to the Annual Meeting, become unavailable to serve as a director due to an event not now anticipated, the proxies will be voted for such substitute nominee, if any, as may be recommended by the Board. In no event, however, will the proxies be voted for a greater number of persons than the number of nominees named.

 

Proxies, if not revoked, will be voted in favor of the Board’s nominees for the Board at the Annual Meeting, unless the stockholder specifies otherwise.

 

The names of the director nominees, their ages as of the date of the Annual Meeting, the year each first became a director, their principal occupations during at least the past five years, other public directorships held by each as of the date hereof, and certain other biographical information are set forth on the following pages.

 

Director Nominees

 

The following are brief biographies of each director nominee for election to the Company’s Board.

 

WILLIAM C. BOWES

Age 66

Director Since April 2004

 

Mr. Bowes currently serves as Chairman of the Governance & Nominating Committee and is also a member of the Compensation Committee.

 

Mr. Bowes is a retired Vice Admiral and an experienced industry executive. As Vice Admiral, he served as Commander of the Naval Air Systems Command, Principal Deputy Assistant Secretary of the Navy for Research, Development and Acquisition (RDA), and Acting Assistant Secretary of the Navy for RDA. Following his retirement from active duty, Mr. Bowes joined Hughes Aircraft as a senior president and deputy general manager of Hughes Aircraft Company’s Sensors and Communications Systems Segment. Shortly after Raytheon acquired Hughes, he joined Litton Industries where he held positions as vice president for Corporate Strategic Planning and vice president of Programs Management at Litton’s Integrated Systems Division. After Northrop Grumman acquired Litton, Mr. Bowes led one of three business units in the newly created Navigation Systems Division of Northrop. Mr. Bowes currently serves on the board of Omega Aerial Refueling Services and the Software Engineering Institute at Carnegie Mellon University. He serves as a member of the Naval Research Advisory Committee and is a Fellow in the Society of Experimental Test Pilots.

 

Mr. Bowes holds a Bachelors degree in Chemical Engineering from the University of Idaho and a Masters degree in Systems Acquisition Management from the Naval Postgraduate School. He has completed financial management, corporate planning and director courses at Harvard, Wharton, the University of Chicago, and at the University of California, Los Angeles. Mr. Bowes is a certified director from the UCLA Anderson School of Business.

 

DWIGHT L. HANGER

Age 65

Director Since April 2005

 

Mr. Hanger was elected as Chairman of the Board effective April 1, 2007. He also served on the Company’s Audit Committee from April 2005 to April 2007.

 

From 2000 to 2004 Mr. Hanger held the position of Vice President for Capgemini Ernst & Young, a provider of consulting, technology and outsourcing services. From 1969 to 2000, he worked as a management consultant with Ernst & Young LLC and Ernst & Whinney serving as a Partner for 22 years. During his tenure, he managed various business areas, geographies (Los Angeles Western Region, and National), and significant global clients. Mr. Hanger

has consulted with government agencies and companies focused on manufacturing, distribution, healthcare and retail. His areas of expertise include strategic planning, IT strategy, operations, systems integration and supply chain management, among others. Mr. Hanger currently serves Biola University in a non-profit capacity as Vice Chairman of the Board, a member of the Trustees Affairs Committee, and a member of the Finance and Audit Committee. He is a member of the AICPA (American Institute of Certified Public Accountants), the IMA (Institute of Management Accountants), and the APICS (American Production and Inventory Control Society).

 

Mr. Hanger was licensed through the states of California and Ohio as a Certified Public Accountant. Mr. Hanger holds a Bachelors degree in Electrical Engineering and an MBA degree in General Management from the University of California, Los Angeles.

 

J. CHRISTOPHER LEWIS

Age 52

Director Since September 1996

 

Mr. Lewis currently serves on the Company’s Compensation Committee.

 

Since 1982, Mr. Lewis has been a general partner of Riordan, Lewis & Haden, a private equity firm that invests in high growth middle market enterprises. Mr. Lewis has been involved in all aspects of private equity investing, including growth financings, acquisitions, and corporate advisory activities. Mr. Lewis also serves as a director of Tetra Tech, Inc., a publicly held company, and several private companies.

 

Mr. Lewis graduated cum laude from the University of Southern California, where he earned a Bachelor of Science in Business Administration and Finance and subsequently received a Masters of Business Administration.

 

CATHY L. McCARTHY

Age 60

Director Since July 2007

 

Ms. McCarthy currently serves as President and Chief Executive Officer of SM&A and is a member of the Company’s Board.

 

Ms McCarthy has served as President and Chief Executive Officer since July 2007 and as President and Chief Operating Officer from February 2006 to July 2007. Ms. McCarthy served as Executive Vice President, Chief Financial Officer and Corporate Secretary from September 2001 until February 2006. Prior to entering into her Employment Agreement with the Company in 2001, Ms. McCarthy served as Executive Vice President, Chief Financial Officer and Secretary of PIA Merchandising, Inc., and as the Chief Financial Officer of The Giant Group, Inc., and in various capacities at Wherehouse Entertainment, Inc., including Chief Financial Officer. Ms. McCarthy started her career at Mellon Bank, N.A. where she served in various capacities over 18 years, including Vice President of the High Leveraged Transaction Group and Vice President and Account Executive for major Retail and Consumer Product Fortune 500 and Middle Market companies. Ms. McCarthy currently serves on the board of directors, audit and compensation committee of Thermage, Inc., the Orange County Advisory Board of City National Bank, and as a member of the board of directors of Operation HomeFront, a non-profit organization.

 

Ms. McCarthy attended Robert Morris College majoring in finance and accounting, the University of Wisconsin School of Banking at Madison and the Carnegie Mellon University Executive Finance & Accounting Program.

 

PETER PACE, General USMC (retired)

Age 62

Director Since January 2008

 

Mr. Pace is President and Chief Executive Officer of SM&A Strategic Advisors and is a member of the Board of SM&A.

 

Mr. Pace served for more than 40 years in the Marine Corps before retiring in October 2007 from the most senior position in the United States Armed Forces. As Chairman of the Joint Chiefs of Staff from 2005 until 2007, he served as the principal military advisor to the President of the United States, the Secretary of Defense, the National Security Council, and the Homeland Security Council during a time of tremendous change in the nation’s strategic focus. Prior to becoming Chairman, he served as Vice Chairman of the Joint Chiefs of Staff from October 2001 to September 2005. Mr. Pace holds the distinction of being the first Marine to have served in either of these positions.

 

Mr. Pace serves on the Board of Directors for the Marine Corps Law Enforcement Foundation — a charity that provides scholarship bonds to children of Marines or Federal law enforcement personnel who were killed while serving our country at home or abroad. Mr. Pace also serves as Operating Partner of Behrman Capital, a private equity investment firm, Chairman of the Board of Behrman Capital’s portfolio company, Pelican Products, Inc., and a Director of portfolio company ILC Industries, Inc., a defense electronics and engineered softgoods provider.

 

A 1967 graduate of the United States Naval Academy, Mr. Pace holds a Master’s Degree in Business Administration from George Washington University and attended Harvard University for the Senior Executives in National and International Security programs. Mr. Pace is also a graduate of the Infantry Officers’ Advanced Course at Fort Benning, GA.; the Marine Corps Command and Staff College in Quantico, VA; and the National War College at Ft. McNair, Washington, DC.

 

DR. JOSEPH B. REAGAN

Age 73

Director Since July 2004

 

Dr. Reagan currently serves as Chairman of the Company’s Compensation Committee and is a member of the Audit Committee.

 

Dr. Reagan is a technology and senior management consultant to industry and the United States Government. He retired in 1996 after 37 years with the Lockheed Martin Corporation where he was a corporate officer and vice president and general manager in the Missiles and Space Company. Dr. Reagan was a director of Southwall Technologies Inc., an OTC public company, from October 1987 to May 1992 and from June 1993 to May 2006, where he served as Chairman of the Compensation Committee and as a member of the Audit Committee. From December 1998 to December 2004, Dr. Reagan was a director of the Naval Studies Board, an element of the National Research Council, where he served as Vice Chairman. From May 1992 until May 2004 he was a director of the Tech Museum of Innovation in San Jose. He was elected to the National Academy of Engineering in 1998 and was the Chairman of the Aerospace Section from 2005 to 2007.

 

Dr. Reagan is a graduate of the Pennsylvania State University Executive Management Program, the Management Institute, Advanced Institute, Executive Institute and Senior Management Institute of Lockheed. Dr. Reagan holds a Bachelor of Science in Physics from Boston College, a Master of Science in Physics from Boston College, and a PhD in Space Science from Stanford University.

 

ROBERT RODIN

Age 54

Director Since January 2005

 

Mr. Rodin currently serves on the Company’s Governance & Nominating Committee.

 

Mr. Rodin holds the office of Chairman and CEO of RDN Group, a management consulting firm. From 1999 through October 2002, Mr. Rodin served as Chairman and CEO of eConnections, a provider of extended supply chain intelligence solutions. From 1991 through 1999, Mr. Rodin served as Chief Executive Officer and President of Marshall Industries. He remained in this position until the Company was acquired by Avnet, Inc. in 1999. Mr. Rodin then became President of Global Supply Chain Management and Electronic Commerce Solutions for Avnet, Inc., and served on the Advisory Board of the Company. Mr. Rodin also serves on the Board of Napster, Inc., where he serves as the Chairman of the Compensation Committee. Additionally, he serves as Vice Chair and Executive Director of CommerceNet.

 

Mr. Rodin holds a Bachelor of Arts in Psychology from the University of Connecticut.

 

JOHN P. STENBIT

Age 67

Director Since April 2004

 

Mr. Stenbit currently serves on the Company’s Audit Committee and Governance & Nominating Committee.

 

Mr. Stenbit has had distinguished careers in both the private and public sectors, including participation as a member of Secretary Rumsfeld’s staff in conjunction with the transformation of the entire Department of Defense during both of his terms of service. In his most recent position, Mr. Stenbit served as the Assistant Secretary of

Defense Networks and Information Integration (NII), previously known as Command, Control, Communications, and Intelligence (C3I), at the Pentagon. He has served in several high profile positions for TRW, Inc., most recently in Fairfax, Virginia, where he was responsible for providing systems integration solutions to the government as an executive vice president and member of the Management Committee of TRW. Mr. Stenbit has chaired advisory committees for the Director of the Central Intelligence Agency and the Administrator of the Federal Aviation Administration, as well as serving as a member of advisory committees on information security, strategic systems, telecommunications, submarines, and future warfare defense communications. Mr. Stenbit also serves in the following capacities: (i) as a member of SI International’s board committees for compensation and corporate governance; (ii) as Chairman of the Governance & Nominating Committee, and member of the Compensation Committee and the Audit Committee of Cogent, Inc.; (iii) on the Compensation and the Governance and Nominating Committee of Viasat; (iv) on technical/scientific boards advising the Secretary of Defense, Commander Strategic Command, the Director National Security Agency, and the Director National Reconnaissance Office. Mr. Stenbit serves as a member of the Board and Audit Committee of Loral Space and Communications Company. He is also a Trustee of the MITRE Corporation.

 

Mr. Stenbit holds a Bachelors degree in Engineering and Masters degree in Electrical Engineering from the California Institute of Technology in Pasadena, California, and attended the Technische Hogeschool in The Netherlands. Mr. Stenbit was a Fulbright Fellow, an Aerospace Corporation Fellow, and a member of the National Academy of Engineering. He is presently a member of Tau Beta Pi, and a recipient of Secretary of Defense Medals for both Distinguished and Outstanding Public Service.

 

ROBERT J. UNTRACHT

Age 59

Director since April 2002

 

Mr. Untracht currently serves as Chairman of the Company’s Audit Committee and is a member of the Governance & Nominating Committee.

 

Mr. Untracht is a consultant on financial reporting matters and teaches accounting classes at the University of California, Los Angeles. He formerly served as an Associate Professor of Accounting at the New York Institute of Technology in Old Westbury, New York. Earlier in his career, Mr. Untracht held positions with Ernst & Young LLP from 1981 to 1998 ranging from Manager to Audit Partner and National Director of Retail and Consumer Product Industry Services where he served clients in the retail, aircraft leasing and entertainment industries. He also was involved in the firm’s financial restructuring group. From 1974 to 1981, at Deloitte & Touche LLP, Mr. Untracht served clients in the aerospace, defense and manufacturing industries.

 

Mr. Untracht holds a Bachelors degree in Computer Technology from the New York Institute of Technology, an MBA degree with a concentration in Finance and Accounting from the State University of New York at Buffalo, and a Juris Doctorate degree from Southwestern University School of Law with a concentration in corporate law. Mr. Untracht is a CPA and was admitted to the State Bar of California.

 

Required Vote; Recommendation of Board

 

The affirmative vote of a plurality of the votes cast is required to elect each nominee as a director. Abstentions will be treated as shares present and entitled to vote, and for purposes of determining the outcome of the vote, will not be treated as votes cast for a nominee. Proxies, if not revoked, will be voted “FOR” each of the nominees unless a stockholder specifies otherwise. Each of the Company’s current directors that holds shares of the Company’s Common Stock as of the record date intends to vote those shares for each of the director nominees listed in this proxy statement.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE “FOR”
THE ELECTION OF EACH OF THE NOMINEES FOR DIRECTOR.

 

Reasons for Board’s Recommendation

 

Your Board has in place a Governance & Nominating Committee whose purpose is to oversee the nomination of directors for election to the Company. The Committee followed its established procedures in evaluating,

selecting and nominating this year’s slate of directors based on the evaluation of criteria including the nominees’ demonstrated ability to ensure effective corporate governance, to support and guide the Company’s strategies, and to exemplify the highest personal and professional integrity. The Committee followed the process outlined in the Corporate Governance section of this Proxy to fill two vacancies that occurred in 2007 as a result of the retirement of the former Chairman of the Board, Mr. Myers, and the resignation of the former Chief Executive Officer, Cynthia Davis. In addition, in January, 2008 the Committee recommended Mr. Pace for Board membership and he subsequently was approved and appointed to the Board.

 

In March 2008 the Board received a request from Mr. Myers to appoint four new candidates for election in 2008 but felt that the independence and experience represented by the slate of nominees proposed by your Board far outweighed any benefit Mr. Myers’ candidates are purported to have. In addition, the Board believes that a proxy contest at this time is disruptive and not in the best interests of the Company and its stockholders. The Board has complete confidence in the current management team and believes that it will be successful in implementing the Company’s new strategic plan for the benefit of all stockholders.

 

 

The Company adopted an employee stock purchase plan effective March 1, 1999, which has been subsequently amended several times. The Amended and Restated Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board to give eligible employees of the Company and its subsidiaries the opportunity to purchase stock in the Company at a 5% discount from the fair market value price, and to attract and retain employees. As of March 10, 2008, there were 78,933 shares available for purchase under the ESPP. On March 4, 2008, the Board approved an amendment to the ESPP, which is subject to stockholder approval. The amendment included as Appendix B (i) adds an additional 100,000 shares to the ESPP reserve account, thereby increasing the number of shares of Common Stock that may be issued under the ESPP from 1,500,000 to 1,600,000, and (ii) extends the ESPP expiration date from December 31, 2008 to December 31, 2018. This amendment to the ESPP is being proposed to allow future purchases of Company stock by employees.

 

Summary of the ESPP

 

General.  The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Each participant will be granted upon entry into an offering period under the ESPP, the right to purchase through accumulated payroll deductions up to a number of shares of the Common Stock of the Company determined in accordance with the ESPP (a “Purchase Right”). A participant’s Purchase Right will be automatically exercised on the last day of the offering period unless the Purchase Right has terminated prior to such date.

 

Shares Subject to Plan.  Prior to the proposed amendment, the ESPP provides for the issuance of a maximum of 1,500,000 of the Company’s shares of Common Stock, subject to appropriate adjustment in the event of any stock dividend, stock split, spin-off, reorganization, recapitalization, merger, consolidation, exchange of shares or similar change affecting the outstanding Common Stock as a class. If any Purchase Right expires or terminates, the shares subject to the unexercised portion of such Purchase Right will again be available for issuance under the ESPP.

 

Administration.  The ESPP will be administered by the Board or a duly appointed committee of the Board (the “Plan Administrator”). The Plan Administrator will interpret and apply the ESPP, and decisions of the Plan Administrator are final and binding on all parties having an interest in the plan. The Plan Administrator may adopt such rules, policies, procedures, limitations or guidelines as it deems advisable for proper administration of the ESPP.

 

Eligibility.  All employees of the Company or of any subsidiary of the Company designated by the Board are eligible to participate in the plan. However, no employee who owns or holds options to purchase 5% or more of the total combined voting power or value of all classes of stock of the Company may be granted a Purchase Right under the ESPP.

 

Offering Periods.  Shares of Common Stock are offered under the ESPP through a series of successive three-month offering periods commencing on the first day of January, April, July and October of each year. Purchases occur on the last day of each offering period.

Participation and Purchase of Shares.  Eligible employees may commence participation in the ESPP at the beginning of an offering period. To enroll in the plan, an eligible employee must authorize payroll deductions prior to the applicable entry date. Payroll deductions may not exceed 15% of a participant’s compensation (as defined by the ESPP) during each offering period. A participant’s authorized payroll deductions will continue throughout the offering period, unless (i) the participant makes an election to increase or decrease the rate of or to stop his or her payroll deductions, (ii) the participant voluntarily terminates his or her Purchase Right, or (iii) the participant ceases to be eligible to participate in the ESPP. Upon termination of a participant’s Purchase Right, the Company will refund, without interest, the participant’s accumulated payroll deductions not previously applied to the purchase of shares. Once a participant’s Purchase Right in an offering period has terminated, the participant may not resume participation in the same offering period and may only resume participation by enrolling in a subsequent offering period.

 

Generally, each participant in an offering period will be granted a Purchase Right for that offering period exercisable for the lesser of (i) 2,500 shares of Common Stock and (ii) that number of fractional shares determined by dividing the participant’s payroll deductions accumulated during the offering period by the applicable purchase price. However, no participant may be granted a Purchase Right that would permit the participant to purchase shares of Common Stock under the ESPP which, when aggregated with shares purchased under any other employee stock purchase plan of the Company, would have a fair market value exceeding $25,000 for each calendar year (measured by the fair market value of the Company’s Common Stock on the first date of the offering period) in which the Purchase Right is outstanding at any time. Purchase Rights are nontransferable and may only be exercised by the participant.

 

As soon as practicable after the last day of each offering period, the Company will issue to each participant in the offering period, the number of shares of the Company’s Common Stock determined by dividing the amount of payroll deductions accumulated for the participant during the purchase interval by the purchase price, subject to the limitations described above. The price at which shares are sold under the ESPP is 95% of the fair market value per share of the Company’s Common Stock on the purchase date. Fair market value currently means the closing price of a share of that Common Stock on any given date on the NASDAQ Global Market. Any payroll deductions under the ESPP not applied to the purchase of shares on any purchase date will be returned to the participant without interest.

 

Change of Control.  If the Company at any time proposes to enter into any merger or other reorganization pursuant to which the Company will not be the surviving entity, or enter into the sale of substantially all of its assets, then, to the extent permitted by applicable law, (i) the successor corporation shall assume the rights previously granted under the ESPP, or substitute for those rights new rights covering the shares of the successor corporation (with appropriate adjustments as to the number and kind of shares and prices) or (ii) the ESPP and the rights previously granted shall continue in full force and effect. If the successor corporation refuses to assume or continue the ESPP, the outstanding purchase rights will be exercised on the effective date of such transaction.

 

Termination or Amendment.  Without the proposed amendment, the ESPP will continue until December 31, 2008, unless earlier terminated by the Company. The Company may at any time amend or terminate the ESPP, except that the approval of the Company’s stockholders is required with respect to any amendment that would increase the number of shares issuable under the ESPP, materially modify the requirements as to eligibility for participation in the ESSP, or materially increase the benefits that accrue to participants under the ESPP. No termination or amendment of the ESPP will affect rights previously granted under the ESPP.

 

The ESPP, as revised to include the proposed amendment, is included as Appendix “B” to this Proxy Statement. The summary discussion above is qualified in its entirety by the full terms of the ESPP set forth in Appendix “B”.

 

New Plan Benefits

 

Because benefits under the ESPP will depend on employees’ elections to participate and to purchase shares under the ESPP at various future dates, it is not possible to determine the benefits that will be received by executive officers and other employees. Non-employee directors are not eligible to participate in the ESPP.

Equity Compensation Plan Information

 

The following table provides information about the Company’s Common Stock that may be issued upon the exercise of options, warrants and rights under all of the Company’s existing equity compensation plans and arrangements as of December 31, 2007.

 

 

 

 

Required Vote; Recommendation of Board

 

The proposal to approve the amendment to the ESPP will require approval by a majority of the votes cast by the holders of the shares of Common Stock voting in person or by proxy at the meeting. Withholding authority to vote for approval of the ESPP will be treated as shares present and entitled to vote and, for purposes of determining the outcome of the vote, will not be treated as votes cast for the approval of the ESPP. Broker “non-votes” will not be treated as shares present and entitled to vote on the approval of the ESPP and will have no effect on the outcome of the vote. Broker “non-votes” will be counted as present for the purpose of determining whether a quorum is present. Proxies, if not revoked, will be voted in favor of the approval of the amendment to the ESPP unless the stockholder specifies otherwise. Each of the Company’s current directors that holds shares of the Company’s Common Stock as of the record date intends to vote those shares for the approval of the proposed amendment to the ESPP.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
“FOR” THE PROPOSAL TO APPROVE THE AMENDMENT TO THE ESPP.

 

 

The Audit Committee of the Board has selected BDO Seidman, LLP (“BDO”) as the independent registered public accounting firm (the “Independent Auditor”) to audit the financial statements of the Company for the fiscal year 2008. If the stockholders do not approve the selection of BDO, the selection of another Independent Auditor will be considered by the Audit Committee. BDO has been the Independent Auditor for the Company since June 2006.

On June 21, 2006, the Company engaged BDO, as the Company’s Independent Auditor, replacing Ernst & Young, LLP (“EY”), which resigned as the Company’s Independent Auditor effective May 18, 2006. The change in Independent Auditor was approved by the Company’s Board of Directors upon the recommendation of the Audit Committee.

 

The audit reports of EY on the consolidated financial statements for the Company as of and for the years ended December 31, 2005 and 2004 did not contain an adverse opinion or a disclaimer of opinion, or were qualified or modified as to uncertainty, audit scope, or accounting principles. As noted below, these financial statements were restated in an Amendment No. 1 to Form 10-K/A filed on May 15, 2006.

 

During the audits of the Company’s financial statements for the two years ended December 31, 2005 and 2004 and in connection with EY’s review of the subsequent interim period through May 18, 2006, there were no disagreements with EY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of EY, would have caused it to make reference to the subject matter of the disagreement in connection with its report, except for the following:

 

 

The Company authorized EY to respond fully to the inquiries of the Company’s subsequent Independent Auditor concerning the subject matter of the disagreement referenced above. In the Company’s two years ended December 31,2005 and 2004 and in the subsequent interim period through May 18, 2006, there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K, except as follows:

 

A representative of BDO will be present at the Annual Meeting, will make a statement if so desired, and will be available to respond to appropriate questions.

 

Independent Auditor Fees

 

The aggregate audit fees billed to the Company and its subsidiaries for the fiscal years ended December 31, 2007 and 2006 were:

 

 

 

 

 

The Audit Committee has considered whether provision of the services described above is compatible with maintaining the Independent Auditor’s independence and has determined that such services did not adversely affect BDO’s independence.

 

Audit Committee Approval of Audit and Non-Audit Services

 

The Audit Committee has adopted procedures for pre-approving all audit and permitted non-audit services provided by the Independent Auditors. The Audit Committee pre-approves a list of specific services and categories of services, subject to a specified cost level. Part of this approval process includes making a determination of whether non-audit services are consistent with the SEC’s rules on auditor independence. The Audit Committee may delegate pre-approval authority to the Chairman of the Audit Committee. The Audit Committee periodically monitors the services rendered and actual fees paid to the Independent Auditors to ensure such services are within the parameters approved.

 

Required Vote; Recommendation of Board

 

The proposal to ratify BDO as the Company’s Independent Auditors for the fiscal year ending December 31, 2008 requires the approval by a majority of the votes cast by the holders of the shares of Common Stock voting in person or by proxy at the meeting. Withholding authority to vote for the ratification of BDO will be treated as shares present and entitled to vote and, for purposes of determining the outcome of the vote, will not be treated as votes cast for ratification of BDO. Broker “non-votes” will not be treated as shares present and entitled to vote on the ratification of BDO and will have no effect on the outcome of the vote. Broker “non-votes” will be counted as present for the purpose of determining whether a quorum is present. Proxies, if not revoked, will be voted in favor of ratifying BDO as the Company’s Independent Auditors for the fiscal year ending December 31, 2008 unless the stockholder specifies otherwise. Each of the Company’s current directors that holds shares of the Company’s Common Stock as of the record date intends to vote those shares for the ratification of the appointment of BDO Seidman, LLP as the Company’s Independent Auditors.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF
BDO SEIDMAN, LLP
AS THE COMPANY’S INDEPENDENT AUDITORS

 

 

The Company knows of no other business that will be considered for action at the Annual Meeting.

CORPORATE GOVERNANCE

 

The Board continues to implement governance practices that will be followed by the Company in order to assure that the Board will have the necessary authority and practices in place to review and evaluate the Company’s business operations as needed and to make decisions that are independent of the Company’s management. These practices are also intended to align the interests of directors and management with those of the Company’s stockholders.

 

The Board held 16 meetings during the fiscal year ended December 31, 2007. All of the incumbent directors attended in excess of 75% of the total number of meetings of the Board held during the time they were directors, and of the committees on which they served.

 

Following most of the regularly scheduled Board meetings in 2007, executive sessions were conducted in which directors in attendance participated.

 

The Company expects all incumbent directors to attend Annual Meetings. The Company generally holds a Board meeting following the Annual Meeting to minimize travel obligations and to facilitate director attendance at the Annual Meeting. All of the Company’s directors then in office attended the Company’s 2007 Annual Meeting.

 

Following is a description of each Committee of the Board.

 

Audit Committee

 

Compensation Committee

 

Governance & Nominating Committee

 

 

 

The Board is responsible for approving candidates for Board membership. The Board has delegated the screening and recruitment process to the Governance & Nominating Committee. The Committee believes that the criteria for director nominees should include ensuring effective corporate governance, supporting the Company’s strategies, reflecting the highest personal and professional integrity, possessing sound judgment, free from conflicts of interest, having adequate time to devote to Board responsibilities, supporting the successful recruitment of qualified candidates for the Board and representing the best interest of all the Company’s stockholders.

 

The Committee may receive recommendations for Board candidates from various sources, including the Company’s directors, management and stockholders. Stockholder proposals for nominations to the Board should be submitted to the Governance & Nominating Committee in care of the Corporate Secretary of the Company at its principal executive office at 4695 MacArthur Court, 8th Floor, Newport Beach, California 92660. To be considered by the Board for nomination at the next succeeding Annual Meeting, nominations must be delivered to the Corporate Secretary no later than December 19, 2008 (see “Submission of Stockholder Proposals for the 2009 Proxy Statement”). The Board will consider and evaluate all Board recommendations in the same manner regardless of source.

 

The Corporate Secretary’s office, at the request of the Committee, researches the qualifications of recommended candidates and reports its findings to the Chairman of the Committee.

 

When a vacancy occurs on the Board, the Committee recommends to the Board a nominee to fill the vacancy. As provided in the Company’s By-Laws, the Board appoints a new director when a vacancy occurs between Annual Meetings. During 2007 two vacancies occurred on the Board. Mr. Myers, former Chairman of the Board retired on March 31, 2007. The Board appointed then director Mr. Hanger as Chairman of the Board. The Board recommended and approved the appointment of Ms. McCarthy to the Board on July 19, 2007 filling the vacancy created by the resignation of Ms. Davis. Ms. McCarthy recommended to the Governance and Nominating Committee, the appointment of General Pace to the Board. The Governance and Nominating Committee subsequently provided their recommendation to the Board, at which time General Pace was approved and appointed to the Board on January 17, 2008 filling the vacancy created by the retirement of Mr. Myers.

 

Each of the Audit, Compensation, and Governance & Nominating Committees has the authority to retain independent advisors, legal counsel or other experts or consultants it deems appropriate to carry out its responsibilities, with all fees and expenses paid by the Company.

 

To promote effective corporate governance, a majority of the members of the Company’s Board qualify as independent under criteria established by NASDAQ. The Governance & Nominating Committee regularly reviews the independence and qualifications of each member of the Board and its various committees. Ms. McCarthy does not participate in any action of the Board relating to any executive or employee compensation plan in which she participates.

 

The Board has determined that seven of the current directors, Messrs. William C. Bowes, Dwight L. Hanger, J. Christopher Lewis, Joseph B. Reagan, Robert Rodin, John P. Stenbit, and Robert J. Untracht are independent. Ms. McCarthy and General Pace are employees of the Company and therefore are not independent.

 

The Company reviews all related party transactions for potential conflict of interest situations on an ongoing basis.

The following describes certain transactions that have occurred during the Company’s fiscal year ending December 31, 2007:

 

Employment Agreement with Mr. Pace

 

The Company and Mr. Pace are party to an employment agreement providing for an annual base salary of $300,000. In addition, Mr. Pace is entitled to an incentive bonus equal to two percent (2%) of all revenue in excess of $12,000,000 earned by the Company from all Qualifying Projects during the Qualifying Periods applicable to such Qualifying Projects (as defined in the agreement). Mr. Pace also received a one-time cash Signing Bonus in the amount of $240,000 and was granted an option on the Effective Date of his agreement to purchase 100,000 shares of Common Stock of the Company, issued pursuant to the Company’s 2007 Equity Incentive Plan. The exercise price of the stock option is equal to the fair market value of such Common Stock on the date of grant and 25% of the option was deemed vested (i.e., exercisable) as of the Effective Date, with the remainder of such option to vest in three equal annual installments, commencing on the first anniversary of the Effective Date. Mr. Pace was included in the 2008 LTIP that covers calendar years 2008, 2009 and 2010. The target incentive for Mr. Pace under this plan is 50,000 shares of Common Stock of the Company, but the actual number of shares granted will be in accordance with the performance scale described above in this document. Additional elements of Mr. Pace’s employment agreement are outlined in the Compensation Discussion and Analysis section of this proxy statement under “Employment Agreements”.

 

Section 16(a) of the Securities Exchange Act of 1934, and the regulations thereunder, requires the Company’s directors, executive officers and persons who own more than ten percent (10%) of a registered class of the Company’s equity securities, to file reports of beneficial ownership and changes in such beneficial ownership of our securities with the SEC. These persons are also required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file with the SEC. To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during its fiscal year ended December 31, 2007, all these persons complied with all applicable filing requirements.

 

During the fiscal year ended December 31, 2007, the members of the Compensation Committee were Joseph B. Reagan, William C. Bowes, and J. Christopher Lewis, all of whom were non-employee directors of the Company. None of the members of the Compensation Committee was, at any time during fiscal 2007 or at any other time, an officer or employee of the Company. There are no Compensation Committee interlocks between the Company and other entities involving the Company’s executive officers and Board members who serve as executive officers or Board members of such other entities.

 

The Board has adopted a written code of ethical conduct that applies to all directors, officers and employees. The code requires avoidance of conflicts of interest compliance with all laws and other legal requirements, conduct of business in an honest and ethical manner, integrity and actions in the Company’s best interest. Directors, officers and employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the code. The policy is included as Appendix C to this proxy statement and is available on the Company’s website at www.smawins.com under Investor Relations>Corporate Governance, or by contacting the Corporate Secretary at 4695 MacArthur Court, 8th Floor, Newport Beach, CA 92660, or calling (949) 975-1550 to obtain a copy without charge.

 

The Board has adopted Corporate Governance Guidelines (“Guidelines”) that address significant issues of corporate governance and set forth the procedures by which the Board carries out its responsibilities. Among the

areas addressed by the Guidelines are director qualifications and responsibilities, Board committee responsibilities, director compensation and tenure, director orientation and continuing education, access to management and independent advisors, succession planning and Board and committee performance evaluations. The Corporate Governance & Nominating Committee is responsible for assessing and reviewing the adequacy of these Guidelines and recommending proposed changes to the Board, as appropriate. The Guidelines are available on the Company’s website at www.smawins.com under Investor Relations>Corporate Governance.

 

The Audit Committee has established procedures for (a) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and (b) the confidential and anonymous submission by the Company’s employees and its stockholders, of concerns regarding questionable accounting or auditing matters. These procedures are described in the Business Conduct and Ethics Code.

 

The Company believes the process described in the Company’s Business Conduct and Ethics Code by which stockholders may communicate directly to directors, has served the Board’s and the stockholders’ needs. Until any other procedures are developed and posted on the Company’s corporate website, stockholders may send written correspondence to the Board in the care of the Corporate Secretary:

 

 

SM&A
4695 MacArthur Court, 8th Floor
Newport Beach, CA 92660
Attn: Corporate Secretary

 

The Audit Committee reviewed and discussed with management the audited financial statements of the Company.

 

The Audit Committee discussed with the Independent Auditors matters required to be discussed pursuant to Statement on Auditing Standards No. 61, “Communication with Audit Committees,” as modified or supplemented. The Committee, has received the written disclosures from the Independent Auditors required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” as currently in effect and has discussed such independence with the Independent Auditors.

 

Based on these reviews and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 for filing with the SEC.

 

 

 

(1) Notwithstanding anything to the contrary set forth in any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings, including this Proxy Statement, in whole or in part, the Audit Committee Report shall not be incorporated by reference into any such filings.

SECURITY OWNERSHIP

 

As of March 14, 2008, the Company had 19,030,021 shares of Common Stock outstanding. The, only persons known by the Company, as of this date, to be beneficial owners of more than five percent of the Company’s Common Stock are noted below.

 

 

 

Footnotes to Principal Holders:

 

 

 

The following table sets forth the shares of the Company’s Common Stock beneficially owned by the current Named Executive Officers and Directors of the Company as of March 14, 2008. All current Named Executive Officers and Directors as a group, consisting of twelve (12) persons, beneficially owned 1,364,974 shares of the Company’s Common Stock, which amount represents 7.17% of the total outstanding shares of the Company’s Common Stock as of that date.

 

 

 

 

Footnotes to Current Named Executive Officers and Directors Table:

 

 

 

 

 

 

 

 

 

 

Former Named Executive Officers

 

The following table sets forth the shares of the Company’s Common Stock beneficially owned, to the Company’s knowledge, as of March 14, 2008 by the Former Named Executive Officers of the Company who served during 2007 but are no longer executive officers of the Company. All Former Named Executive Officers as a group, consisting of six (6) persons, to the Company’s knowledge, beneficially owned 3,060,774 shares of the Company’s Common Stock, which represents 16.08% of the total outstanding shares of the Company’s Common Stock as of March 14, 2008.

 

 

 

 

Footnotes to Former Named Executive Officers Table:

 

 

 

 

 

 

 

 

 

Set forth below is certain information with respect to the Company’s current Named Executive Officers, including the business experience of each during the past five years.

 

Cathy L. McCarthy (59) currently serves as President and Chief Executive Officer of SM&A and is a member of the Company’s Board.

 

Ms. McCarthy has served as President and Chief Executive Officer since July 2007 and as President and Chief Operating Officer from February 2006 to July 2007. Ms. McCarthy served as Executive Vice President, Chief Financial Officer and Corporate Secretary from September 2001 until February 2006. Prior to entering into her Employment Agreement with the Company in 2001, Ms McCarthy served as Executive Vice President, Chief Financial Officer and Secretary of PIA Merchandising, Inc., and as the Chief Financial Officer of The Giant Group, Inc., and in various capacities at Wherehouse Entertainment, Inc, including Chief Financial Officer. Ms. McCarthy started her career at Mellon Bank, N.A. where she served in various capacities over 18 years including Vice President of the High Leveraged Transaction Group and Vice President and Account Executive for major Retail and Consumer Product Fortune 500 and Middle Market companies. Ms. McCarthy currently serves on the board of directors, audit and compensation committee of Thermage, Inc., the Orange County Advisory Board of City National Bank, and as a member of the board of directors of Operation HomeFront, a non-profit organization.

 

Ms.McCarthy attended Robert Morris College majoring in finance and accounting, the University of Wisconsin School of Banking at Madison and the Carnegie Mellon University Executive Finance & Accounting Program.

 

Anna L. Aguirre (46) currently serves as Senior Vice President, Human Resources. Ms. Aguirre joined the Company as an employee in September 2007. In this role, she has direct responsibility for human resources operations, recruiting, training, security and facilities. A seasoned HR professional with over 18 years of experience, most recently Ms. Aguirre served five years as the VP Global Human Resources and Facilities at Iomega Corporation, a leading provider of data storage products. As an integral member of the executive team, she provided strategic guidance and set policy in the areas of change management, organizational development, human resources planning and facilities management. Prior to that she lead the human resources and facilities functions at Proxima Corporation, a manufacturer of multimedia projectors. Ms. Aguirre holds a Bachelors of Science in Business Administration and and a minor in Economics from Humboldt State University. She also attended graduate studies in International Business at San Diego State University.

 

James R. Eckstaedt (53) currently serves as Executive Vice President, Finance, Chief Financial Officer, and Secretary of the Company. Mr. Eckstaedt joined the Company in January 2008. Mr. Eckstaedt most recently held the position of Executive Vice President and Chief Financial Officer of Sage Software, Inc. from 2001-2007. He also held the positions of Senior Vice President, Finance and Chief Financial Officer from 1999-2001, and Vice President, Finance and Chief Financial officer from 1997-1999. Prior to Sage Software, Mr. Eckstaedt was the Senior Vice President and Chief Financial Officer of the Cerplex Group, Inc., a provider of outsourcing services for the computer industry. Before that, he held various senior finance positions at Western Digital Corporation. Mr. Eckstaedt started his career as a staff auditor of Price Waterhouse and Co. He is a graduate of Valparaiso University with a B.S. in Business Administration, Accounting. He is a member of the California Society of CPAs.

 

Peter Pace, General USMC (retired) (62) currently serves as President and Chief Executive Officer of SM&A Strategic Advisors and is a member of the Board of SM&A.

 

Mr. Pace served for more than 40 years in the Marine Corps before retiring in October 2007 from the most senior position in the United States Armed Forces. As Chairman of the Joint Chiefs of Staff from 2005 until 2007, he

served as the principal military advisor to the President of the United States, the Secretary of Defense, the National Security Council, and the Homeland Security Council during a time of tremendous change in the nation’s strategic focus. Prior to becoming Chairman, he served as Vice Chairman of the Joint Chiefs of Staff from October 2001 to September 2005. Mr. Pace holds the distinction of being the first Marine to have served in either of these positions.

 

Mr. Pace serves on the Board of Directors for the Marine Corps Law Enforcement Foundation — a charity that provides scholarship bonds to children of Marines or Federal law enforcement personnel who were killed while serving our country at home or abroad. Mr. Pace also serves as Operating Partner of Behrman Capital, a private equity investment firm, Chairman of the Board of Behrman Capital’s portfolio company, Pelican Products, Inc., and a Director of portfolio company ILC Industries, Inc., a defense electronics and engineered softgoods provider.

 

A 1967 graduate of the United States Naval Academy, Mr. Pace holds a Master’s Degree in Business Administration from George Washington University and attended Harvard University for the Senior Executives in National and International Security programs. Mr. Pace is also a graduate of the Infantry Officers’ Advanced Course at Fort Benning, GA.; the Marine Corps Command and Staff College in Quantico, VA; and the National War College at Ft. McNair, Washington, DC.

 

Kevin L. Reiners (47) currently serves as Executive Vice President of Operations. In this capacity, Mr. Reiners is responsible for all product development, product maintenance, associate deployment, quality, and Information Technology within SM&A. Mr. Reiners established the Program Services product area and served as the SVP of Program Services from October 2005 until August 2007. Prior to joining the Company, Mr. Reiners served from August 2002 to July 2005 as Vice President of Business Operations for Lockheed Martin Space Systems Company. In this capacity, he was responsible for all contracts, program controls, cost/schedule management, cost estimating, Finance, Accounting, and compliance for all Lockheed Martin Space Systems programs. From July 2000 to August 2002 Mr. Reiners served as Business Director for Lockheed Martin Space Systems Company on the Terminal High Altitude Area Defense (THAAD) program. Previous to this he served as Controller for the Space and Strategic Missiles company, and the Program Manager for the Lockheed/Martin Marietta merger related Consolidation Program. This program executed the strategic plan for the 1995 merger including the closure of East Windsor and Valley Forge and the facilitization of Sunnyvale to accommodate heritage Astrospace programs. Included within this merger related activity, Mr. Reiners also served as the Program Manager for the SAP system implementation project. Mr. Reiners holds a Bachelor of Science degree in Finance from San Diego State University.

COMPENSATION DISCUSSION AND ANALYSIS

 

Certain information provided herein is provided in the limited context of the Company’s compensation programs. This information should not be interpreted as information regarding the management teams; expectations or any other guidance and should not be relied upon by investors or analysts in establishing future performance metrics. We specifically caution investors not to apply this information to other contexts.

 

In the sections that follow, we will provide an overview and analysis of our compensation program and policies, the material compensation decisions we have made under those programs and policies, and the material factors that we considered in making those decisions. You will also find a series of tables containing specific information about the compensation earned or paid in 2007 to the following Executive Officers:

 

Current Executive Officers

 

 

Former Executive Officers

 

 

 

 

 

 

The discussion below is intended to help you understand the detail information provided in those tables and put that information into context within our overall compensation program.

 

The Company’s compensation philosophy is to align executive officer compensation decisions with the Company’s desired business direction, strategy and performance. The primary objectives and priorities of the executive compensation program are to:

 

 

Consistent with our compensation philosophy and objectives, we consider many factors in determining appropriate compensation for our Executive Officers, including:

 

 

To guide in the implementation of our compensation philosophy, our compensation program is designed to:

 

 

Our total compensation packages may include the following components:

 

 

Our market for experienced management is highly competitive. We aim to attract and retain the most highly qualified executives to manage each of our business functions. In doing so, we aim to draw upon a pool of talent that is highly sought after by both competitive consulting groups and large, established firms in our clients’ industries. We believe we have competitive advantages in our ability to offer significant upside potential through long-term equity-based incentives. Nonetheless, we must recognize market cash compensation levels and satisfy the day to day financial requirements of our executives through competitive base salaries and cash awards.

 

To assist us in establishing competitive compensation levels for our executives, the Compensation Committee engaged DolmatConnell, a nationally recognized compensation consulting firm, to perform a study of the compensation of our senior management and a selection of comparable companies that generally recruit individuals to fill senior management positions who are similar in skills and background to those we recruit. Studies such as this typically include only the five most highly compensated officers at each company for whom compensation information is publicly disclosed. DolmatConnell also provided us with data that was less company-specific to assist in respect to establishing compensation at other levels within our organization.

 

The overall results of this study provided us the starting point for our analysis and review of Executive Compensation. DolmatConnell worked directly with the Compensation Committee and management to interpret results and to make certain specific and general recommendations. DolmatConnell use the following market references to compare our executive total compensation practices and levels to those in the market:

 

 

This section is intended to provide a framework within which to understand the actual compensation awarded to, earned or held by each Executive Officer during 2007, as reported in the compensation tables and accompanying narrative sections of this Proxy Statement.

 

Ms. Davis’ compensation, as embodied in her employment agreement, was based on the compensation philosophy described above, an analysis of market data obtained in cooperation with the executive search firm assisting the Compensation Committee, and specific incentives intended to replace benefits that had been earned by Ms. Davis at her previous employer but were forfeited as a result of her departure. Ms. McCarthy’s compensation, as embodied in her employment agreement, is based on the compensation philosophy described above, market data obtained from the DolmatConnell report and specific incentives intended to compensate Ms. McCarthy for returning to the Company after her retirement.

 

For other executives, based on competitive market information and the Company’s compensation philosophy and objectives, the Chief Executive Officer submits her recommendations for Executive Officer compensation for the upcoming fiscal year to the Compensation Committee toward the end of the fiscal year. The Compensation Committee reviews these recommendations and can decide to accept or modify them. The Compensation Committee then discusses its recommended proposal with the full Board at the first meeting in the new fiscal year, and may further modify targeted compensation based on input from the full Board. The Company’s Executive Officer compensation packages combine and allocate cash and equity-based compensation taking into account the role of each Executive Officer of the Company, market practices, and the total value of all forms of compensation including benefits and perquisites available to the individual. Our total compensation packages include base salary and annual awards, all paid in cash, as well as long-term compensation in the form of stock options or restricted stock awards, and other benefits and perquisites. The rationale, design, reward process, and related information regarding the components of compensation are described generally below.

 

The Company does not currently have any equity or other security ownership policy that mandates ownership of certain amounts of Common Stock by our Executive Officers. The Company has arrangements with our Executive Officers, which provide for such executives to receive certain payments and benefits if their employment with the Company is terminated. These arrangements are discussed in detail below. The Board has determined that such payments and benefits are necessary in order to attract and retain our Executive Officers.

 

Base salaries, which are paid in cash, are provided as compensation for day-to-day responsibilities and services to the Company and are designed to meet the objective of attracting and retaining the talent needed to run the business. Executive salaries are reviewed annually. Other than the annual award program described below, and the Long-Term Incentive Compensation plan adopted in 2007, there are no profit-sharing or deferred compensation programs.

 

For fiscal year 2007, the Compensation Committee reviewed salaries recommended by the Company’s Chief Executive Officer for the Executive Officers, and recommended the base salary of each Executive Officer on a case-by-case basis taking into account each individual officer’s responsibilities and performance, the competitive market information collected by the Compensation Committee and the compensation objectives of the Company. For fiscal year 2007, the Company referenced the data provided by the DolmatConnell review, the relative seniority and level of responsibility of the Company’s Executive Officers as compared to the peer group, the Company’s historic compensation structure, and other relevant information. The Compensation Committee approved and recommended to the Board of Directors the following base salaries for fiscal year 2007 for our named Executive Officers:

 

 

 

Additionally, after reviewing competitive market compensation information and the performance of the Company and each individual Executive Officer in fiscal year 2007, and based on the recommendation of the Company’s Chief Executive Officer, the Compensation Committee did not approve or recommend base salary increases for our named Executive Officers for fiscal year 2008 as Ms. McCarthy entered into her new employment agreement with a set base salary rate in July, 2007 and Mr. Reiners received increase in base in conjunction with his promotion in August, 2007.

 

While the Company’s goal is long-term sustainable growth, the Compensation Committee also chooses to provide annual incentive cash awards to Executive Officer and other management employees to reward them for individual performance and achieving Company financial goals. The incentive cash award arrangements are reflected in each Executive Officer’s employment agreement or employment offer letter, and are set by the Chief Executive Officer for other employees based on financial and other targets discussed with and approved by the Compensation Committee. The Compensation Committee reviews these incentive cash award arrangements on an annual basis taking into account the individual’s level of responsibilities and performance. The Compensation Committee also considers market information and the annual awards and other incentives paid to Executive Officers within the peer groups. The Compensation Committee discusses the financial targets embodied in annual executive incentive cash awards with the Company’s Board for its approval during the first quarter of a fiscal year, and may modify them based on changes to the operating budget and other factors, including the competitive market for qualified personnel.

 

The Compensation Committee and Board on March 7, 2007 set the following award targets for each Executive Officer as a percentage of their respective fiscal year 2007 base salaries: 63% for Ms. Davis; 63% for Ms. McCarthy; 50% for Mr. Handy; 82% for Mr. Bauman; 50% for Mr. Eide; and 50% for Mr. Reiners. Subsequently, Ms. McCarthy’s award target was set at 56% by her employment agreement dated July 19, 2007 and Mr. Reiners’ award target was set at 90% effective with his promotion on August 3, 2007. Ms. Aguirre’s award target was set at 50% as established in her employment offer letter dated September 17, 2007. Generally, higher award targets represent a larger amount of compensation at risk for the Executive Officer. Executive Officers with greater levels of responsibility for and influence on achievement of corporate goals have a larger portion of their compensation at risk and also have an opportunity for larger reward with achievement of those goals.

 

The Executive Officers’ performance goals for 2007 were established by the Compensation Committee to be achievable by each officer when performing at or above a performance level that the Company believes would be expected of a similarly situated officer of a competitive peer company. The amount of the actual award for performance in fiscal year 2007 was based solely on a combination of annual revenue and net income targets, measured on a sliding scale and paid on a quarterly basis. There were no discretionary or individual performance elements to the calculation of awards.

 

As an example of the sliding scale calculation, if either the revenue or net income target is missed by more than 20%, no incentive payment will be awarded. Conversely, if revenue and/or net income targets are exceeded, the incentive payment may be higher than the award target. The table that follows details the percent of award target that each Executive Officer received in 2007.

 

 

Using the same approach for determining incentive cash award arrangements in fiscal year 2008, as in fiscal year 2007, along with the data from the DolmatConnell report, the Compensation Committee and the Board on November 28, 2007 set the following award targets for each Executive Officer as a percentage of their respective fiscal year 2008 base salaries: 65% for Ms. McCarthy; 60% for Mr. Reiners; 50% for Ms. Aguirre; and 55% for Mr. Eckstaedt.

 

The Compensation Committee typically selects one or two measures at the beginning of the performance period that will focus the participants, including the Executive Officers, on those behaviors and short-term decisions that will drive sustainable growth. When deciding what financial measures to use at the start of a plan year, and the target level of achievement of those measures, the Compensation Committee carefully considers the state of the Company’s business and what measures are most likely to focus the Executive Officers, on making decisions that deliver short-term results aligned with the Company’s long-term goals. The goals are generally projected after a review of management’s operating budget and forecast for the coming fiscal year.

 

Financial performance is determined after the end of the fiscal year based on actual business results versus these pre-established business objectives. Payouts occurred on a quarterly basis in 2007 and will be on an annual basis in 2008. The final financial performance is reflected as a percentage amount. For example, achieving target financial performance would yield an award of 100% of the target amount set at the beginning of the year, and poor performance, below 80% of the target range, would result in no award.

 

In early 2008, the Compensation Committee set the minimum target and maximum levels for each financial performance goal on an individual basis. In 2008, the financial performance goals will again be based on revenue and net income targets. New in 2008 is the addition of individual performance goals as a portion of the executive officers’ incentive award calculations. Financial performance goals will be weighted at 70% and individual performance goals will be weighted at 30% of the overall incentive awards payments. The individual performance goals and actual results to these goals are approved by the compensation committee and reflect each executive officer’s strategic initiatives for the plan year. For example, individual goals include the successful introduction of new product offerings, improvements to business systems and operations and increasing the net flow of talent in the company.

 

Stock Options.  Based on the Company’s compensation philosophy and objectives, the Company intends to pay a portion of the total compensation for our Executive Officers in the form of long-term incentives through stock options. Historically, this has been in the form of stock option awards that vest over a defined period of employment, almost always four years, with exercise prices equal to the market price of the shares on the date of grant and which will be of no value unless the market price of the Company’s Common Stock appreciates. The Company believes this arrangement best encourages employee retention and long-term performance, and aligns employee and stockholder interests. Stock options typically have been granted to Executive Officers when the Executive Officer first joins the Company, when management level employees have been promoted, and annually as part of each executive’s annual performance review.

 

The stockholders of the Company approved the 2007 Equity Incentive Plan to replace the Second Amended and Restated Equity Incentive Plan, which expired in October 2007. The Plan provides the Board, through the Compensation Committee, the ability to issue stock options, restricted stock, and other forms of stock based compensation.

The Board has delegated to the Compensation Committee the authority to grant stock and other equity awards including awards to our Executive Officers. The Compensation Committee believes that having pre-determined grant dates throughout the year reduces the degree of subjectivity of option grant date selection, provides greater transparency to its option granting practices, and informs potential grantees of dates certain when grants may occur. Accordingly, in 2007, the Compensation Committee maintained the following general procedures relating to the grant of stock options and other awards.

 

 

The Compensation Committee annually reviews the stock-based compensation provided to the Executive Officers to further the Company’s compensation philosophy and objectives to attract, retain and motivate its Executive Officers. Toward the end of each year the Chief Executive Officer submits her recommendations for target equity awards for the Executive Officers (excluding herself) for the following fiscal year to the Compensation Committee, which may accept or modify her recommendations. The Compensation Committee then reports to the Board on its planned annual equity awards, and may modify its final decisions based on input from the other Board members.

 

New hire and promotional awards for non-Executive Officers are approved by the Chief Executive Officer (pursuant to applicable equity award guidelines for each job position) under the authority delegated to her by the Compensation Committee and are typically effective 90 days after the date of hire or the later of the effective date of the promotion or the Chief Executive Officer’s approval.

 

All stock options are granted with an exercise price equal to the closing price of Company Common Stock on the date of grant. We have not engaged in the practice of granting discounted stock options or backdating our stock options.

 

In determining the size of option awards for fiscal year 2007, the Compensation Committee and the Board took into account a number of standard compensation factors, as well as the following special considerations:

 

 

The Compensation Committee determines when to grant stock options to our Executive Officers based on a variety of factors including performance of the individual officers and the Company, volatility of the Company’s stock price, and the need of the Company to retain, motivate and promote the Executive Officers.

 

During fiscal year 2007, the stock option grants were generally determined in each Executive Officer’s employment agreement or employment offer letter. The Compensation Committee granted stock options to the Executive Officers as detailed in the Grants of Plan-Based Awards Table later in this discussion. In January, 2007,

the then current Executive Officers were issued an annual option grant (exclusive of Mr. Myers). Ms. McCarthy received the largest grant to reflect her scope of responsibility as Chief Operating Officer and President and her ability to impact future company performance. Mr. Bauman and Mr. Reiners received slightly larger grants in comparison to Mr. Eide and Mr. Handy in recognition of their broader strategic responsibilities and impact on company performance. Ms. Davis and Ms. McCarthy both were issued grants upon their appointment to Chief Executive Officer as outlined in their respective employment agreements. In August, 2007, Mr. Reiners received an additional option grant in conjunction with his promotion to Executive Vice President, Operations with corresponding additional scope of responsibility and strategic impact on company performance. Ms. Aguirre was issued options as a result of her employment with the Company. The grant level was determined by reviewing internal equity and market data as provided by the DolmatConnell survey.

Performance Share Units.  Based on the Company’s compensation philosophy and objectives, the Company will pay a portion of the total compensation for Executive Officers and certain other management employees in the form of performance share units under the Company’s Long-Term Incentive Plan (“LTIP”). The LTIP, which was adopted by the Compensation Committee on March 7, 2007, will reward Executive Officers for achieving certain earnings per share value of the Company’s Common Stock over rolling three-year periods. For the three-year period starting January 1, 2008 and ending December 31, 2010, earnings per share less than $0.54 will result in the Executive Officers earning no award under the LTIP. The Compensation Committee chose this measure as it believed it is a key metric for the Company’s growth model because it was determined to align closely the interests of the Executive Officers with those of the Company’s stockholders. The Compensation Committee believes growth in earnings per share has historically correlated with the Company’s share price. Under the LTIP for 2008, in the event that the Company achieves earnings per share of the Company’s Common Stock as described in the table below on or before December 31, 2010, the Executive Officers will be granted the number of shares as mentioned in the table that follows. Each Executive Officer participating in the LTIP will be issued a restricted stock unit agreement reserving the underlying shares to the Executive Officer, and reflecting the criteria for receiving the performance share units as described in the following table.

 

Earnings Per Share of Company’s Common Stock

 

 

The Compensation Committee developed the LTIP based on publicly available information, and as part of the process of succession planning during 2006. The Compensation Committee developed the view that stock options alone were inadequate for the recruiting of key personnel, including a potential successor Chief Executive Officer, and as a means to reward the Executive Officers for executing a long-term strategic plan, which the Board viewed as necessary in light of business goals such as diversification of the client base outside of the Aerospace and Defense area, reduced “concentration risk” in the form of decreased reliance on the largest competitive bids and program services assignments for the Company’s revenue, and a long-term view towards evaluating acquisition opportunities. The LTIP combined with existing annual performance-based cash awards and annual stock-based awards, is believed by the Compensation Committee to reflect the general approach to executive compensation in the Company’s peer group as reported in the DolmatConnell survey.

Employee Stock Purchase Plan.  In order to provide employees at all levels with greater incentive to contribute to the Company’s success, the Company provides employees, including the Executive Officers , with the opportunity to purchase discounted shares of Common Stock under the Company’s Amended and Restated Employee Stock Purchase Plan, which is intended to be a qualified plan under Section 423 of the Internal Revenue Code. Under this plan, eligible employees may authorize payroll deductions of up to 15% of their biweekly base pay. The amounts are

accumulated and, at the end of each quarter are used to purchase shares of the Company’s Common Stock at 95% of the fair market value of the Company’s Common Stock on the Purchase Date (as defined in the plan).

 

The Company offers additional benefits designed to be competitive with overall market practices, and to attract and retain the talent needed by the Company.

 

The Company provides a full range of benefits to its Executive Officers, including standard medical, dental and disability coverage available to employees generally.

 

The Company also sponsors a 401(k) Retirement Savings Plan (“401(k) Plan”) that allows employees to make plan contributions on a pre-tax basis. Employees may enroll to a maximum deferral limit of 20% of covered compensation into the 401(k) Plan. During 2007, the Company matched employee contributions at 100% of the first 2.5% of salary deferrals for a total of 2.5% of eligible compensation.

 

The Company does not maintain a defined benefit supplemental retirement savings plan or a pension plan for the Executive Officers.

 

The Company provides the following perquisites to its Executive Officers in an effort to remain competitive with similarly situated companies.

 

Exec-U-Care Coverage.  The Executive Officers are eligible for a maximum medical benefit of $100,000 a year through the Exec-U-Care program. During 2007, six of the Executive Officers participated in this program. Exec-U-Care supplements an Executive Officer’s basic health plan by reimbursing annual expenses not covered under the basic medical and dental benefit plan that are available on a Company-wide basis. Examples of such expenses include deductibles, co-insurance amounts, special health equipment and chiropractic care. The Executive Officer is entitled to receive reimbursement for documented medical expenses of the Executive Officer and dependents.

 

Club Fees & Entertaining.  The Company reimburses or pays for Executive Officers for entrance or initiation fees and monthly club dues. Club memberships are primarily used for business meetings or entertainment purposes. Only three of the Executive Officers participated with the club membership perquisite in 2007.

 

Temporary Housing Allowance.  The Company provides a temporary housing allowance in the Orange County area for one of its Executive Officers who maintain a permanent residence outside of California.

 

Automobile Expense.  In lieu of an automobile allowance, the Company leases an automobile for the Chief Executive Officer’s use. In addition, the reasonable cost of annual insurance, fuel, maintenance, cleaning and repair is borne by the Company. For Executive Officers that reside outside the local headquarters vicinity, the Company reimburses mileage expense for travel to and from the headquarter location.

 

Life Insurance.  The Executive Officer’s are entitled to receive reimbursement for documented premium expenses for life insurance coverage obtained on Executive Officer’s life, up to a maximum of two thousand dollars ($2,000) of premium cost per year.

 

401(k) Matching Contribution.  The Executive Officer’s are eligible to participate in the Company’s 401(k) Plan thereby entitling the Executive Officer to the Company’s matching contribution.

 

The Company has entered into Change of Control agreements with the Executive Officers which become effective only upon certain Change of Control events, which are defined in the agreements. These Change of Control agreements are meant to induce the continued employment of the Executive Officers and other key employees and to enhance their loyalty and performance by providing them with certain compensation and benefits in the event a Change of Control of the Company occurs. The Compensation Committee determined that the Executive Officers should have the protection of receiving severance if their employment is terminated within 24 months following a Change of Control event to ensure that the Executive Officers would be focused on

enhancing the long term value of the Company through actions that might include a transaction that would be in the best interest of the Company’s stockholders rather than focused on their potential loss of employment as a result of that transaction. The term of these agreements and the amounts payable upon the occurrence of the Change of Control events is described in more detail under the section entitled “Potential Payments Upon Termination or Change of Control.” The Board reserves the right to extend Change of Control benefits to other Executive Officers to the extent deemed necessary for the Company’s business.

 

The Company typically does not enter into employment agreements with its executives. However, it is party to agreements with its President and Chief Executive Officer, Cathy L. McCarthy and with the President and Chief Executive Officer of SM&A Strategic Advisors, Inc., Peter Pace, General USMC (retired). In addition, the Company was party to an employment agreement with its former Chief Executive Officer, Ms. Davis. The Company entered into these agreements because it believes that it is important to secure the leadership of these key management individuals. These agreements, which are described in more detail under the sections entitled “Employment Agreement with Ms. McCarthy,” “Employment Agreement with Mr. Pace,” and “Employment Agreement with Ms. Davis” of this Proxy Statement, set forth the base salaries, incentive opportunities, stock based compensation and benefits and perquisites payable to Ms. McCarthy, Mr. Pace, and Ms. Davis. The Company has provided its other Executive Officers with letters outlining benefits and perquisites to which they are entitled, and those benefits (including Change of Control and severance benefits) are described herein, including under “Potential Payments Upon Termination or Change of Control.”

 

The Company and Ms. McCarthy are party to an employment agreement, as amended, providing for an annual base salary of $450,000 and an annual incentive award with a target annual payout equal to 65% of her then current annual base salary pursuant to a plan adopted by the Board. Pursuant to that agreement, Ms. McCarthy also received an annual stock option grant for the purchase of 200,000 shares of the Company’s Common Stock at an exercise price equal to the fair market value of the Company’s Common Stock on the date of grant. These options vest and become exercisable in 16 quarterly installments. Ms. McCarthy and her dependents are entitled to reimbursement for documented medical expenses not otherwise covered by the Company’s medical plan and long-term care and disability insurance coverage and she receives other benefits as more fully set forth in this discussion. Ms. McCarthy may not compete with the Company during the term of the agreement, and may not solicit any employees to leave their employment with the Company for a period of two years following the expiration of the term of the agreement. Ms. McCarthy has an obligation to keep confidential and protect the trade secrets and other confidential information of the Company and its customers.

 

Ms. McCarthy’s employment agreement has a term expiring July 18, 2009.

 

The Company and Mr. Pace are party to an employment agreement. Under the terms of this agreement, Mr. Pace is not obligated to work full time for the Company and may serve on the boards of, or as a consultant to, businesses that do not compete with the Company as long as he informs the Company of those outside activities and those outside activities do not materially interfere with the performance of his duties to the Company. The agreement provides for an annual base salary of $300,000. In addition, Mr. Pace is entitled to an incentive bonus equal to two percent (2%) of all revenue in excess of $12,000,000 earned by the Company from all Qualifying Projects during the Qualifying Periods applicable to such Qualifying Projects (as defined in the agreement). Mr. Pace also received a one-time cash Signing Bonus in the amount of $240,000 and was granted an option on the Effective Date of his agreement to purchase 100,000 shares of Common Stock of the Company, issued pursuant to the Company’s 2007 Equity Incentive Plan. The exercise price of the stock option is equal to the fair market value of such Common Stock on the date of grant and 25% of the option was deemed vested (i.e., exercisable) as of the Effective Date, with the remainder of such option to vest in three equal annual installments, commencing on the first anniversary of the Effective Date. Mr. Pace was included in the 2008 LTIP that covers calendar years 2008, 2009 and

2010. The target incentive for Mr. Pace under this plan is 50,000 shares of Common Stock of the Company, but the actual number of shares granted will be in accordance with the performance scale described above in this document.

 

Mr. Pace and his dependents are entitled to reimbursement for documented medical expenses not otherwise covered by the Company’s medical plan and disability insurance coverage and he receives other benefits as afforded other Executives and set forth elsewhere in this discussion. Mr. Pace may not compete with the Company during the term of the agreement, and may not solicit any employees to leave their employment with the Company for a period of two years following the expiration of the term of the agreement. Mr. Pace has an obligation to keep confidential and protect the trade secrets and other confidential information of the Company and its customers.

 

The Company may terminate the agreement at any time for “Cause” (as defined therein), or without “Cause” on 30 days’ prior notice. Mr. Pace may resign at any time on 30 days’ prior notice. If Mr. Pace is terminated without “Cause,” or if he resigns for “Good Reason” (as defined in the agreement), he will receive his base salary and health and welfare benefits, for the shorter of three months, the commencement of full time employment or in the case of any listed violations of terms of the agreement, and he will receive the pro rata portion of any incentive bonus which has been earned through the date of his termination. If Mr. Pace is terminated without “Cause” or resigns for “Good Reason” within twelve months following a “Change in Control” of the Company, Mr. Pace will receive (i) a lump sum payment equal to his annual base salary for the longer of the remainder of the term of the agreement or 18 months, and (ii) health and welfare benefits for the longer of the remainder of the term of the agreement or 18 months.

 

Mr. Pace’s employment agreement has a term expiring January 16, 2010.

 

The Company and Ms. Davis were party to an employment agreement providing for an annual base salary of $400,000 per annum and participation in the Company’s incentive compensation program with an opportunity to earn $250,000 in award compensation. In addition, on her first day of employment, as compensation for relinquishing benefits at her previous employer, Ms. Davis received 200,000 SM&A stock options, with an exercise price of $7.14 per share, a grant of 7,000 shares of SM&A Common Stock and a $50,000 payment. On July 18, 2007, Ms. Davis’ employment was terminated and she entered into a separation agreement with the Company that is discussed fully under the section titled “Separation Agreement with Ms. Davis”.

 

Our Compensation Committee has reviewed the impact of tax and accounting treatment on the various components of our executive compensation program. We believe that achieving the compensation objectives discussed above is more important than the benefit of tax deductibility and our executive officer compensation programs may, from time to time, limit the tax deductibility of compensation. Nevertheless, when not inconsistent with these objectives, we endeavor to award compensation that will be deductible for income tax purposes. Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to publicly-held companies for compensation paid to “covered” executive officers, to the extent that compensation paid to such an officer exceeds $1 million during the taxable year. No material portion of the compensation paid to our covered executive officers for the year ended December 31, 2007 that would be taken into account in determining a Section 162(m) limitation exceeded the $1 million limit. The Company’s employee stock option plans and option grants to executives, as well as the LTIP plan adopted in 2007, have been structured so that any compensation deemed paid to an executive officer in connection with the exercise of options with an exercise price equal to the fair market value of the shares on the grant date will qualify as performance-based compensation that will not be subject to the $1 million limitation. The Compensation Committee does not expect to take any action at this time to modify cash compensation payable to the executive officers that would result in the application of Section 162(m).

 

With the adoption of FAS 123(R), we do not expect accounting treatment of differing forms of equity awards to vary significantly and, therefore, accounting treatment is not expected to have a material effect on the selection of forms of compensation.

 

The following table shows, for the fiscal year ended December 31, 2007 and December 31, 2006, the annual compensation paid to or earned by the Current and Former Executive Officers.

 

 

 

Footnotes to Table 1-Summary Compensation Table:

 

 

 

 

Amount of All Other Compensation for 2007:

 

 

 

 

 

 

 

The following table sets forth information concerning exercisable and unexercisable stock options for the Executive Officers named in the Summary Compensation Table as of December 31, 2007.

 

 

As of December 31, 2007, there were no stock awards issued to any Executive Officer.

 

The following table presents information regarding the exercise of stock options by Executive Officers during 2007. There were no performance shares to the Executive Officers during 2007.

 

 

The Company has entered into agreements with its Executive Officers as noted that provide certain payments and benefits upon termination of such officers’ employment.

 

Payments to Chief Executive Officer Upon Termination Without Cause or Resignation For Good Reason

 

The Company may terminate Ms. McCarthy’s agreement at any time for “Cause” (as defined therein), or without “Cause” on 30 days’ prior notice. Ms. McCarthy also may resign at any time on 30 days’ prior notice. If Ms. McCarthy is terminated without “Cause,” or if she resigns for “Good Reason” (each as defined in the agreement), she will receive her base salary, and health and welfare benefits, for the shorter of six months or until the expiration of the term of the agreement, and she will receive the pro rata portion of any incentive award which has been earned through the date of her termination. If Ms. McCarthy is terminated without “Cause” or resigns for “Good Reason” within twelve months following a “Change in Control” of the Company, Ms. McCarthy will receive

(i) a lump sum payment equal to her annual base salary for the shorter of the remainder of the term of the agreement or six months, and (ii) health and welfare benefits for the shorter of the remainder of the term of the agreement, the date which is 18 months from the date of the “Change in Control”, or the date which is six months from the date of termination.

 

The Company provides Ms. McCarthy with continuation of salary following death or disability for up to six months, or the expiration of the applicable agreement term, whichever occurs first. In the case of disability, health and life insurance will be provided (or premiums reimbursed) for the period.

 

The Company entered into a benefits letter with each of the other Executive Officers which requires the Company to provide the following payments and benefits upon termination of such officers’ employment as follows.

 

In the event that, absent a “Change of Control”, the Company terminates any other Executive Officer’s employment without cause or any Executive Officer resigns for good reason and the officer signs a waiver and release in a form that meets the Company’s approval, the officer will be entitled to (i) a payment equal to twelve times the sum of the Executive Officer’s then current monthly base salary plus 1/12 annual target incentive compensation in accordance with the Company’s customary payroll practices and (ii) the same health and life insurance benefits he or she was then currently receiving until twelve calendar months after the effective date of the termination or, if the policies for such benefits do not permit continued participation in such plan, the monthly premium or premiums for such discontinued health and/or life insurance.

 

The continuation of health and life insurance benefits will cease on the date upon which an Executive Officer becomes employed on a full-time basis (including to self-employment, but only if the Executive Officer holds himself or herself out to the public as being a self-employed consultant or other businessman) or the date upon which the Executive Officer violates any provision of the Company’s Proprietary Information and Invention Assignment Agreement or the Company’s Business Conduct and Ethics Code. Cause includes but is not limited to the following: (i) refusal or failure to carry out any reasonable direction from the Company; (ii) demonstrated negligence or misconduct in the execution of the Executive Officer’s assigned duties; (iii) habitual non-performance or incompetent performance of an Executive Officer’s duties; (iv) conviction of a felony or other serious crime involving moral turpitude; (v) engaging in fraud, embezzlement or other illegal conduct; (vi) a violation of the Company’s Proprietary Information and Invention Assignment Agreement or the Company’s Business Conduct and Ethics Code; (vii) failure or refusal to materially perform the Executive Officer’s duties and responsibilities; or (viii) material violation of any material written policy or procedure of the Company. Good reason is defined as any of the following: (x) the assignment of duties inconsistent with the Executive Officer’s then current position, duties, or responsibilities which is sufficient to constitute a diminution of status with the Company; (y) a significant reduction by the Company in the Executive Officer’s base salary then in effect unless the reduction is the result of an across the board reduction in salary of all Executive Officers; or (z) any failure by the Company to obtain the assumption of the terms of the employment agreement that contains these provisions by a successor or assignee of the Company, if the successor or assignee asserts that it is not bound by those provisions.

 

In the event of a Change of Control of the Company, each Executive Officer (except Ms. McCarthy with respect to the vesting of unvested stock options as described below), if the Executive Officer is terminated within 24 months of the Change of Control for any reason (including non-continuation of his or her position with the acquirer), the Executive Officer will be entitled to (i) a payment equal to 18 times the Executive Officer’s then current monthly base salary plus 1/12 annual target incentive compensation in accordance with the Company’s customary payroll practices and (ii) the same health and life insurance benefits he or she was then currently receiving until 18 calendar months after the effective date of the termination or, if the policies for such benefits do

not permit continued participation in such plan, the monthly premium or premiums for such discontinued health and/or life insurance. Under these arrangements, date termination is defined as the earliest date on which any of the following occurs: (i) a merger or consolidation in which the shares of the Company outstanding immediately prior to such merger or consolidation (or the securities into which they are converted by virtue of such merger or consolidation) do not represent at least 50% of the voting power of the surviving corporation or its parent or (ii) a sale, lease or other transfer of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, or (iii) any transaction in which the Company ceases to be a publicly traded company.

 

The table that follows reflects the estimated amount of compensation that would be payable to (i) Ms. McCarthy under the terms of her employment agreement in effect on December 31, 2007 and (ii) each of the other Executive Officers under the terms of the Company’s severance pay policy, in each case, in the event of termination of each such Executive Officer’s employment under any one of the follow scenarios effective as of December 31, 2007: