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

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SM&A

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December 8, 2008

SPECIAL MEETING OF STOCKHOLDERS

 

MERGER PROPOSAL — YOUR VOTE IS VERY IMPORTANT

 

Dear SM&A Stockholder:

 

You are cordially invited to attend a special meeting of stockholders of SM&A (“SM&A”) to be held at 4685 MacArthur Court, Suite 380, Newport Beach, California 92660, on December 29, 2008, at 9:00 a.m., local time. At the special meeting, you will be asked to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of October 31, 2008 (the “merger agreement”), by and among SM&A, Project Victor Holdings, Inc., a Delaware corporation (“Parent”), and Project Victor Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub”). Parent is controlled by a private investment fund affiliated with Odyssey Investment Partners, LLC.

 

The merger agreement contemplates the merger of Merger Sub with and into SM&A, with SM&A continuing as the surviving corporation and becoming a wholly-owned subsidiary of Parent (the “merger”). Upon the completion of the merger, each share of our common stock (other than shares held by stockholders who perfect their appraisal rights in accordance with Delaware law, and shares held by SM&A, Parent, Merger Sub and their respective wholly-owned subsidiaries), and each share of our common stock underlying outstanding restricted stock units, will be converted into the right to receive $6.25 in cash, without interest and less any applicable withholding taxes. In addition, each outstanding option to purchase SM&A common stock that has an exercise price less than $6.25 (other than any assumed by Parent by mutual agreement of SM&A and Parent) will be converted into the right to receive a cash amount, without interest and less any applicable withholding taxes, equal to $6.25 less the exercise price of the option, multiplied by the number of shares subject to the option.

 

After careful consideration, our board of directors has unanimously determined that the merger is advisable and in the best interests of SM&A and its stockholders. Accordingly, our board of directors has approved the merger agreement and the merger and recommends that you vote “FOR” the approval and adoption of the merger agreement at the special meeting. Our board of directors’ recommendation is based, in part, upon the unanimous recommendation of the special committee of our board of directors, which consists of five independent and disinterested directors and was organized to review, evaluate and negotiate a possible transaction relating to the sale of SM&A to Parent.

 

Our board of directors also recommends that you vote “FOR” approval of adjournments of the special meeting, if determined necessary by SM&A, to facilitate the approval and adoption of the merger agreement by permitting the solicitation of additional proxies if there are not sufficient votes at the time of the special meeting to adopt the merger agreement.

 

The accompanying Notice of Special Meeting of Stockholders and proxy statement explain the merger and provide specific information concerning the special meeting. We encourage you to read those materials carefully.

 

Your vote is very important, regardless of the number of shares you own. We cannot complete the merger unless the merger agreement is adopted by the affirmative vote of the holders of a majority of the outstanding shares of our common stock. The failure of any stockholder to vote on the proposal to adopt the merger agreement will have the same effect as a vote “AGAINST” the adoption of the merger agreement.

 

 

This proxy statement is dated December 8, 2008, and is first being mailed to our stockholders on or about December 8, 2008.

4695 MacArthur Court, 8th Floor

Newport Beach, California 92660

(949) 975-1550

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be Held on December 29, 2008

 

Dear SM&A Stockholder:

 

Notice is hereby given that on December 29, 2008, at 9:00 a.m., local time, SM&A (“SM&A”) will hold a special meeting of its stockholders (the “special meeting”) at 4685 MacArthur Court, Suite 380, Newport Beach, California 92660, for the following purposes:

 

1. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of October 31, 2008 (the “merger agreement”), by and among SM&A, Project Victor Holdings, Inc. (“Parent”) and Project Victor Merger Sub, Inc. (“Merger Sub”), and to approve Parent’s acquisition of SM&A through a merger of Merger Sub, which is a wholly-owned subsidiary of Parent, with and into SM&A, as contemplated by the merger agreement; and

 

2. To consider and vote upon a proposal to approve any adjournments of the special meeting, if determined necessary by SM&A, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting, or at any adjournment or postponement of that meeting, to approve and adopt the merger agreement.

 

The merger proposal is described more fully in the proxy statement of which this notice forms a part. Please give your careful attention to all of the information in the proxy statement.

 

Only holders of record of SM&A common stock at the close of business on December 5, 2008, the record date for the special meeting, or their proxies can vote at the special meeting or any adjournment or postponement thereof. Approval and adoption of the merger agreement requires the affirmative vote of the holders of a majority of the shares of SM&A common stock issued and outstanding on the record date. The list of stockholders entitled to vote at the special meeting is available, upon request, at SM&A’s corporate headquarters at the address indicated above, for examination by any SM&A stockholder.

 

Your vote is important.  Whether or not you expect to attend the special meeting in person, you are urged to complete, sign, date and return the enclosed proxy card or voting instruction card, or vote by telephone or the Internet by following the instructions contained on the enclosed proxy card, at your earliest convenience. The failure of any stockholder to vote on the proposal to adopt the merger agreement will have the same effect as a vote “AGAINST” the adoption of the merger agreement. Instructions for voting your shares are included on the enclosed proxy card or voting instruction card. If you are a record holder and you send in your proxy, or vote by telephone or the Internet, and then decide to attend the special meeting to vote your shares, you may still do so. You may revoke your proxy in the manner described in the proxy statement at any time before it has been voted at the special meeting. If you have any questions about the proposals or about your shares, please contact MacKenzie Partners, Inc. by telephone at (800) 322-2885 (toll-free) if you are an individual stockholder or at (212) 929-5500 (collect) if you are a bank or broker, or by e-mail at winsproxy@mackenziepartners.com.

 

If the merger is completed, SM&A stockholders who do not vote in favor of the approval and adoption of the merger agreement will have the right to seek appraisal of the fair value of their shares of SM&A common stock, as determined by the Delaware Court of Chancery under applicable provisions of Delaware law. A copy of the applicable Delaware statutory provisions is included as Annex C to the proxy statement, and a summary of these provisions can be found under the section entitled “Appraisal Rights” beginning on page 41 of the proxy statement.

 

By Order of the Board of Directors,

 

James R. Eckstaedt

Executive Vice President, Finance

Chief Financial Officer and Secretary

 

Newport Beach, California

December 8, 2008

 

TABLE OF CONTENTS

 

 

This proxy statement contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our expectations, assumptions, estimates and projections about our company and our industry. These forward-looking statements include, among other things, statements under the heading “The Merger — Projected Financial Data,” statements concerning whether and when the merger will close, whether conditions to the merger will be satisfied, the effect of the merger on our business and operating results, and other statements qualified by words such as “expect,” “anticipate,” “intend,” “believe,” “estimate,” “should,” and similar words indicating future events. These forward-looking statements are based on our expectations and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements, including, among others:

 

 

The statements made in this proxy statement represent our views as of the date of this proxy statement, and it should not be assumed that the statements made herein remain accurate as of any future date. Except to the extent required by applicable law or regulation, we undertake no duty to any person to update the statements made in this proxy statement under any circumstances.

 

For additional information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please see the reports that SM&A has filed with the Securities and Exchange Commission (the “SEC”) under “Where You Can Find More Information.”

 

SUMMARY TERM SHEET

 

The Companies

 

The Special Meeting of SM&A Stockholders (see page 13)

 

The Merger (see page 15)

 

SM&A’s Board of Directors’ and Special Committee’s Recommendation (see page 27)

 

Opinion of Wedbush Morgan Securities Inc. (see page 30)

 

Interests of SM&A’s Executive Officers and Directors in the Merger (see page 36)

 

Equity Plans (see page 47)

 

Arrangements with the Surviving Corporation (see page 39)

 

The Merger Agreement (see page 47)

	•	initiate or solicit or knowingly encourage or facilitate the submission of any inquiries, proposals or offers that constitute or may reasonably be expected to lead to, any acquisition proposal;
	•	enter into, continue or otherwise engage in any discussions or negotiations with respect to any of the foregoing or otherwise knowingly cooperate with, assist, participate in, facilitate or encourage any such inquiries, proposals, discussions or negotiations; or
	•	approve or recommend, or publicly propose to approve or recommend, an acquisition proposal or enter into any merger or other agreement relating to an acquisition proposal or that requires SM&A to abandon, terminate or not consummate the transactions contemplated by the merger agreement or breach our obligations thereunder, or propose or agree to do any of the foregoing.

	•	withhold, withdraw, modify, qualify, or amend (or propose publicly to do any of the foregoing), in a manner adverse to Parent or Merger Sub, the recommendation of our board of directors to approve the merger agreement,
	•	approve or recommend the superior proposal, and/or
	•	terminate the merger agreement with Parent to enter into a definitive agreement with respect to the superior proposal.

	•	the superior proposal did not result from our breach of our non-solicitation obligations in the merger agreement,
	•	we have provided prior written notice to Parent of our intention to take any such action with respect to a superior proposal at least four business days in advance of taking such action, providing specified information regarding the superior proposal, and
	•	during such four business day period, we and our advisors negotiate with Parent in good faith (to the extent Parent seeks to negotiate) to make adjustments to the terms and conditions of the merger agreement with Parent so that the superior proposal ceases to constitute a superior proposal.

	•	our stockholders must have approved the merger agreement;
	•	any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) must have expired or been terminated without any limitation, restriction or condition that would have a material adverse effect on SM&A; and
	•	no injunction, law, rule, legal restraint or prohibition may be in effect preventing, restraining, imposing materially burdensome conditions on, or rendering illegal the merger.

	•	our representations and warranties contained in the merger agreement must be true and correct, subject to certain exceptions, as of the dates specified in the merger agreement;
	•	we must have performed in all material respects all of our obligations required to be performed by SM&A under the merger agreement at or prior to the closing date;
	•	since the date of the merger agreement, there must not have occurred any event, change, effect, development, condition or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a “Company Material Adverse Effect” (see “The Merger Agreement — Definition of Company Material Adverse Effect”);
	•	the time period for the exercise by any of our stockholders of appraisal rights, including under Section 262 of the Delaware General Corporation Law, must have expired and the holders of shares representing less than

		10% of our outstanding shares of common stock must have demanded and perfected their appraisal rights and not withdrawn such demand;

	•	Merger Sub must have obtained an aggregate of $75.0 million of debt financing (of which $10.0 million must be available on an undrawn revolving credit facility) on the terms and for the purposes set forth in the debt financing commitments Parent delivered to SM&A in connection with the execution of the merger agreement (provided that if all other conditions to closing are satisfied and Parent or Merger Sub fails to consummate the merger, then Parent may be required to pay the termination fee described below);
	•	each of the directors of SM&A and our subsidiaries must have delivered a letter of resignation effective as of the closing;
	•	SM&A must have, as of immediately prior to the closing, (i) no less than $5.0 million in cash and cash equivalents and (ii) no outstanding indebtedness for borrowed money, letters of credit or outstanding guarantees of indebtedness for borrowed money; and
	•	SM&A must have delivered a solvency certificate to Parent in the form attached to the merger agreement.

	•	the representations and warranties of Parent and Merger Sub contained in the merger agreement must be true and correct, subject to certain exceptions, as of the dates specified in the merger agreement; and
	•	Parent and Merger Sub must have performed in all material respects all of their respective obligations required to be performed by them under the merger agreement at or prior to the closing date.

	•	the mutual written consent of SM&A and Parent;
	•	either SM&A or Parent upon any final and non-appealable legal order, injunction or other restraint permanently restraining, enjoining, otherwise prohibiting or imposing materially burdensome conditions on consummation of the merger, subject to certain requirements regarding the terminating party’s efforts to oppose the applicable restraint;
	•	either SM&A or Parent, if the merger is not consummated by April 30, 2009, which we refer to as the “outside date,” subject to limited exceptions regarding the terminating party’s compliance with the terms of the merger agreement;
	•	either SM&A or Parent, if the required approval of the merger agreement by our stockholders is not obtained at the special stockholders meeting (including at any adjournments or postponements thereof);
	•	us, if Parent or Merger Sub breach of any of their covenants, agreements, representations or warranties set forth in the merger agreement which breach, either individually or in the aggregate, would reasonably be expected to result in the failure of our closing conditions to be satisfied and which is not or cannot be cured within specified time periods, subject to our compliance with the terms of the merger agreement;
	•	Parent, if we breach of any of our covenants, agreements, representations or warranties set forth in the merger agreement which breach, either individually or in the aggregate, would reasonably be expected to result in the failure of Parent’s closing conditions to be satisfied and which is not or cannot be cured within specified time periods, subject to Parent’s compliance with the terms of the merger agreement;
	•	Parent, if (i) our board of directors changes or is deemed to have changed its recommendation to our stockholders to approve the merger agreement, (ii) our board of directors withholds, withdraws, qualifies, modifies or amends such recommendation in a manner adverse to Parent or Merger Sub, (iii) our board of

		directors (or any committee thereof) approves, adopts or recommends, or enters into or allows SM&A or any of our subsidiaries to enter into, a letter of intent, agreement in principle or definitive agreement for, any superior proposal or acquisition proposal, (iv) our board of directors fails publicly to reaffirm its recommendation to approve the merger agreement within 10 business days after the date any acquisition proposal or any material modification thereto is first published or sent or given to our stockholders (with the understanding being that taking no position with respect to such acquisition proposal or modification thereto will constitute a failure to reject the acquisition proposal), or (v) we breach specified obligations under the merger agreement (generally relating to non-solicitation, our board of directors’ recommendation and the special meeting) in any manner that adversely affects Parent or Merger Sub;

	•	us, at any time prior to our stockholders’ approval of the merger agreement, in accordance with, and subject to the terms and conditions of, certain provisions of the merger agreement described above relating to our entry into an alternative agreement relating to a superior proposal;
	•	us, if all of the conditions to Parent’s and Merger Sub’s obligations to consummate the merger (other than the debt financing condition) have been satisfied or waived, and Parent or Merger Sub fail for any reason to consummate the closing on the second business day after all such conditions are satisfied or waived; or
	•	Parent, if (i) all of the conditions to its obligations to consummate the merger (other than the applicable conditions relating to the debt financing, our cash position and indebtedness and our delivery of the required solvency certificate) have been satisfied or waived, and (ii) we fail for any reason to satisfy either the condition related to our cash position and indebtedness or the condition related to our delivery of the required solvency certificate, subject to Parent’s furnishing the confirmation of its financing contemplated by the condition related to our delivery of the required solvency certificate, and compliance with the other terms of the merger agreement.

 

Financing (see page 40)

 

Market Price and Dividend Data (see page 65)

 

Appraisal Rights (see page 41)

 

Material United States Federal Income Tax Consequences of the Merger (see page 44)

 

Regulatory Matters (see page 57)

 

Delisting and Deregistration of SM&A Common Stock (see page 43)

 

The following questions and answers are provided for your convenience, and briefly address some commonly asked questions about the SM&A special meeting of stockholders and the proposed merger. These questions and answers may not address all questions that may be important to you as a stockholder. You should still carefully read this entire proxy statement, including each of its annexes.

 

Why am I receiving the proxy materials?

 

We sent you this proxy statement and the enclosed proxy card because the board of directors of SM&A is soliciting your proxy to vote at a special meeting of SM&A stockholders in connection with a proposal to approve and adopt a merger agreement whereby SM&A would become a wholly-owned subsidiary of Parent. You may submit a proxy if you complete, date, sign and return the enclosed proxy card, or if you vote by telephone or the Internet by following the instructions on the enclosed proxy card. You are also invited to attend the special meeting in person, although you do not need to attend the special meeting to have your shares voted at the special meeting.

 

What will I receive in the merger for my shares?

 

If the merger is completed, you will be entitled to receive $6.25 in cash, without interest and less any applicable withholding taxes, for each share of our common stock that you own at the effective time of the merger. For example, if you own 100 shares of our common stock, you will receive $625.00 in cash, less any applicable withholding taxes, in exchange for those shares.

 

What will happen in the merger with any options or restricted stock units that I hold to acquire SM&A common stock under SM&A’s stock incentive plans?

 

At the effective time of the merger, each issued and outstanding option (other than options assumed by Parent by agreement of Parent and SM&A) will become fully vested and cancelled in exchange for the right to receive an amount in cash equal to the number of shares subject to such option, multiplied by the excess of (i) the price of $6.25 to be paid with respect to a share of our common stock in the merger, over (ii) the exercise price per share of such option, less any applicable withholding taxes. At the effective time of the merger, each issued and outstanding restricted stock unit will become fully vested and cancelled in exchange for the right to receive an amount in cash equal to the total number of shares of common stock subject to such restricted stock unit multiplied by $6.25, less any applicable withholding taxes.

 

How does SM&A’s board of directors recommend I vote?

 

Our board of directors has unanimously adopted resolutions approving the merger agreement and the merger, determining that the merger and the merger agreement are advisable and in the best interests of SM&A and our stockholders, and directing that the merger agreement be submitted for approval and adoption at a special meeting of our stockholders. Our board of directors unanimously recommends that all of our stockholders vote “FOR” the approval and adoption of the merger agreement. This recommendation is based, in part, upon the unanimous recommendation of the independent special committee of the board of directors. The reasons for the special committee’s recommendation and our board of directors’ determination are discussed below in this proxy statement. Our board of directors also recommends that you vote “FOR” approval of adjournments of the special meeting, if determined necessary by SM&A, to facilitate the approval and adoption of the merger proposal by permitting the solicitation of additional proxies if there are not sufficient votes at the time of the special meeting to approve and adopt the merger proposal.

 

Who will own SM&A after the merger?

 

After the merger, SM&A will be a wholly-owned subsidiary of Parent, an entity owned substantially by Odyssey Investment Partners Fund III, LP. From and after the effective time of the merger you will no longer benefit from any increase in SM&A’s value, nor will you acquire an ownership interest in Parent or any of the entities that own Parent. Optionees whose options are assumed by Parent in the merger, if any, will retain the opportunity to

acquire, upon exercise of those options, an ownership interest in Parent after the effective time and could benefit from any increase in SM&A’s value after the effective time.

 

What vote is needed to approve and adopt the merger agreement?

 

The affirmative vote of a majority of the issued and outstanding shares of our common stock is required to approve and adopt the merger agreement. Each holder of our common stock is entitled to one vote per share of stock they held on the record date. Proxies returned to SM&A that are properly signed and dated but not marked to indicate your voting preference will be counted as votes “FOR” approval and adoption of the merger agreement.

 

What do I need to do now?

 

We urge you to read this proxy statement carefully, including its annexes, and to consider how the merger affects you. Then mail your completed, dated and signed proxy card in the enclosed return envelope, or vote by telephone or by the Internet by following the instructions on the enclosed proxy card as soon as possible so that your shares can be voted at the special meeting.

 

What happens if I do not return a proxy card or vote by telephone or the Internet?

 

If you fail to return your proxy card or vote by telephone or the Internet, and do not attend the special meeting in person or through another proxy, your shares will not be counted for purposes of determining whether a quorum is present at the special meeting. In addition, the failure to return your proxy card or otherwise have your shares duly voted for the merger at the special meeting will have the same effect as voting “AGAINST” the merger.

 

May I vote in person?

 

Yes. If your shares are not held in “street name” through a broker, bank or other nominee, you may attend the special meeting of our stockholders and vote your shares in person, rather than signing and returning your proxy card. If your shares are held in “street name,” you must get a proxy from your broker, bank or other nominee in order to attend the special meeting and vote.

 

Do I need to attend the special meeting in person?

 

No. You do not have to attend the special meeting in order to vote your shares of common stock. Your shares can be voted at the special meeting without attending by mailing your completed, dated and signed proxy card in the enclosed return envelope or voting by telephone or the Internet by following the instructions on the enclosed proxy card.

 

If my broker holds my shares in “street name,” will my broker vote my shares for me?

 

Your broker will not be able to vote your shares without instructions from you. You should instruct your broker to vote your shares by following the procedures provided by your broker. Without instructions, your shares will not be voted, which will have the same effect as a vote against the merger.

 

May I change my vote after I have mailed my signed proxy card?

 

Yes. You may change your vote at any time before your proxy is voted at the special meeting. You can do this in one of three ways. First, you can send a written, dated notice to our Corporate Secretary stating that you would like to revoke your proxy. Second, you can complete, date, and submit a new proxy card. Third, you can attend the meeting and vote in person. Your attendance alone will not revoke your proxy. If you have instructed a broker to vote your shares, you must follow directions received from your broker to change your instructions.

 

Should I send in my SM&A stock certificates now?

 

No. After the merger is completed, you will receive written instructions for exchanging your shares of our common stock for the applicable merger consideration.

When do you expect the merger to be completed?

 

We are working toward completing the merger as quickly as possible. We currently expect the merger to be completed near the end of 2008. However, we cannot assure you when or if the merger will occur. In addition to stockholder approval, the other closing conditions contained in the merger agreement must be satisfied or waived. Either Parent or we may terminate the merger agreement if the merger has failed to occur by April 30, 2009, and the terminating party has not caused that failure by its breach of the merger agreement.

 

What if the proposed merger is not completed?

 

If the merger is not completed, we will continue our current operations and our status as a publicly held company.

 

Am I entitled to appraisal rights?

 

Under Delaware law, SM&A stockholders of record who do not vote in favor of the merger and who properly deliver a written demand for appraisal to SM&A will be entitled to exercise appraisal rights in connection with the merger and obtain payment in cash for the judicially-determined fair value of their shares of SM&A common stock if the merger is completed. The provisions of the Delaware General Corporation Law relating to appraisal rights are attached as Annex C to this proxy statement. Failure to take all of the steps required under Delaware law may result in the loss of any appraisal rights under Delaware law.

 

Will the merger be a taxable transaction for me?

 

If you are a U.S. taxpayer, your receipt of cash in the merger will be treated as a taxable sale of your SM&A common stock for U.S. federal income tax purposes. In general, you will recognize gain or loss in an amount equal to the difference between (i) the amount of cash you receive (determined before reduction for any applicable withholding taxes) in the merger in exchange for your shares of our common stock and (ii) the adjusted tax basis of your shares of our common stock. You should consult your tax advisor on how specific tax consequences of the merger apply to you.

 

What other matters will be voted on at the special meeting?

 

Our stockholders are also being asked to vote at the special meeting in favor of adjourning the meeting, if adjournments are determined necessary by SM&A, to facilitate the approval and adoption of the merger proposal by permitting the solicitation of additional proxies from our stockholders if there are not sufficient votes at the time of the special meeting to approve and adopt the merger proposal. This proposal requires the approval of a majority of the votes represented in person or by proxy at the special meeting to be approved. Pursuant to Delaware law and our bylaws, only matters set forth in the notice of meeting may be considered at the special meeting of stockholders.

 

Who can help answer my questions?

 

If you have questions about the merger, including the procedures for voting your shares, or if you would like additional copies, without charge, of this proxy statement, you should contact our proxy solicitor, MacKenzie Partners, Inc., at (800) 322-2885 (toll-free) if you are an individual stockholder or at (212) 929-5500 (collect) if you are a bank or broker, or by e-mail at winsproxy@mackenziepartners.com, or you can contact us at SM&A, 4695 MacArthur Court, 8th Floor, Newport Beach, California 92660, (949) 975-1550.

 

We are furnishing this proxy statement to our stockholders as part of the solicitation of proxies by our board of directors for use at the special meeting and at any adjournments or postponements of the special meeting.

 

We will hold the special meeting at 4685 MacArthur Court, Suite 380, Newport Beach, California 92660, at 9:00 a.m., local time, on December 29, 2008.

 

At the special meeting, we will ask holders of our common stock to approve and adopt the merger agreement. Our board of directors has approved resolutions approving the merger agreement and the merger, determining that the merger agreement and the merger are advisable and in the best interests of SM&A and our stockholders and directing that the merger and the merger agreement be submitted for approval and adoption at a special meeting of our stockholders. Our board of directors, upon the unanimous recommendation of the independent special committee of our board of directors, unanimously recommends that our stockholders vote “FOR” the approval and adoption of the merger agreement.

 

Our board of directors also recommends that our stockholders vote “FOR” the approval of adjournments of the special meeting, if determined necessary by SM&A, to facilitate the approval and adoption of the merger proposal by permitting the solicitation of additional proxies if there are not sufficient votes at the time of the special meeting to approve and adopt the merger proposal.

 

Only holders of record of our common stock at the close of business on December 5, 2008, which is the record date for the special meeting, are entitled to notice of and to vote at the special meeting. As of the record date, 18,450,860 shares of our common stock were issued and outstanding and held by approximately 87 holders of record. A quorum will be present at the special meeting if a majority of the shares of our common stock issued and outstanding and entitled to vote on the record date are represented in person or by proxy at the special meeting. Shares of our common stock represented at the special meeting but not voting, including shares of our common stock for which proxies have been received but for which stockholders have abstained, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business at the special meeting. Our bylaws provide that if a quorum is not present at any meeting of our stockholders, then holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, shall have the power to adjourn the meeting to another place (if any), date or time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present. However, if the adjournment is to a date that is more than 30 days after the original meeting date, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting must be given to each stockholder of record entitled to vote at the meeting.

 

The proposal to approve and adopt the merger agreement requires the affirmative vote of the holders of a majority of the shares of our common stock issued and outstanding on the record date. If a holder of our common stock abstains from voting or does not vote, either in person or by proxy, it will have the effect of a vote against the merger proposal. If you hold your shares in “street name” through a broker, bank or other nominee, you must direct your broker, bank or other nominee to vote in accordance with the instructions you have received from your broker, bank or other nominee. Brokers, banks or other nominees who hold shares of our common stock in street name for customers who are the beneficial owners of those shares may not give a proxy to vote those customers’ shares in the absence of specific instructions from those customers. These non-voted shares will have the effect of votes against the approval and adoption of the merger agreement.

 

The proposal to approve adjournments of the special meeting, if determined necessary by SM&A, to facilitate the approval and adoption of the merger proposal by permitting the solicitation of additional proxies if there are not sufficient votes at the time of the special meeting to approve and adopt the merger proposal, requires the affirmative vote of a majority of the shares of our common stock represented in person or by proxy at the special meeting, even if less than a quorum. Accordingly, not voting at the special meeting will have no effect on the outcome of this proposal, but abstentions will have the effect of a vote against this proposal.

Holders of record of our common stock on the record date are entitled to one vote per share on each matter to be considered at the special meeting.

 

As of the record date, directors and executive officers of SM&A, and their affiliates, had the right to vote 376,832 shares of SM&A common stock, or 2.04% of the issued and outstanding SM&A common stock at that date.

 

All shares represented by properly executed or submitted proxies received in time for the special meeting will be voted at the special meeting in the manner specified by the holders thereof. Properly executed proxies that do not contain voting instructions will be voted “FOR” the approval and adoption of the merger agreement and “FOR” the approval of adjournments of the special meeting, if determined necessary by SM&A, to facilitate the approval and adoption of the merger proposal by permitting the solicitation of additional proxies if there are not sufficient votes at the time of the special meeting to approve and adopt the merger proposal. No proxy that is specifically marked “AGAINST” approval and adoption of the merger proposal will be voted in favor of the adjournment proposal, unless it is specifically marked “FOR” the proposal to adjourn the special meeting to a later date.

 

Pursuant to Delaware law, our bylaws and the merger agreement, no matter other than the proposals to approve and adopt the merger agreement and to adjourn the meeting, if determined necessary by SM&A, will be brought before the special meeting.

 

 

The grant of a proxy on the enclosed form of proxy or by telephone or the Internet does not preclude a stockholder from voting in person at the special meeting. A stockholder may revoke a proxy at any time prior to its exercise by:

 

 

If you have instructed your broker to vote your shares, you must follow directions received from your broker to change these instructions.

 

If you require assistance you should contact SM&A or our proxy solicitor, MacKenzie Partners, Inc., at (800) 322-2885 (toll-free) if you are an individual stockholder or at (212) 929-5500 (collect) if you are a bank or broker, or by e-mail at winsproxy@mackenziepartners.com.

 

 

All costs related to the solicitation of proxies, including the printing and mailing of this proxy statement, will be borne by SM&A. We have retained MacKenzie Partners, Inc. to aid in the solicitation of proxies and to verify records relating to the solicitation. MacKenzie Partners, Inc. will receive a fee for its services of $10,000 and expense reimbursement. MacKenzie Partners, Inc. will also receive a fee of $2,500 for serving as inspector of elections at the special meeting. Our directors, officers and employees may, without additional compensation, also solicit proxies from stockholders by mail, telephone, facsimile, or in person. However, you should be aware that certain members of our board of directors and our officers may have interests in the merger that are different from, or in addition to, yours. See “The Merger — Interests of SM&A’s Executive Officers and Directors in the Merger.”

 

To the extent necessary in order to ensure sufficient representation at the special meeting, SM&A may request the return of proxy cards by telecopy. The extent to which these proxy soliciting efforts will be necessary depends entirely upon how promptly proxies are received. You should send in your proxy by mail without delay. We will also reimburse brokers and other custodians, nominees and fiduciaries for their expenses in sending these materials to you and getting your voting instructions.

 

Stockholders should not send stock certificates with their proxies. A letter of transmittal with instructions for the surrender of our common stock certificates will be mailed to our stockholders as soon as practicable after completion of the merger.

 

The board of directors of SM&A, upon the unanimous recommendation of the independent special committee of the board of directors, has approved a merger agreement and a merger whereby SM&A will become a wholly-owned subsidiary of Parent upon completion of the merger. If the merger agreement is approved and adopted by SM&A stockholders, Merger Sub, a newly-formed merger subsidiary of Parent will be merged with and into SM&A, and SM&A will be the surviving company in the merger. We strongly encourage you to read carefully the merger agreement in its entirety, a copy of which is attached as Annex A to this proxy statement, because it is the legal document that governs the merger.

 

If the merger is completed, you will receive the cash merger consideration of $6.25, without interest and less applicable withholding taxes, in exchange for each share of SM&A common stock that you own at the effective time of the merger.

 

After the merger is completed, you will have the right to receive the merger consideration but you will no longer have any rights as a stockholder of SM&A. You will receive your portion of the merger consideration after exchanging your stock certificates representing our common stock in accordance with the instructions contained in a letter of transmittal to be sent to you shortly after completion of the merger.

 

SM&A common stock is currently registered under the Exchange Act and is designated for trading on The NASDAQ Stock Market under the symbol “WINS.” Following the merger, SM&A common stock will be delisted from The NASDAQ Stock Market and will no longer be publicly traded, and the registration of SM&A common stock under the Exchange Act will be terminated.

 

Please see “The Merger Agreement” for additional and more detailed information regarding the merger agreement.

 

The Proxy Contest

 

On March 24, 2008, Mr. Steven S. Myers, a founder of SM&A, our former Chief Executive Officer, former Chairman of our board of directors and the beneficial owner of more than 10% of our capital stock, filed a preliminary proxy statement in connection with the nomination of his own slate of four candidates (including himself) for election as directors at our 2008 annual stockholders meeting. Mr. Myers subsequently filed other materials with the SEC, urging stockholders to support his slate of director candidates. Mr. Myers stated that the goal of his director candidates would be to maximize stockholder value. In our proxy materials filed with the SEC, we urged our stockholders to vote in favor of our director nominees, rather than the slate proposed by Mr. Myers.

 

On May 21, 2008, we entered into a settlement agreement with Mr. Myers. Mr. Myers agreed to terminate his proxy solicitation, withdraw his director nominations for the 2008 annual meeting, and vote all of his shares of our common stock in favor of our director nominees. Mr. Myers also agreed not to engage in any proxy solicitation to elect or remove a director, or make any stockholder proposal, until the earlier of March 1, 2010 and the date that is ten days before the notice deadline for actions to be taken at our 2010 annual meeting. We agreed not to hold our 2010 annual meeting before May 15, 2010. We also agreed to obtain the resignations of two of our directors and appoint two individuals proposed by one or more of our major stockholders (including Mr. Myers) and mutually acceptable to us and our major stockholders to fill the resulting vacancies as soon as practicable. In addition, we agreed not to increase the size of our board of directors before the 2010 annual meeting, unless such increase is approved by the holders of a majority of our outstanding common stock. We also granted certain registration rights to Mr. Myers.

 

A number of our institutional stockholders were in contact with management during the proxy contest, and several of our largest stockholders inquired about strategic options for SM&A. During the proxy contest, we

received a few inquiries from third parties regarding our business; however, none of these inquiries amounted to any serious interest in proceeding with a sale of SM&A.

 

The Odyssey Proposal

 

Introduction to Odyssey.  In late May 2008, Michael Kane of Caltius, which had provided financing to SM&A in 2000, provided our Chief Executive Officer, Cathy L. McCarthy, with information regarding Odyssey. Mr. Kane described Odyssey to Ms. McCarthy as a private equity firm focused on middle-market acquisitions with an interest in acquiring companies in the aerospace and defense industries. This introduction led to an initial phone call between Ms. McCarthy and William Hopkins of Odyssey on June 2, 2008. Following the execution by SM&A and Odyssey of a nondisclosure agreement on June 9, 2008, Ms. McCarthy and Mr. Hopkins had an initial meeting on June 12, 2008, which Mr. Kane attended. At this meeting, Ms. McCarthy described SM&A’s business generally, and Mr. Hopkins described the process typically followed by Odyssey to evaluate potential acquisition opportunities and indicated his interest in evaluating further the possibility of Odyssey acquiring SM&A.

 

On June 16, 2008, Ms. McCarthy, James R. Eckstaedt, our Executive Vice President, Finance, and Chief Financial Officer, and Kevin Reiners, our Executive Vice President, Operations, met with Mr. Hopkins and Randy Paulson of Odyssey and had a general discussion regarding SM&A’s business and strategic plan for the future. Following this discussion, Ms. McCarthy and Mr. Reiners held a telephone conference with Mr. Hopkins and Robert Aikman of Odyssey, and one of Odyssey’s consultants. On July 8, Ms. McCarthy and Mr. Reiners attended a follow-up meeting with Odyssey’s consultant, and provided Odyssey with a copy of our strategic plan. On July 17, a current forecast of our future performance was provided to Odyssey. On July 18 and July 24, Mr. Eckstaedt and representatives of Odyssey had telephone calls regarding SM&A’s financial statements and such forecast. It was expected that Odyssey would use this information in formulating an offer to acquire SM&A, which Mr. Hopkins expected Odyssey would be prepared to deliver within a few weeks.

 

On July 22, 2008, Ms. McCarthy contacted Wedbush Morgan about potentially retaining Wedbush Morgan as an advisor to SM&A in connection with a potential sale transaction. Wedbush Morgan had no prior relationship with SM&A or our management, other than previous advisory work for which it was not paid, and has expertise in the aerospace and defense industry in which we operate. On July 28, 2008, Ms. McCarthy spoke with Mr. Hopkins, who indicated that, based on information about SM&A received through such date, Odyssey intended to submit an offer for a merger transaction in which our stockholders would receive approximately $6.50 per share in cash. Later that day, Ms. McCarthy met with representatives of Wedbush Morgan to discuss the consequences of such an offer and to arrange for Wedbush Morgan to make a presentation to our board of directors in connection with that offer once it was received. On July 29, 2008, our board of directors met at Ms. McCarthy’s request, and Ms. McCarthy informed the board of directors of her communications with Odyssey to date and of Odyssey’s oral indication of interest in acquiring SM&A.

 

On July 30, 2008, Odyssey submitted an initial unsigned written proposal to acquire SM&A for $6.50 per share in cash, representing a premium of approximately 70% over the closing price of a share of our common stock on that day ($3.81). During the next few days, Odyssey and SM&A began to negotiate a revised nondisclosure agreement and a proposed exclusivity agreement. On August 2, Odyssey delivered to Mr. Hanger, in his capacity as Chairman of the board of directors, a revised, signed expression of interest in acquiring SM&A, which was dated August 4. The revised proposal stated a price of $6.50 per share, representing an approximately 80% premium over the closing price of a share of our common stock on August 1, 2008 ($3.62). Odyssey assumed for purposes of its offer that we would have $9.0 million in cash and no outstanding indebtedness at closing, and $17.3 million in EBITDA over the twelve months ended September 30, 2008 (excluding certain one-time fees and expenses, and estimated public company expenses). In addition, the August 4 letter stated that retention of our management was a condition of the transaction. Odyssey indicated that, if SM&A was interested in Odyssey’s offer, we should enter into a 90-day exclusivity agreement. Odyssey proposed to complete customary due diligence and obtain commitments for the financing necessary to consummate the merger during the 90-day period. Odyssey noted that it had already engaged in substantial discussions with Caltius regarding it providing financing for the merger and that Caltius was knowledgeable about SM&A and our management, having previously provided financing to us. Odyssey requested a response by 5:00 p.m. (PT) on August 11.

On August 5, 2008, our board of directors met to discuss Odyssey’s August 4 proposal. At that meeting, our board of directors retained Wedbush Morgan to advise it in connection with the proposal from Odyssey. Wedbush Morgan representatives then made a presentation in which they reviewed our profile and financial information and the trading history of our common stock, provided a profile of Odyssey, and presented a preliminary analysis of SM&A’s valuation, strategic alternatives and Odyssey’s proposal. Representatives of Bingham McCutchen LLP, SM&A’s regular corporate counsel, advised the board of directors of its general fiduciary duties relating to a proposal involving a sale or change in control of SM&A. On the advice of its legal advisors, the board of directors concluded that the transaction proposed by Odyssey involved a potential conflict of interest because Odyssey had conditioned its initial offer on retaining management (though Odyssey subsequently dropped this condition) and had indicated its willingness, after acquiring SM&A, to cause SM&A to adopt an equity-based compensation plan for members of senior management. The board of directors therefore authorized the formation of a special committee of independent and disinterested directors to, among other things, evaluate and respond to Odyssey’s proposal and its request for exclusivity (which included the authority to reject the offer), negotiate the terms and conditions of a transaction with Odyssey, and seek alternative transactions, in each case as deemed appropriate by the special committee. The board of directors appointed as the members of this special committee Robert J. Untracht as Chairman, J. Christopher Lewis, Dr. Joseph B. Reagan, William C. Bowes, and Mr. Hanger.

 

Initial Negotiations with Odyssey.  On August 7, 2008, the special committee convened an initial meeting of its members, in which it retained Munger, Tolles & Olson LLP (“Munger, Tolles”) as its legal advisor and Wedbush Morgan as its financial advisor. In making its determination of the qualifications and independence of the financial and legal advisors, the special committee considered the familiarity of Wedbush Morgan with SM&A and its industry and noted that neither Munger, Tolles nor Wedbush Morgan had separately represented any members of management or Odyssey with respect to the potential sale or any other matters that the special committee believed would compromise the advisors’ independence. The special committee noted that the board of directors (and not management) had just recently engaged Wedbush Morgan to advise the board of directors in connection with the Odyssey proposal, and that engaging Wedbush Morgan to represent the special committee in this matter was in the best interests of SM&A’s stockholders.

 

In this initial meeting, Munger, Tolles advised the special committee of the general fiduciary duties of directors under Delaware law, including the need for the special committee to represent the interests of our stockholders, and the duties of a special committee evaluating and overseeing a potentially conflicted transaction such as the proposed sale to Odyssey.

 

The special committee then considered at length Odyssey’s request for a 90-day exclusivity period. The special committee members reviewed the Wedbush Morgan presentation made to the full board of directors on August 5 and discussed various responses to Odyssey’s request, including (i) requesting that Odyssey complete its diligence and affirm its proposal prior to exclusivity being granted, (ii) agreeing to a relatively short exclusivity period of 30 days, subject to an express agreement by Odyssey to a post-signing “go-shop” market check in the event we entered into a definitive merger agreement, or (iii) beginning a limited auction process immediately, prior to entering into substantive discussions with Odyssey.

 

The special committee concluded that it was not yet prepared to accede to Odyssey’s request for exclusivity. The special committee, however, determined that it would not be in SM&A’s best interests at this time, in light of the instability and uncertainty that might be engendered among SM&A’s employees and customers, to disclose publicly the Odyssey proposal, engage in either a broad or a limited auction, or determine if other bidders might be interested in purchasing SM&A. The special committee noted that no serious interest in proceeding with a sale had emerged in connection with the proxy contest with Mr. Myers. The special committee was also concerned that, by seeking other bids, it might cause Odyssey to become less interested in SM&A, which would not be in the best interests of our stockholders in light of the significant premium over the current market price for our common stock offered by Odyssey. Accordingly, Wedbush Morgan was directed to tell Odyssey that the special committee was prepared to enter into a new nondisclosure agreement, but needed to understand Odyssey’s proposal better and have Odyssey agree to a post-signing go-shop period before SM&A could grant exclusivity.

 

During the next several days, the special committee’s legal advisors had discussions with Odyssey’s legal counsel, Gibson Dunn & Crutcher LLP. In those discussions, Odyssey’s counsel indicated that Odyssey required an

exclusivity agreement in order to proceed with discussions with SM&A and that, in light of the high premium Odyssey was offering, it was unwilling to grant SM&A a post-signing go-shop period.

 

From August 11 through August 18, the special committee met on six occasions with its financial and legal advisors, primarily to discuss Odyssey’s demand for a 90-day period of exclusivity.

 

 

 

The terms of the August 18, 2008 exclusivity agreement provided for a period of exclusivity ending on the earliest to occur of (i) 5:00 p.m. (PT) on October 3, 2008, (ii) September 8, 2008, unless Odyssey submitted a confirmation of its continued interest in a transaction with SM&A at or above $6.50 per share by 5:00 p.m. (PT) on that date, and (iii) the date the parties entered into a definitive agreement regarding a transaction. Beginning September 8, 2008, the special committee retained the ability to respond to unsolicited offers in exercise of its members’ fiduciary duties. Further, the agreement contemplated that any definitive merger agreement would provide for a post-signing go-shop period of at least 30 days, subject to Odyssey’s right to receive a to-be-negotiated “topping fee” in an amount commensurate with such a go-shop provision.

 

Commencing on August 22, SM&A provided due diligence materials to Odyssey and also made such materials available through an online data room.

 

Following August 18, the special committee met three times with its legal and financial advisors in advance of the September 8 deadline for a valuation discussion with Odyssey. The primary purpose of these meetings was to prepare for a meaningful discussion with Odyssey regarding pricing. On August 25, Wedbush Morgan made a presentation regarding its valuation analysis of SM&A and the appropriate pricing of a transaction with Odyssey. The special committee probed Wedbush Morgan on its analysis, focusing in particular on Odyssey’s calculation of adjusted EBITDA (on which Odyssey had based its August 4 offer at $6.50 per share), and strategies to induce Odyssey to improve its proposed price.

 

On August 26, 2008, members of our management and representatives of Odyssey, Caltius and Wedbush Morgan met for dinner and had a general discussion regarding SM&A’s business and strategic plan for the future. On August 28, 2008, Wedbush Morgan spoke with Mr. Hopkins, pressed for an in-person meeting at which pricing could be discussed, and proposed a meeting following Odyssey’s presentation to its prospective lenders, which was scheduled for September 3. On September 3, 2008, Wedbush Morgan attended Odyssey’s meeting with prospective lenders, which management also attended, and had a subsequent in-person meeting with Mr. Hopkins, other representatives of Odyssey, and Mr. Kane of Caltius. Mr. Hopkins stated unequivocally that Odyssey would not increase its offer price above $6.50 per share.

 

The special committee met with its legal and financial advisors the next day to discuss the results of the September 3 meeting between Wedbush Morgan and Odyssey. Following Wedbush Morgan’s report, the special committee engaged in a vigorous discussion about pricing, strategies to induce Odyssey to improve its offer, and how best to structure the post-signing go-shop period to maximize stockholder value. At the close of the September 4 meeting, the special committee directed Wedbush Morgan to continue refining its valuation analysis.

 

On September 8, 2008, Odyssey confirmed in writing its continued interest in a merger transaction with SM&A at $6.50 per share in cash, thus preserving its period of exclusivity with SM&A under the existing exclusivity agreement.

 

Further Negotiations with Odyssey.  On September 9, 2008, the special committee met again with its legal and financial advisors to discuss Wedbush Morgan’s revised valuation analysis (brought forward to be current) and the proposed terms that Messrs. Untracht and Lewis planned to present to Mr. Hopkins, at a dinner with Mr. Hopkins and representatives of Wedbush Morgan that had been arranged for September 10.

Materials relating to Wedbush Morgan’s financial and valuation presentation, potential questions that Odyssey might pose to Messrs. Untracht and Lewis and appropriate responses, and talking points regarding the special committee’s proposed terms were circulated in advance of the meeting. Specific attention was paid to the merits of the terms of the termination fee and a reverse termination fee payable by Odyssey to SM&A. After a lengthy discussion with its advisors, the special committee agreed to propose the following terms to Odyssey:

 

 

On September 10, 2008, Messrs. Untracht and Lewis met with Messrs. Hopkins and Aikman over dinner (with representatives of Wedbush and Caltius also present) and proposed the foregoing terms including, more specifically, a 2% termination fee during the go-shop period with a 3.75% termination fee thereafter and a 3% reverse termination fee. Among other things, Messrs. Untracht and Lewis stated that SM&A had not made a determination that it was for sale and that they believed Odyssey’s proposed price of $6.50 per share was low relative to other private equity deals in the market, taking into account, among other things, comparisons on the basis of EBITDA multiples. Mr. Hopkins responded that he was awaiting due diligence reports and wanted to review a presentation by management regarding SM&A’s strategic growth plan before further negotiating terms. The management presentation was scheduled to be delivered to Odyssey on September 25.

 

Between September 10 and September 25, SM&A continued to make due diligence materials available to Odyssey, and the special committee met three times with its legal and financial advisors to review updates on the status of Odyssey’s due diligence and the preparation for the management presentation on September 25.

 

On September 25, in a meeting attended by Wedbush Morgan, management made an approximately three-hour presentation regarding management’s strategic plan and operational roadmap to representatives of Odyssey and Caltius. The special committee met with its advisors on the same day to receive a report on the management presentation.

 

On October 8, Odyssey submitted a revised, non-binding letter of intent (the “October 8 LOI”) to Mr. Hanger in his capacity as Chairman of the board of directors. The October 8 LOI proposed an all-cash merger at $6.00 per share, rather than $6.50. The October 8 LOI noted that $6.00 represented an approximately 130% premium over the closing price of a share of our common stock on October 7 ($2.60). In the October 8 LOI, Odyssey agreed to a go-shop period of 30 days from the date of the definitive merger agreement, subject to SM&A paying Odyssey a termination fee of 1% of SM&A’s equity value plus Odyssey’s out-of-pocket expenses, together not to exceed 3%. Following the go-shop period, SM&A would be required to pay Odyssey a termination fee equal to 4% of SM&A’s equity value (inclusive of expenses). In addition, Odyssey agreed to a reverse termination fee of 3% payable by Odyssey if the merger did not close due to Odyssey’s failure to obtain financing or Odyssey’s failure otherwise to close, with such fee being SM&A’s sole remedy against Odyssey. Finally, Odyssey requested that the period of exclusivity under the existing exclusivity agreement be extended to October 24, 2008. Odyssey stated that it would commence its remaining work on the transaction once SM&A agreed to so extend exclusivity, and requested SM&A’s response by October 13, 2008.

 

Upon receipt of the revised proposal, Wedbush Morgan called Mr. Hopkins, seeking the reasons behind the reduction in the price Odyssey was offering. Mr. Hopkins cited as reasons for lowering Odyssey’s proposed price the unavailability of senior bank financing given the deteriorating financial markets, Caltius reducing the amount of financing it was prepared to provide based on lower revenue and EDITDA projections included in the financial forecasts that were provided by SM&A’s management in early September 2008 at Odyssey’s request, deteriorating

macroeconomic conditions generally, and indications that the U.S. government might decrease its defense industry spending under the new presidential administration.

 

The special committee met on October 8 with its legal and financial advisors to discuss the October 8 LOI, and engaged in a lengthy discussion with respect to Odyssey’s reduced proposal. The special committee discussed the advantages and disadvantages of approving a merger at $6.00 per share, focusing on the risks and benefits of SM&A continuing as a standalone public company or pursuing other alternatives available to it and whether this was an appropriate time to engage in a sale of SM&A. The special committee reviewed the reasons provided by Mr. Hopkins for the downward revision in the proposed price and also noted the decrease in SM&A’s closing price per share since the date of the first proposal on July 30 ($3.81) to the closing price per share on October 7 ($2.60), and the fall in the S&P 500 index from 1,284 to 996 during the same period. The special committee also revisited the Wedbush Morgan valuation analysis discussed at its previous meetings, discussing at length the appropriate valuation methodology with respect to SM&A, and considered the efficacy of relying on a post-signing go-shop to maximize stockholder value in light of the difficult credit markets. After discussion, Wedbush Morgan was instructed to tell Odyssey that the $6.00 per share proposal was not acceptable and that Odyssey should propose its best and final price.

 

On October 10, 2008, Mr. Hopkins called Wedbush Morgan and proposed $6.25 per share as Odyssey’s best and final offer. Wedbush Morgan responded that it would relay the revised offer to the special committee, but that the decline in price from the original proposal of $6.50 per share would require renegotiation of the terms of the go-shop and the termination and reverse termination fees given that the special committee was focused on achieving both optimal price and certainty for stockholders. Also on October 10, Wedbush Morgan spoke with Caltius, which indicated that the material terms of its financing commitment had been discussed with Mr. Hopkins and that it expected to a deliver a final commitment letter early the following week.

 

Later on October 10, the special committee, together with its legal and financial advisors, vigorously discussed Odyssey’s revised proposal. The special committee weighed the decrease in the price originally offered by Odyssey in light of current market conditions, Wedbush Morgan’s valuation analysis, and the premium over the current market price of our common stock represented by Odyssey’s revised offer. In addition, the special committee reviewed the terms that each party had proposed with respect to termination and reverse termination fees. After a significant amount of discussion, the special committee concluded that it was willing to pursue a transaction with Odyssey on the following terms:

 

 

The special committee authorized Mr. Untracht to negotiate the terms of a merger agreement with Odyssey, with Mr. Untracht keeping the remaining special committee members appropriately informed. That afternoon, Munger, Tolles circulated to Odyssey’s legal counsel a draft merger agreement, reflecting the terms proposed by the special committee.

 

On October 12, 2008, Odyssey submitted a revised, non-binding letter of intent (“October 12 LOI”), reflecting its willingness to accept the special committee’s proposed terms for the per share merger consideration and bifurcated termination fees. However, Odyssey proposed a go-shop period of 45 days, without a 15-day tail period. In addition, Odyssey proposed a reverse termination fee of 3% in the event Odyssey failed to obtain financing or Odyssey otherwise breached its obligation to consummate the merger, with such reverse termination fee to be SM&A’s sole remedy against Odyssey. Finally, Odyssey proposed for the first time that SM&A reimburse Odyssey for its out-of-pocket expenses if SM&A’s stockholders failed to approve the merger (the “naked no-vote” provision).

Between October 12 and October 14, 2008, representatives of the special committee and Odyssey attempted to negotiate the terms of the October 12 LOI. The parties ultimately agreed on an equal amount of 3.5% of equity value payable for both the termination fee and the reverse termination fee, but the special committee refused to agree to the naked no-vote provision. On October 14, 2008, Mr. Hopkins and Mr. Untracht discussed the issue, and agreed to proceed to negotiate final documentation without resolving the issue or executing the October 12 LOI. The special committee did agree, however, to extend Odyssey’s period of exclusivity through October 24, 2008.

 

The legal advisors to the special committee and Odyssey then commenced negotiation of the terms of the definitive merger agreement based on the draft previously circulated by the special committee’s legal advisors. On October 17, Odyssey’s legal counsel delivered Odyssey’s comments to the draft agreement, which included Odyssey’s request for reimbursement of up to $2.25 million of its expenses upon a naked no-vote.

 

Final Negotiations with Odyssey; Recommendation by the Committee, and Approval of the Board, of the Merger.  On October 22, 2008, Munger, Tolles made a detailed presentation to the special committee concerning the material terms and conditions of the draft merger agreement, a copy of which had been previously distributed to the special committee along with a separate summary, answered the directors’ questions, and outlined the significant issues that remained open, which included the definition of “Company Material Adverse Effect,” Odyssey’s request for reimbursement of its expenses upon a naked no-vote, the events that would trigger termination of the agreement and payment of a termination fee by SM&A, and the payment of attorney’s fees in the event of a dispute between the parties. Specific attention was paid to the relative risks and concerns associated with reimbursement of Odyssey’s expenses upon a naked no-vote. Munger, Tolles noted that Odyssey had not yet provided drafts of the equity or debt financing commitment letters. The special committee discussed these and other open issues.

 

During the next several days, negotiations continued on the terms of the merger agreement and ancillary documents. As part of these negotiations, on October 24, Mr. Untracht, Ms. McCarthy, Mr. Hopkins and legal advisors for both Odyssey and the special committee had a telephone conversation to discuss open issues. After this conversation, Mr. Untracht met with Munger, Tolles to consider a compromise proposal, which Munger, Tolles then communicated to Odyssey’s legal counsel: SM&A would agree to Odyssey’s definition of “Company Material Adverse Effect,” Odyssey would agree to SM&A’s position on the trigger events for termination of the agreement and payment of termination and reverse termination fees, and SM&A would agree to reimburse Odyssey for up to $1 million in expenses upon a naked no-vote. Odyssey substantially accepted this compromise proposal, but disagreed with the amount of the naked no-vote expense reimbursement.

 

During the next few days, the legal advisors to Odyssey and the special committee continued to negotiate the terms of the merger agreement. Among other things, Odyssey agreed that each party would bear its own attorney’s fees in the event of a dispute and that Odyssey would accept a naked no-vote expense reimbursement of $1.5 million. The special committee countered with a proposal for $1.25 million.

 

On the evening of October 27, the special committee met for an update on the negotiations with Odyssey, and considered whether to recommend that the full board of directors approve the merger agreement, a revised copy of which had been distributed to the special committee prior to the meeting. Munger, Tolles updated the special committee on the resolution of issues relating to the merger agreement. Munger, Tolles noted, however, that the amount of the naked no-vote expense reimbursement remained open.

 

Following this update, Wedbush Morgan provided the special committee a detailed financial presentation, including descriptions of and comparisons to public companies in SM&A’s industry, and transactions with comparable companies, as well as discounted cash flow, leveraged buy-out and premiums paid analyses. In the presentation, Wedbush Morgan delivered its oral opinion (subsequently confirmed in writing) that the proposed merger consideration of $6.25 per share was fair, from a financial point of view, to SM&A’s public stockholders. After considering, among other things, the factors described below under “The Merger — Reasons for the Merger,” and the financial analysis and fairness opinion of Wedbush Morgan, the special committee determined that the merger and merger agreement were advisable and in the best interests of SM&A’s stockholders and unanimously approved resolutions recommending that the board of directors approve the merger and the merger agreement, subject to delivery of Wedbush Morgan’s fairness opinion and to Odyssey obtaining debt commitment letters for financing sufficient to consummate the transaction.

Following the conclusion of the special committee meeting, SM&A’s full board of directors convened to consider the then-current draft of the negotiated merger agreement. Munger, Tolles and Wedbush Morgan explained the special committee’s process in evaluating the Odyssey proposal and Munger, Tolles described in detail the material terms of the merger agreement to the board of directors, a copy of which had been distributed to the board of directors in advance of the meeting. Munger, Tolles directed the board of directors’ particular attention to material terms and conditions, including, but not limited to, the per share merger consideration, the impact of the merger on outstanding option and restricted stock units awards, the terms of the post-signing go-shop, the parties’ remedies in the event of termination of the merger agreement, the payment of Odyssey’s expenses up to a proposed cap of $1.25 million (which amount Odyssey had not yet accepted) in the event SM&A’s stockholders failed to approve the merger, and conditions to closing. Wedbush Morgan then made a financial presentation to the board of directors and delivered to the board of directors its oral opinion (subsequently confirmed in writing) that the proposed merger consideration of $6.25 was fair, from a financial point of view, to SM&A’s public stockholders. After considering, among other things, the factors described below under “The Merger — Reasons for the Merger,” the financial analysis and fairness opinion of Wedbush Morgan, and the recommendation of the special committee, the members of the board of directors present at the meeting (constituting a quorum) unanimously determined that the merger and merger agreement were advisable and in the best interests of SM&A’s stockholders and unanimously approved resolutions approving the merger and the merger agreement and recommending that our stockholders approve the same.

 

During the next few days, the legal advisors to the special committee and Odyssey continued to finalize the definitive agreements, and Odyssey and its advisors continued to work with its financing sources to finalize the terms of their commitments to provide the financing required for the transaction. Among other things, on October 29, Odyssey agreed to a naked no-vote expense reimbursement of up to $1.25 million. Odyssey requested, and the special committee agreed to, two additional closing conditions: that SM&A have no indebtedness and at least $5 million in cash and cash equivalents at closing, and that SM&A’s Chief Financial Officer deliver a solvency certificate at closing in the form attached to the merger agreement.

 

On October 29, all of the members of the board of directors other than Mr. Lewis met for an update regarding the proposed merger. Mr. Untracht updated the other special committee members on the additional closing conditions relating to SM&A’s indebtedness and cash and the solvency certificate. He noted that the terms of the solvency certificate had been negotiated, and that management had indicated that it was comfortable that SM&A could comply with both conditions. Wedbush Morgan orally reaffirmed its opinion delivered on October 27 that the merger consideration was fair, from a financial point of view, to SM&A’s public stockholders. Following the discussion, the board of directors approved the terms of the merger agreement, the terms of any ancillary agreements to which SM&A would be a party and which were contemplated by the merger agreement, and the transactions contemplated by the merger agreement (including the merger), subject to such changes and modifications as appropriate officers of SM&A might consider necessary or appropriate. The board of directors also discussed Odyssey’s request for unanimous board of directors approval of the merger agreement and circulated a written consent, which was signed by all members of SM&A’s board of directors.

 

Thereafter, upon disclosure to SM&A of executed equity and debt financing commitment letters, the merger agreement was executed and delivered on October 31, 2008, as disclosed in SM&A’s Current Report on Form 8-K, filed with the SEC on October 31, 2008, which contained a copy of the executed merger agreement.

 

During the due diligence process and negotiations described above, the special committee, together with its legal and financial advisors, met on nineteen occasions to discuss the status of the negotiations with Odyssey, including the material open issues and how they were resolved. During these meetings, members of the special committee had the opportunity to, and did, question representatives of Munger, Tolles and Wedbush Morgan, and representatives of Munger, Tolles and Wedbush Morgan made themselves available to members of the special committee who wished to contact them individually to ask questions. In addition, at various meetings of the special committee, the special committee solicited the views of management and requested updates regarding the due diligence process, after which the special committee typically continued in executive session without members of management present. Our board of directors, together with its advisors, met on eight occasions during the same period to discuss the matters described above.

SM&A obtained amendments of its settlement agreement with Mr. Myers during the process described above, extending the time in which SM&A is required to obtain the resignations of two of its directors and appoint certain replacements, all of which amendments have been filed with the SEC on Current Reports on Form 8-K.

 

At the meeting of the special committee on October 27, 2008, the special committee unanimously determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of SM&A and our stockholders and recommended to our board of directors that the board (i) authorize the officers of SM&A to execute and deliver the merger agreement in substantially the form presented to the special committee (with such changes as our authorized officers may deem necessary or appropriate), (ii) approve the transactions contemplated by the merger agreement (including the merger), and (iii) recommend to our stockholders that they adopt and approve the merger and the merger agreement. See “The Merger — Background of the Merger” and “The Merger — SM&A Board of Directors’ and Special Committee’s Recommendation.”

 

In the course of its deliberations, the special committee considered, among other factors, the following material positive factors regarding the merger:

 

 

 

Factors relating to the procedural fairness of the merger upon the terms and subject to the conditions set forth in the merger agreement and supporting the special committee’s recommendation and determination include, among others, the following:

 

 

In the course of its deliberations, the special committee also considered, among other factors, the following potentially negative factors regarding the merger:

 

 

 

The special committee concluded that these potentially negative factors were sufficiently outweighed by the opportunity presented by the merger for our stockholders to monetize their SM&A investment for $6.25 per share in cash within a relatively short period of time if the merger is consummated, which the special committee believed would maximize the value of our shares and eliminate the risk that the inherent uncertainty affecting our future prospects could result in a diminution in the market value of our shares. Accordingly, the special committee concluded that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of SM&A and our stockholders, and unanimously recommended to our board of directors that the board of directors (i) authorize the officers of SM&A to execute and deliver the merger agreement in substantially the form presented to the special committee (with such changes as our authorized officers may deem necessary or appropriate), (ii) approve the transactions contemplated by the merger agreement (including the merger), and (iii) recommend to our stockholders that they adopt and approve the merger and the merger agreement.

 

In making its determination and recommendation set forth above, the special committee relied on the business experience of its members and their active role in overseeing, with the assistance of our management and experienced legal and financial advisors, the negotiation and execution of the merger agreement with Parent.

 

The preceding discussion of the factors considered by the special committee is not, and is not intended to be, exhaustive, but sets forth the material factors considered. In light of the variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the special committee found it impracticable to, and did not, quantify or otherwise attempt to assign relative weights to the various factors considered in reaching its determination, nor did it undertake to make any specific determination as to whether any particular factors (or any aspect of any particular factors) were favorable or unfavorable to its ultimate determination. Rather, the special committee reached its conclusion and recommendation based on its evaluation of the totality of the information

presented, considered and analyzed. In considering the factors discussed above, individual directors may have assigned differing significance to different factors.

 

 

As noted above, at its meeting on October 27, 2008, the special committee unanimously determined that the merger agreement and the merger are advisable and in the best interests of SM&A and our stockholders and recommended to our board of directors that the board (i) authorize the officers of SM&A to execute and deliver the merger agreement in substantially the form presented to the special committee (with such changes as our authorized officers may deem necessary or appropriate), (ii) approve the transactions contemplated by the merger agreement (including the merger), and (iii) recommend to our stockholders that they adopt and approve the merger and the merger agreement.

 

Our board of directors, acting upon the unanimous recommendation of the special committee, by unanimous written consent dated October 30, 2008, (i) determined that the merger agreement and the merger, are advisable and in the best interests of SM&A and our stockholders, (ii) approved the merger agreement and the transactions contemplated thereby, including the merger and (iii) recommended the adoption and approval by our stockholders of the merger agreement. In reaching these determinations, our board of directors considered (A) the financial presentations of Wedbush Morgan that were prepared for the special committee and which were each delivered to the board of directors at the request of the special committee, as well as the fact that the board of directors received an opinion delivered by Wedbush Morgan as to the fairness, from a financial point of view, to our public stockholders of the consideration to be received by such holders in the merger (the full text of the written opinion of Wedbush Morgan, dated October 31, 2008, which set forth the assumptions made, procedures followed, matters considered and any limitations on the review undertaken in connection with such opinion, is attached as Annex B to this proxy statement), and (B) the unanimous recommendation and analysis of the special committee, as described above.

 

The foregoing discussion summarizes the material factors considered by our board of directors in its consideration of the merger agreement and the transactions contemplated thereby, including the merger. In view of the wide variety of factors considered by our board of directors, and the complexity of these matters, our board of directors did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual members of our board of directors may have assigned different weights to various factors. The board of directors approved and recommends the merger agreement and the merger based upon the totality of the information presented to and considered by it.

 

The board of directors, upon the unanimous recommendation of the independent special committee of the board of directors, recommends that our stockholders vote “FOR” the approval and the adoption of the merger agreement, and “FOR” the adjournment of the special meeting, if determined necessary by SM&A, to facilitate the approval and adoption of the merger proposal by permitting the solicitation of additional proxies if there are not sufficient votes at the time of the special meeting to approve and adopt the merger proposal.

 

 

In July 2008, in connection with Odyssey’s expression of interest in acquiring SM&A, our management prepared a financial forecast of our operating performance for fiscal years 2008 through 2012 and provided that forecast to Wedbush Morgan. The projections for years 2008 through 2010 included in that financial forecast were also provided to Odyssey on July 17, 2008, as described in “The Merger — Background of the Merger,” but modified to project the estimated savings in selling, general and administrative expenses expected to be realized from SM&A becoming a private company. In early September 2008 our management revised the July financial forecast of our operating performance for fiscal years 2008 through 2012 and provided that revised forecast to Wedbush Morgan. That September financial forecast was utilized by Wedbush Morgan, at the direction of the special committee of our board of directors, for purposes of its analyses in connection with its opinion described in “The Merger — Opinion of Wedbush Morgan Securities Inc.” The reason for the revised September forecast was that SM&A had gained greater visibility into the likely actual operating performance to be achieved in fiscal year 2008 and, as noted below, the projected financial data for fiscal years 2009 through 2012 included in both financial forecasts are a function of the projected numbers for fiscal year 2008. We refer to all financial forecasts set forth in this proxy statement as the “Projections.”

The Projections provided to Wedbush Morgan in July were as follows:

 

FY2008-2012(1)

 

 

 

 

The Projections provided to Wedbush Morgan in September were as follows:

 

FY2008-2012(1)

 

 

 

 

 

The development of the Projections entailed numerous assumptions about SM&A’s industry, markets and services, and SM&A’s ability to execute on its strategic growth plan. Although the Projections are presented with numerical specificity, the Projections reflect numerous assumptions and estimates as to future events made by our management that our management believed were reasonable at the time the Projections were prepared. These Projections do not take into account any circumstances or events occurring after the date that they were prepared and, accordingly, do not give effect to the merger or any changes to our operations or strategy that may be implemented after completion of the merger. For the foregoing reasons, the inclusion of Projections in this proxy

statement should not be regarded as an indication that such Projections will be necessarily predictive of actual future events, and they should not be relied on as such.

 

SM&A does not, as a matter of course, publicly disclose projections as to its future financial performance. The Projections were not prepared with a view to public disclosure and are included in this proxy statement only because such information was made available, in whole or in part, to Odyssey and its financing sources, in connection with their due diligence review of SM&A, and to Wedbush Morgan in connection with its opinion. The Projections were not prepared with a view to compliance with published guidelines of the SEC regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Furthermore, our independent registered public accounting firm has not examined, compiled or otherwise applied procedures to the Projections and, accordingly, assumes no responsibility for, and expresses no opinion on them.

 

No one has made or makes any representation to any stockholder or other third party regarding the information included in the Projections. The inclusion of this information should not be regarded as an indication that SM&A, our board of directors or the special committee, Parent, Merger Sub, Odyssey, Wedbush Morgan or any other recipient of this information considered, or now considers, the Projections to be necessarily predictive of actual future results. Except to the extent required by applicable federal securities laws, we do not intend, and expressly disclaim any responsibility to, update or otherwise revise the Projections to reflect circumstances existing after the date when prepared or to reflect the occurrence of future events, even in the event that any of the assumptions underlying the Projections are shown to be in error.

 

Scope of the Assignment

 

Our board of directors engaged Wedbush Morgan to serve as the exclusive financial advisor to the independent special committee of the board of directors in connection with the potential sale of SM&A, and to render an opinion as to whether the consideration to be received in the merger by the holders of our common stock was fair to such holders from a financial point of view. Wedbush Morgan had no prior or current relationship with Odyssey and no prior relationship with SM&A or our management other than previous advisory work for which it was not paid. Wedbush Morgan rendered its oral opinion to our board of directors that, as of October 27, 2008, and based upon the assumptions made, matters considered, and qualifications and limitations of the review set forth in its form of written opinion presented to the board of directors, the merger consideration of $6.25 per share to be received by our public stockholders pursuant to the merger agreement was fair from a financial point of view to such stockholders. Wedbush Morgan confirmed its opinion on October 29, 2008, and delivered its written opinion on October 31, 2008.

 

The full text of Wedbush Morgan’s written opinion, which sets forth the procedures followed, assumptions made, matters considered, and qualifications and limitations of the review undertaken in connection with the opinion, is attached as Annex B and is incorporated herein by reference. Wedbush Morgan’s opinion was intended for the use and benefit of our board of directors in connection with their evaluation of the merger. Wedbush Morgan’s opinion does not address our underlying business decision to enter into the merger agreement or complete the merger or the relative merits of the merger compared to any alternative business strategies that may exist for us, and does not constitute a recommendation to the board of directors or any stockholder as to how that person should vote on the merger or any related matter. The following summary of Wedbush Morgan’s opinion is qualified in its entirety by reference to the full text of the opinion, and our stockholders are urged to read the opinion in its entirety.

 

For purposes of its opinion and in connection with its review of the merger, Wedbush Morgan, among other things:

 

 

 

In addition to the foregoing, Wedbush Morgan discussed with our management our views as to the financial and other information described in the bullet points above and conducted such other analyses and examinations and considered such other financial, economic and market criteria as Wedbush Morgan deemed appropriate to arrive at its opinion.

 

In arriving at its opinion, Wedbush Morgan assumed and relied upon the accuracy and completeness of all financial and other information provided to or reviewed by it or publicly available, and did not assume any responsibility for independent verification of any such information. With respect to financial projections and other information provided to or reviewed by it, Wedbush Morgan was advised by our management that such projections and other information were reasonably prepared on bases reflecting the best currently available estimates and judgments of our management as to our expected future financial performance, but with our consent Wedbush Morgan did not take into account the reduction in estimates we made at the request of Odyssey for inclusion in information delivered to Odyssey’s prospective financing sources. Wedbush Morgan further relied on the assurances of our management that we are unaware of any facts that would make the information or projections provided to Wedbush Morgan incomplete or misleading. Wedbush Morgan did not make and was not provided with any independent evaluations or appraisals of any of our assets, properties, liabilities or securities, nor did Wedbush Morgan make any physical inspection of our properties or assets. Wedbush Morgan does not have any opinion on any financial forecast by our management, or the assumptions upon which any financial forecast was based, nor does it have any opinion as to the price of our common stock in the future. Wedbush Morgan assumed that the final form of the merger agreement would be similar in all material respects to the draft reviewed by it.

 

The opinion is based on economic, market and other conditions as in effect on, and the information made available to Wedbush Morgan as of, the date of the opinion. Wedbush Morgan also relied on the accuracy and completeness of our representations and warranties in the merger agreement. Events occurring after the date of the opinion could materially affect the assumptions used in preparing the opinion. Wedbush Morgan has not undertaken to reaffirm or revise the opinion or otherwise comment upon any events occurring after the date of the opinion.

 

Wedbush Morgan is an investment banking firm and a member of The New York Stock Exchange and other principal stock exchanges in the United States, and is regularly engaged as part of its business in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements, secondary distributions of listed and unlisted securities, and valuations for corporate, estate and other purposes. Wedbush Morgan was selected by the independent special committee of our board of directors based on Wedbush Morgan’s experience, expertise, reputation and familiarity with SM&A.

 

In rendering its opinion, Wedbush Morgan expressed no opinion as to the amount or nature of any compensation to any officers, directors, or employees of SM&A, or any class of such persons, relative to the consideration to be received by the public holders of the common stock of SM&A in the merger or with respect to the fairness of any such compensation. Wedbush Morgan did not opine as to the merits of the merger compared to any alternative transactions that may be available to us should we desire to pursue such alternatives.

 

Wedbush Morgan has acted as financial advisor to the independent special committee of our board of directors with respect to the merger and will receive a fee from us upon the consummation of the merger. Wedbush Morgan

also received a retainer fee in relation to this engagement, and an additional fee for rendering its opinion for the merger, which was not contingent upon the conclusions reached in its opinion. In the ordinary course of its business, Wedbush Morgan and its affiliates may actively trade our common stock for its own account and for the accounts of its customers and, accordingly, it may at any time hold a long or short position in our common stock.

 

Summary of Analyses

 

The following is a summary of the financial analyses performed by Wedbush Morgan in connection with reaching its opinion:

 

 

While the following summaries describe some analyses and examinations that Wedbush Morgan deemed material to the opinion, they are not a comprehensive description of all analyses and examinations actually conducted by Wedbush Morgan. The preparation of a fairness opinion necessarily is not susceptible to partial analysis or summary description. Wedbush Morgan believes that such analyses and the following summaries must be considered as a whole, and that selecting portions of such analyses and of the factors considered, without considering all such analyses and factors, would create an incomplete view of the process underlying the analyses.

 

In performing its analyses, Wedbush Morgan made numerous assumptions with respect to industry performance and general business and economic conditions such as industry growth, inflation, interest rates and many other matters, many of which are beyond our control and the control of Wedbush Morgan. Any estimates contained in Wedbush Morgan’s analyses are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses.

 

The financial analyses summarized below include information presented in tabular format. In order to understand Wedbush Morgan’s analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the analyses. Considering the data described below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Wedbush Morgan’s analyses.

 

Share Trading Analysis

 

Wedbush Morgan reviewed the average daily closing price and average daily trading volume of SM&A’s common stock for each of the quarters of SM&A’s fiscal years from 2006 through 2008 year-to-date. The average daily closing price of SM&A’s common stock decreased 65.6% from $7.26 for the quarter ended January 31, 2006 to $2.50 for the fourth quarter in fiscal 2008 (period to date as of October 27, 2008). The average daily trading volume of the common stock from January 1, 2006 to October 27, 2008 was 52,725 shares, which indicated a low number and dollar volume of traded shares.

 

Public Companies Selected for Comparison Analysis

 

Using publicly available information, Wedbush Morgan compared selected financial data of SM&A with similar data of selected publicly traded consulting and services companies considered by Wedbush Morgan to be comparable to SM&A. The analysis assumed that companies in the same industry share similar markets. The potential for revenue and earnings growth is usually dependent upon the characteristics of the growth rates of these markets, and this analysis assumed that companies in the same industry experience similar operating characteristics. In this regard, Wedbush Morgan noted that, although such companies were considered similar, none of the companies has the same management, make-up, size or mix of business as SM&A. Wedbush Morgan reviewed and

analyzed the following U.S. publicly-traded companies, which Wedbush Morgan deemed to be comparable to SM&A: CRA International, Inc., Exponent Inc., Huron Consulting Group, Inc., ICF International, Inc., LECG Corp., Navigant Consulting, Inc., Resources Connection, Inc., SRA International, Inc. and Stanley, Inc. (collectively, the “Comparison Companies”). This analysis assumed that the Comparison Companies are ongoing concerns.

 

Wedbush Morgan analyzed the following financial data for SM&A and each of the Comparison Companies:

 

 

This analysis indicated that our public valuation multiples, based on the merger consideration price of $6.25 per share, are above all the median trading multiples of the Comparison Companies.

 

Wedbush Morgan performed this valuation analysis by applying certain market trading statistics of the Comparison Companies to SM&A’s historical and estimated financial results. As of October 27, 2008, the Comparison Companies were trading at the following median valuation multiples:

 

 

As a result of this comparison company analysis, Wedbush Morgan derived an average implied market value of approximately $77.2 million, or $4.09 per share, for SM&A’s common stock, compared to the merger consideration of $6.25 per share, as of October 27, 2008. The range of values for the various valuation multiples was $3.21 to $4.86 per share.

 

Public Companies Selected for Comparison Analysis with Control Premium

 

This analysis is similar to the “Public Companies Selected for Comparison Analysis” described above, except that the Comparison Companies’ public valuation multiples included an appropriate control premium. Wedbush Morgan reviewed selected merger and acquisition transactions to analyze the premiums paid compared to the stock price of the relevant target company at various times prior to the announcement of the acquisition. As a result of its

analysis, Wedbush Morgan considered a 25% acquisition premium to be appropriate. For purposes of this analysis, Wedbush Morgan used the same Comparison Companies as in its “Public Companies Selected for Comparison Analysis” described above. Wedbush Morgan compared the merger consideration of $6.25 per share to the Comparison Companies’ common stock public valuation multiples, including a 25% acquisition premium applied to the Comparison Companies’ market value.

 

The analysis indicated that SM&A’s common stock public valuation multiples, based on the merger consideration price of $6.25 per share, are above all the mean and median trading multiples of the Comparison Companies, including a 25% acquisition premium applied to the Comparison Companies’ market value. As a result of this analysis, Wedbush Morgan derived an average implied market value of approximately $96.5 million, or $5.11 per share, for SM&A’s common stock, compared to the merger consideration of $6.25 per share, as of October 27, 2008. The range of values for the various valuation multiples was $4.02 to $6.07 per share.

 

Merger and Acquisition Transaction Analysis

 

Wedbush Morgan reviewed certain publicly available information relating to 18 selected merger and acquisition transactions (the “Selected Transactions for Comparison”) from June 1, 2003 to October 27, 2008, involving consulting companies. The Selected Transactions for Comparison considered were as follows:

 

 

Information reviewed in the Selected Transactions for Comparison consisted of, if available, EV divided by, if available, LTM revenue and LTM EBITDA, as of the time of the announcement of the acquisition. Price to Earnings analysis was not included because such data were available only for public companies and the companies analyzed had different capital structures than ours. Wedbush Morgan noted that the median EV multiples for the Selected Transactions for Comparison with EV less than $250 million were 1.29x LTM revenue and 10.9x LTM EBITDA. Based on these multiples, Wedbush Morgan derived enterprise values of $119.8 million to $153.9 million, or $6.34 to $8.15 per share.

 

Wedbush Morgan also reviewed the Selected Transactions for Comparison, as well as transactions involving take private acquisitions of public companies (“Take Private Transactions”), where pricing information was available, to analyze premiums paid compared to the target’s stock price at various times prior to the announcement of the acquisition. Wedbush Morgan compared premiums paid in three transaction categories (Selected Transactions for Comparison, Take Private Transactions with Equity Value $100 million to $500 million and Take Private Transactions with Equity Value greater than $100 million) to the premium that would be paid to the holders of

SM&A common stock based on the merger consideration of $6.25 per share. Wedbush Morgan analyzed both the actual closing prices and the Volume Weighted Average Price (“VWAP”), which is intended to provide a better indication of the price at which our common stock actually traded over the relevant period. VWAP represents the total value of shares traded in a particular stock over a specific period of time, divided by the total volume of shares traded over the same period of time. Premiums in these transaction categories ranged from 18% to 40% over the target’s pre-acquisition stock price, compared to a premium of 95% to 158% for the merger consideration of $6.25 per share.

 

Wedbush Morgan noted that this analysis necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of us and the companies included in the Selected Transactions for Comparison and Take Private Transactions and other factors that could affect the acquisition value of the companies to which SM&A is being compared. A mathematical analysis such as determining the median or average is not in itself a meaningful method of using comparable transaction data.

 

Discounted Cash Flow Analysis

 

Wedbush Morgan reviewed the discounted cash flow (“DCF”) methodology, which assumes that the present value of our common stock is equal to the sum of the present value of the projected available cash flow streams to our stockholders and the future value of our equity. Wedbush Morgan noted that it assumed SM&A remained independent during the term of the analysis.

 

Using financial projections furnished by SM&A management for the five years ending December 31, 2008 through 2012, Wedbush Morgan calculated the projected cash flow available for distribution, and projected future values of our common stock, by applying assumed EBITDA multiples of 6.0x, 7.0x and 8.0x to SM&A’s projected EBITDA for the year ending December 31, 2012. The projected future values were then discounted using a range of discount rates of 14.0% to 16.0%, which yielded an implied range of discounted equity present values of $142.7 million to $188.2 million, representing $7.56 to $9.96 per share.

 

In determining the discount rates (14.0% to 16.0%) used in the discounted present value analysis, Wedbush Morgan noted, among other things, factors such as inflation, prevailing market interest rates, the inherent business risk and rates of return required by investors. Wedbush Morgan calculated the Weighted Average Cost of Capital (“WACC”) for SM&A as 14.5%, including in its calculation a higher than overall equity market risk premium to factor in SM&A’s small capitalization status. The WACC represents the theoretical cost of capital taking into account the cost of debt and the cost of equity based upon a prescribed capital structure. In determining the appropriate EBITDA multiple range (6.0x to 8.0x EBITDA) used in calculating SM&A’s projected future equity value, Wedbush Morgan noted, among other things, the multiples at which public companies which Wedbush Morgan deemed comparable to SM&A had historically traded, and the multiples observed in historical mergers and acquisition transactions which Wedbush Morgan deemed relevant.

 

Leveraged Buyout Analysis

 

Wedbush Morgan performed an illustrative analysis of the theoretical maximum consideration that could be paid in an acquisition of SM&A by a financial buyer using management estimates of future financial performance and considering capital structures typically employed by financial buyers. In performing this analysis, based on its experience and judgment and consideration of data which it deemed relevant, Wedbush Morgan assumed:

 

 

Given current credit market conditions, it is possible that banks would not be prepared to lend debt in an amount equal to 4.0x EBITDA.

Based on these projections and assumptions, using the Projections, which were “base case” financial projections furnished by SM&A’s management for the five years ending December 31, 2008 through 2012 (see “The Merger — Projected Financial Data”), Wedbush Morgan estimated that the theoretical maximum consideration that could be paid in an acquisition of SM&A by a financial buyer ranged from $6.00 to $7.00 per share of SM&A common stock.

 

Conclusion

 

The preparation of a fairness opinion is a complex process involving multiple elements and assumptions and is not necessarily susceptible or conducive to a partial or single-point analysis or summary description. Focus on one or more elements of the analyses or of the foregoing summary to the exclusion of all other elements or to the exclusion of the analyses as a whole may result in an incomplete understanding of the processes underlying the Wedbush Morgan opinion. In preparing its fairness opinion, Wedbush Morgan considered the outcome of all its analyses and did not attribute a particular weight to any single analysis or element that entered into its determination. Wedbush Morgan’s conclusion as to fairness from an economic point of view was made upon the basis of its experience and professional judgment after taking into account all of the analyses and factors as a whole. No company or transaction included in the foregoing analyses for purposes of illustration and comparison is directly comparable to SM&A or to the merger transaction.

 

Based upon its analyses, and subject to the assumptions made, matters considered, and qualifications and limitations of the review undertaken in connection with the opinion, Wedbush Morgan is of the opinion that, as of the date of the opinion, the merger consideration to be received by the public holders of SM&A’s common stock as provided in the merger agreement is fair to such holders from a financial point of view.

 

In considering the recommendation of our board of directors and the special committee with respect to the merger agreement and merger, you should be aware that some of our executive officers and directors may have interests in the merger that are in addition to or different from the interests of SM&A stockholders generally. Our board of directors and the special committee were aware of and considered these interests in approving the merger agreement and the merger.

 

Merger Proceeds and Other Payments to be Received by Directors and Executive Officers.  Each of our directors and executive officers beneficially owns shares of our common stock, restricted stock units and/or in-the-money stock options to purchase shares of our common stock. Shares of our common stock and common stock underlying restricted stock units will be exchanged for the right to receive $6.25 per share in cash as described in this proxy statement. Options not assumed by Parent pursuant to the mutual agreement of SM&A and Parent prior to closing will be cancelled in exchange for a cash payment for each underlying share equal to the positive difference, if any, between (1) the cash price of $6.25 to be paid with respect to a share of our common stock in the merger and (2) the exercise price per share of the options, less applicable withholding taxes. The vesting of all stock options not assumed by Parent and all restricted stock units will be accelerated in full immediately prior the effective time of the merger.

 

The following table sets forth the approximate cash proceeds that each of our current executive officers and directors will receive, without interest and less any applicable withholding taxes, at the completion of the merger on the basis of the shares of SM&A common stock, restricted stock units and in-the-money options to purchase shares of SM&A common stock that they hold as of December 1, 2008:

 

 

For additional information regarding the nature of each director’s and executive officer’s beneficial ownership of our share of common stock, please see the information below under the caption “Security Ownership of Certain Beneficial Owners and Management.”

 

Change In Control Payments.  Following the completion of the merger, certain of our executive officers may be entitled to a change in control payment if their employment is terminated under certain circumstances pursuant to written employment arrangements between the respective officers and SM&A.

 

Pursuant to our employment arrangements with Ms. McCarthy, if Ms. McCarthy’s employment is terminated by SM&A without cause or by Ms. McCarthy for good reason within 24 months following a change in control of SM&A, she will be entitled to receive, provided that she executes a general release of claims in favor of SM&A and complies with the restrictive covenants under her employment agreement: (i) for a period of 12 months following the effective date of her termination, on a monthly basis paid in accordance with SM&A’s customary payroll practices, 1/12 of her highest average annual base salary and target bonus during the immediately preceding three-year period; (ii) until the longer of 6 months following the effective date of her termination or the date that her employment agreement would have expired in accordance with its terms absent such termination, continuation of coverage under the group health plans of SM&A at no cost or premium charge (provided that she makes a timely election and is eligible for such coverage continuation); and (iii) reimbursement of out-of-pocket healthcare costs under SM&A’s “Executive Edge” plan for a period of 12 months following the effective date of her termination (capped at $10,000). The merger would constitute a change in control of SM&A for the purposes of our employment arrangements with Ms. McCarthy.

 

Pursuant to our employment arrangements with Mr. Pace, if Mr. Pace’s employment is terminated by SM&A without cause or by Mr. Pace for good reason within 24 months following a change in control of SM&A, Mr. Pace will be entitled to receive, provided that he executes a general release of claims in favor of SM&A and complies with the restrictive covenants under his employment agreement: for a period of eighteen 18 months following the effective date of his termination, (i) on a monthly basis paid in accordance with SM&A’s customary payroll practices, 1/12 of his highest average annual base salary and during the immediately preceding three-year period,

(ii) continuation of coverage under the group health plans of SM&A at no cost or premium charge (provided that he makes a timely election and is eligible for such coverage continuation); and (iii) reimbursement of out-of-pocket healthcare costs under SM&A’s “Executive Edge” plan (capped at $10,000). Mr. Pace would also be entitled to receive incentive bonus payments, if applicable, under his employment agreement. The merger would constitute a change of control of SM&A for the purposes of our employment arrangements with Mr. Pace.

 

Pursuant to our employment arrangements with each of Mr. Reiners, Mr. Eckstaedt and Ms. Aguirre, if the applicable executive officer’s employment is terminated by SM&A without cause or by the executive officer for good reason within 24 months following a change in control, the executive officer will be entitled to receive, provided that he or she executes a general release of claims in favor of SM&A and complies with the restrictive covenants under his or her employment agreement, for a period of 18 months following the effective date of his or her termination: (i) on a monthly basis paid in accordance with SM&A’s customary payroll practices, 1/12 of his or her highest average annual base salary and target bonus during the immediately preceding three-year period; (ii) continuation of coverage under the group health plans of SM&A at no cost or premium charge (provided that he or she makes a timely election and is eligible for such coverage continuation); and (iii) reimbursement of out-of-pocket healthcare costs under SM&A’s “Executive Edge” plan (capped at $10,000). The merger would constitute a change in control of SM&A for the purposes of our employment arrangements with the foregoing executive officers.

 

The following table sets forth an estimate of the potential cash change in control payments that would be payable as described above, with respect to each of the foregoing officers, in the event that he or she becomes entitled to such amount pursuant to the foregoing change in control agreements following the merger (assuming, for illustrative purposes, that the respective officer’s employment is terminated (either by SM&A without cause or by the officer for good reason) immediately following a change in control on December 31, 2008, his or her base salary remains at current levels, and in the case of each officer, SM&A is on track to achieve its performance targets for the applicable performance periods). The table further assumes that no stock options or other equity awards held by the applicable officer are assumed by Parent or Merger Sub in connection with the merger. The table does not include amounts attributable to costs of health and welfare benefits (other than a maximum benefit of $10,000 reimbursed under SM&A’s “Executive Edge” plan), outplacement services or payment of accrued vacation, holiday and personal leave days to be received by the respective officer following a termination. The table also does not include

any amounts reflected above under “The Merger — Interests of SM&A’s Executive Officers and Directors in the Merger — Merger Proceeds and Other Payments to be Received by Directors and Executive Officers.”

 

 

Arrangements with the Surviving Corporation.  Parent has previously indicated its belief that the continued involvement of our existing management team is integral to SM&A’s future success. However, as of the date of this proxy statement, no members of our current management team have entered into any agreement, arrangement or understanding with SM&A or its subsidiaries (other than their existing employment arrangements in effect as of the date of the merger agreement) or with Parent, Merger Sub or their affiliates regarding employment with, or the right to convert into or reinvest or participate in the equity of, the surviving corporation or Parent or any of its subsidiaries. Pursuant to the terms of the merger agreement, Parent and SM&A may agree prior to the closing that Parent will assume certain outstanding options to purchase our common stock. Parent currently does not have any obligation to assume any such options. Further, Parent has informed SM&A that it may allow some members of SM&A management to exchange their shares of SM&A common stock into equity of Parent prior to completion of the merger in transactions not contemplated by the merger agreement and/or establish equity-based compensation plans for management of the surviving corporation. It is anticipated that awards granted under any equity-based compensation plans adopted by Parent would generally vest following completion of the merger over a number of years of continued employment and would entitle management to share in the future appreciation of the surviving corporation. Although it is likely that certain members of our current management team will enter into arrangements with Parent or its affiliates regarding employment with, and the right to exchange their shares of SM&A common stock into Parent equity, or purchase or otherwise participate in the equity of Parent (and/or a subsidiary of Parent after the merger), as of the date of this proxy statement no discussions about specific terms of any such arrangements have occurred between members of our current management and representatives of Parent, and there can be no assurance that any parties will agree as to any such arrangements or whether such arrangements will be put in place before or after the merger is completed. Pursuant to the terms of the merger agreement, Parent has generally agreed to, for one year after the effective time of the merger agreement, provide continuing SM&A employees (including our management team) certain salary and bonus opportunities, other employee benefits, and severance benefits consistent with similar benefits that were in effect on the date of the merger agreement.

 

Indemnification of Directors and Officers.  From and after the effective time of the merger, Parent shall, and shall cause the surviving corporation to, indemnify and hold harmless, to the fullest extent permitted under applicable law and the applicable governing documents of SM&A and its subsidiaries, and to advance expenses as

incurred to the fullest extent permitted under applicable law and such applicable governing documents, each present and former director and officer of SM&A and its subsidiaries against costs, damages or liabilities incurred in connection with claims arising out of or related to such person’s service as a director or officer of SM&A or its subsidiaries. Prior to the effective time of the merger, SM&A shall, and if SM&A is unable to, Parent shall cause the surviving corporation to obtain and maintain and extension of (i) SM&A’s existing directors’ and officers’ liability insurance policies, and (ii) SM&A’s existing fiduciary liability insurance policies, in each case for a claims reporting or discovery period of at least 6 years from and after the effective time of the merger. If SM&A and the surviving corporation for any reason fail to obtain such “tail” insurance policies as of the effective time of the merger, the surviving corporation shall, and Parent shall cause the surviving corporation to, continue to maintain in effect for a period of at least 6 years from and after the effective time of the merger such directors’ and officers’ liability insurance policies and fiduciary liability insurance policies in place as of the date of the merger agreement, provided that in no event will the surviving corporation be required to expend for such policies an annual premium amount in excess of 150% of the annual premiums paid by SM&A for such insurance as of the date of the merger agreement.

 

The payments required to be made by Parent and Merger Sub to complete the merger and the related transactions are expected to be funded by a combination of equity and debt financing together with cash on-hand at SM&A.

 

Equity Financing.  Parent has received an equity commitment letter, dated as of October 31, 2008, from Odyssey Investment Partners Fund III, LP, which we refer to as the “fund,” pursuant to which the fund has agreed to contribute, or cause to be contributed, an aggregate amount of $50,000,000 to Parent contemporaneous with the closing of the merger. The equity commitment is generally subject to the satisfaction or waiver of all of the conditions to the obligations of Parent and Merger Sub to effect the closing of the merger under the merger agreement as well as the satisfaction or waiver of all of the conditions set forth in the definitive agreements evidencing the debt financing.

 

The equity commitment letter will terminate automatically upon the earliest to occur of (a) the termination of the merger agreement in accordance with its terms, (b) the breach by Parent or Merger Sub of any covenant or agreement under the Merger Agreement that gives rise to an obligation by Parent to pay the termination fee specified in the merger agreement, (c) the commencement by SM&A or any of its affiliates of a lawsuit or other proceeding asserting any claim under the limited guaranty provided by the fund to SM&A, (d) any person or entity, other than Parent, seeking to enforce the equity commitment, and (e) payment in full by the fund of the guarantied obligation as provided in the limited guaranty.

 

The fund may assign all or a portion of its obligations to fund the equity commitment letter, but if the assignment is to any person or entity other than Odyssey Investment Partners Fund IV, LP the assignment will not relieve the fund of any of its obligations under the equity commitment letter.

 

In addition, affiliates of Caltius have committed to Parent to provide $5.0 million in equity financing (subject to similar conditions as the fund’s equity commitment), which will comprise a portion of the equity to be provided by the fund.

 

Debt Financing.  In connection with its execution and delivery of the merger agreement, Merger Sub obtained commitment letters to obtain (i) debt financing in an aggregate principal amount of $65,000,000, pursuant to senior and senior subordinated secured credit facilities from affiliates of Caltius, which we refer to collectively as the “Caltius Facilities,” and (ii) debt financing in an aggregate principal amount of $10,000,000, pursuant to a senior secured revolving line of credit with City National Bank, which we refer to as the “CNB Facility.” The debt financing commitments described in this proxy statement expire on April 30, 2009.

 

The commitments of the lenders under the Caltius Facilities commitment letter are conditioned on the merger being consummated in accordance with the merger agreement, as well as, among other things:

 

 

 

The commitment of the lender under the CNB Facility commitment letter is conditioned upon the merger being consummated in accordance with the merger agreement, as well as, among other things:

 

 

Although the debt financing described in this proxy statement is not subject to “due diligence” or “market out” contingencies, such financing may not be considered assured. As of the date of this proxy statement, no alternative financing arrangements or alternative financing plans have been made in the event the debt financing described herein is not available as anticipated.

 

In connection with the merger, record holders of SM&A common stock will be entitled to appraisal rights if certain procedures are complied with and the merger is completed. Under Section 262 of the DGCL (“Section 262”), in lieu of receiving the merger consideration, SM&A stockholders whose appraisal rights are properly demanded and perfected and not withdrawn or lost are entitled to have the “fair value” of their shares of SM&A common stock at the effective time of the merger, exclusive of any element of value arising from the accomplishment or expectation of the merger, judicially determined and paid to them in cash by complying with the provisions of Section 262.

 

A stockholder who does not vote in favor of the merger and who strictly complies with other applicable procedures of Delaware law as summarized below and set forth in Annex C may exercise statutory appraisal rights under Delaware law.

 

The following is a brief summary of Section 262, which sets forth the procedures for demanding statutory appraisal rights. This summary is qualified in its entirety by reference to Section 262, a copy of the text of which is attached hereto as Annex C. Failure to comply with all the procedures set forth in Section 262 will result in the loss of a SM&A stockholder’s statutory appraisal rights under Delaware law.

 

An SM&A stockholder who desires to exercise appraisal rights must (a) not vote in favor of the merger and (b) deliver a written demand for appraisal of such stockholder’s shares to the Secretary of SM&A before the vote to approve and adopt the merger agreement at the special meeting.

 

A demand for appraisal must be executed by or for the SM&A stockholder of record, fully and correctly, as the stockholder’s name appears on the certificates representing the shares of SM&A common stock. If these shares of SM&A common stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, such

demand must be executed by the fiduciary. If shares of SM&A common stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand must be executed by all joint owners. An authorized agent, including an agent of two or more joint owners, may execute the demand for appraisal for a SM&A stockholder of record; however, the agent must identify the record owner and expressly disclose that, in exercising the demand, the agent is acting as agent for the record owner. In addition, the SM&A stockholder must continuously hold the shares of record from the date of making the demand through the effective time of the merger.

 

A record owner, such as a broker, who holds shares of SM&A common stock as a nominee for others may exercise appraisal rights with respect to the shares held for all or less than all beneficial owners of shares of SM&A common stock as to which the holder is the record owner. In that case, the written demand must set forth the number of shares of SM&A common stock covered by the demand. Where the number of shares of SM&A common stock is not expressly stated, the demand will be presumed to cover all shares of SM&A common stock issued and outstanding in the name of the record owner.

 

Beneficial owners who are not record owners and who intend to exercise appraisal rights should instruct the record owner to comply strictly with the statutory requirements with respect to the exercise of appraisal rights before the vote on the approval and adoption of the merger agreement at the special meeting. SM&A stockholders with shares held in “street name” who desire appraisal rights with respect to those shares must take such actions as may be necessary to ensure that a timely and proper demand for appraisal is made by the record owners of the shares. Shares of SM&A common stock held through brokerage firms, banks and other financial institutions are frequently deposited with and held of record in the name of a nominee of a central security depositary. Any SM&A stockholder desiring appraisal rights with respect to such stockholder’s shares held through a brokerage firm, bank or other financial institution is responsible for ensuring that the demand for appraisal is made by the record holder and should instruct such firm, bank or institution that the demand for appraisal must be made by the record holder of the shares, which might be the nominee of a central security depositary if the shares of SM&A common stock have been so deposited.

 

As required by Section 262, a demand for appraisal must be in writing and must reasonably inform SM&A of the identity of the record holder (which might be a nominee as described above) and of such holder’s intention to seek appraisal of such shares.

 

SM&A stockholders of record who elect to demand appraisal of their shares must mail or deliver their written demand to: SM&A, 4695 MacArthur Court, 8th Floor, Newport Beach, California 92660, Attention: Corporate Secretary. The written demand for appraisal should specify the SM&A stockholder’s name and mailing address, the number of shares owned, and that the stockholder is demanding appraisal of such stockholder’s shares. The written demand must be received by SM&A prior to the special meeting. Neither voting (in person or by proxy) against, abstaining from voting on or failing to vote on the proposal to approve and adopt the merger agreement will alone suffice to constitute a written demand for appraisal within the meaning of Section 262.

 

In addition, SM&A stockholders exercising appraisal rights must not vote their shares of SM&A common stock in favor of approval and adoption of the merger agreement. Because a proxy that does not contain voting instructions will, unless revoked, be voted in favor of approval and adoption of the merger agreement, a SM&A stockholder who votes by proxy and who wishes to exercise appraisal rights must vote against the approval and adoption of the merger agreement or abstain from voting on the approval and adoption of the merger agreement.

 

Within 120 days after the effective time of the merger, either the surviving corporation or any SM&A stockholder who has timely and properly demanded appraisal of such stockholder’s shares and who has complied with the required conditions of Section 262 and is otherwise entitled to appraisal rights may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of SM&A common stock of all SM&A stockholders who have properly demanded appraisal. If a petition for an appraisal is timely filed, after a hearing on such petition, the Delaware Court of Chancery will determine which SM&A stockholders are entitled to appraisal rights and thereafter will appraise the shares owned by those stockholders, determining the fair value of the shares of SM&A common stock exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be the fair value. In determining fair value, the Delaware Court of Chancery is to take into account all relevant factors. In Weinberger v. UOP, Inc., et al., the Delaware Supreme Court discussed the considerations that could be considered

in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered and that “[f]air price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court stated that in making this determination of fair value the court must consider “market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of merger which throw any light on future prospects of the merged corporation.” The Delaware Supreme Court construed Section 262 to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.” However, the Delaware Supreme Court noted that Section 262 provides that fair value is to be determined “exclusive of any element of value arising from the accomplishment or expectation of the merger.”

 

SM&A stockholders considering seeking appraisal should bear in mind that the fair value of their shares of SM&A common stock determined under Section 262 could be more than, the same as or less than the merger consideration they are entitled to receive pursuant to the merger agreement if they do not seek appraisal of their shares, and that opinions of investment banking firms as to the fairness from a financial point of view of the consideration payable in a merger are not opinions as to, and do not in any way address, fair value under Section 262.

 

The cost of the appraisal proceeding may be determined by the Delaware Court of Chancery and taxed upon the parties as the Delaware Court of Chancery deems equitable in the circumstances. Upon application by an SM&A stockholder seeking appraisal rights, the Delaware Court of Chancery may order that all or a portion of the expenses incurred by such stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all shares of SM&A common stock entitled to appraisal. In the absence of such a determination, each party bears its own expenses.

 

Except as explained in the last sentence of this paragraph, at any time within sixty (60) days after the effective time of the merger, any SM&A stockholder who has demanded appraisal shall have the right to withdraw such stockholder’s demand for appraisal and to accept the merger consideration. After this sixty (60) day period, the SM&A stockholder may withdraw such stockholder’s demand for appraisal only with the consent of the surviving corporation. If no petition for appraisal is filed with the Delaware Court of Chancery within 120 days after the effective time of the merger, SM&A stockholders’ rights to appraisal shall cease and all SM&A stockholders shall be entitled only to receive the merger consideration. Inasmuch as the parties to the merger agreement have no obligation to file such a petition, and have no present intention to do so, any SM&A stockholder who desires that such petition be filed is advised to file it on a timely basis. No petition timely filed in the Delaware Court of Chancery demanding appraisal shall be dismissed as to any SM&A stockholders without the approval of the Delaware Court of Chancery, and that approval may be conditioned upon such terms as the Delaware Court of Chancery deems just.

 

If the merger is completed, our common stock will no longer be traded on The NASDAQ Stock Market and will be deregistered under the Exchange Act.

 

If the merger is not approved by our stockholders or if the merger is not completed for any other reason, our stockholders would not receive any merger consideration for their shares of our common stock. Instead, SM&A would remain an independent public company, its common stock would continue to be listed and traded on The Nasdaq Stock Market and our stockholders would continue to be subject to the same risks and opportunities as they currently are with respect to their ownership of our common stock. If the merger is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value of SM&A’s shares, including the risk that the market price of our common stock may decline to the extent that the current market price of that stock reflects a market assumption that the merger will be completed. From time to time, our board of directors would evaluate and review our business operations, properties, dividend policy and capitalization, and, among other

things, make such changes as are deemed appropriate. In addition, our board of directors might seek to identify strategic alternatives to maximize stockholder value. If the merger is not approved by our stockholders or if the merger is not consummated for any other reason, we cannot guarantee that any other transaction acceptable to SM&A would be offered or that our business, prospects or results of operations would not be adversely impacted. Additionally, the merger agreement requires that we pay Parent specified termination and/or expense reimbursement fees in certain circumstances if we or Parent terminate the merger agreement and that Parent pay us a specified termination fee if the merger agreement is terminated under certain other circumstances. See “The Merger Agreement — Effect of Termination; Termination Fees; Limited Guaranty.”

 

General.  The following discussion summarizes the material U.S. federal income tax consequences of the merger that are generally applicable to beneficial holders of our common stock upon an exchange of their shares of our common stock for cash in the merger. This summary is based upon current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), existing Treasury Regulations and current administrative rulings and court decisions, all of which are subject to change. Any change, which may be retroactive, could materially alter the tax consequences described in this proxy statement. This discussion assumes that you hold your shares of our common stock as capital assets for investment.

 

This summary does not discuss all of the U.S. federal income tax considerations that may be relevant to a particular stockholder in light of his or her individual circumstances or to stockholders subject to special treatment under the U.S. federal income tax laws, including, without limitation:

 

 

The tax treatment of a partnership and each partner thereof will generally depend on the status and activities of the partnership and such partner. Accordingly, partnerships and other pass-through entities, and persons holding shares through such entities, should consult with their own tax advisors regarding the consequences of a disposition of shares pursuant to the merger.

This summary does not address the tax consequences of the merger under state, local and foreign laws or under U.S. federal tax law other than U.S. federal income tax law. In addition, the following discussion does not address the tax consequences of transactions effectuated before, after, or at the same time as the merger, whether or not they are in connection with the merger, including, without limitation, the exercise or cancellation of options, restricted stock units or similar rights to purchase stock.

 

WE STRONGLY URGE YOU TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS, IN VIEW OF YOUR PARTICULAR CIRCUMSTANCES.

 

U.S. Holders.  As used in this proxy statement, a “U.S. holder” means a beneficial holder of our common stock who is for U.S. federal income tax purposes:

 

 

Consequences of the merger to U.S. holders.  The receipt of cash by a U.S. holder in exchange for shares of our common stock in the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount of cash received (determined before reduction for any applicable withholding taxes) and the U.S. holder’s adjusted tax basis in the shares of our common stock exchanged in the merger. Gain or loss will be calculated separately for each block of shares exchanged in the merger, with each block of shares consisting of shares acquired at the same cost in a single transaction. Such gain or loss will be long-term capital gain or loss (and thus eligible for reduced rates of taxation for noncorporate U.S. holders) if the U.S. holder held such shares for more than one year as of the effective time of the merger. Certain limitations apply to the deductibility of capital losses by U.S. holders.

 

Backup withholding.  A U.S. holder may be subject to federal income tax backup withholding at the rate of 28% with respect to a payment of cash in the merger unless the U.S. holder:

 

 

To prevent backup withholding and possible penalties, you should complete and sign the substitute Form W-9 included in the letter of transmittal, which will be sent to you if the merger is completed. Amounts withheld under the backup withholding taxes rules are not additional taxes, and any amount withheld under these rules may be credited against the U.S. holder’s U.S. federal income tax liability, provided such U.S. holder furnishes the required information to the IRS in a timely manner.

 

Non-U.S. Holders.  As used in this proxy statement, a “Non-U.S. holder” means a beneficial holder of our common stock (other than an entity that is treated as a partnership or other pass-through entity for U.S. federal income tax purposes) that is not a “U.S. holder” as defined above.

Consequences of the merger to Non-U.S. holders.  A Non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized on the receipt of cash in exchange for shares of our common stock in the merger unless:

 

 

Backup withholding.  Non-U.S. holders may be subject to federal income tax backup withholding at a rate of 28% with respect to a payment of cash in the merger unless the Non-U.S. holder certifies under penalties of perjury that it is not a U.S. person under the Code (and the payor does not have actual knowledge or reason to know otherwise), usually on an applicable IRS Form W-8 BEN (or other applicable IRS Form W-8), or such holder otherwise establishes an exemption. Amounts withheld under the backup withholding tax rules are not additional taxes, and any amount withheld under these rules may be credited against a Non-U.S. holder’s U.S. federal income tax liability, if any, provided that such Non-U.S. holder furnishes the required information to the IRS in a timely manner.

 

The following summary of the material terms of the merger agreement is qualified in its entirety by reference to the complete text of the merger agreement, which is incorporated by reference in this proxy statement and attached to this proxy statement as Annex A. The merger agreement has been included to provide you with information regarding its terms. It is not intended to provide you with any other factual information about SM&A, Parent, or Merger Sub. Such information can be found elsewhere in this proxy statement and in other public filings made by SM&A and Parent, if any, with the SEC, which are available without charge at www.sec.gov or as more fully described in the section titled “Where You Can Find More Information.” Our stockholders are urged to read the merger agreement in its entirety.

 

Under the terms of the merger agreement, Merger Sub will merge with and into SM&A, with SM&A surviving the merger. Following completion of the merger, SM&A will be a wholly-owned subsidiary of Parent.

 

Unless otherwise mutually agreed in writing by SM&A and Parent, the closing of the merger will take place on the first business day following the day on which the last to be satisfied or waived of the closing conditions set forth in the merger agreement (other than those conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions) are satisfied or waived in accordance with the merger agreement. The merger will become effective upon the filing and acceptance of a certificate of merger with the Secretary of State of the State of Delaware, or at such later time as Parent and SM&A shall agree and shall specify in such certificate of merger. We are working with Parent to complete the merger as soon as practicable and are targeting completion of the merger near the end of 2008. However, we cannot be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

 

At the effective time of the merger, except as otherwise provided in the merger agreement, each share of our common stock issued and outstanding prior to the effective time of the merger (other than (i) dissenting shares, as described below, (ii) shares directly or indirectly owned by Parent, Merger Sub or any of their direct or indirect wholly owned subsidiaries, and (iii) any shares owned or held in treasury by SM&A or any of our direct or indirect wholly owned subsidiaries), will be automatically converted into and thereafter represent the right to receive $6.25 in cash, without interest, subject to deduction for any required withholding of tax, and will be automatically cancelled and cease to exist. The per share merger consideration will be equitably adjusted in the event of any stock split, reverse stock split, stock dividend, reorganization, reclassification, combination, recapitalization or other like change with respect to our common stock that occurs prior to the effective time of the merger.

 

Options

 

As of the record date, options to purchase 2,644,776 shares of common stock of SM&A were issued and outstanding. At the effective time of the merger, each outstanding option to purchase common stock, all of which were granted under our 2007 Equity Incentive Plan or Second Amended and Restated Equity Incentive Plan, (except for stock options which may be assumed by Parent in connection with the merger and remain outstanding thereafter, as discussed below) will become fully vested and be cancelled in exchange for the right to receive, as soon as reasonably practicable after the effective time of the merger (and in any event within 3 business days after the effective time), an amount in cash equal to the product of (A) the total number of shares subject to the option immediately prior to the effective time, multiplied by (B) the excess, if any, of $6.25 over the exercise price per share of the applicable option, less any applicable withholding taxes.

 

Certain outstanding options to purchase common stock of SM&A may be assumed by Parent in connection with the merger and remain outstanding after the effective time of the merger. Prior to the fifth business day

preceding the closing, Parent and SM&A will mutually agree as to which options, if any, will be assumed by Parent in connection with the merger. If any such options are assumed, at the effective time of the merger, each assumed option will be converted into an option to acquire, on substantially similar terms and conditions applicable to the assumed option immediately prior to the effective time of the merger (except for the adjustments provided herein), the number of shares of common stock, rounded down to the nearest whole share, of Parent that is equal to the product, rounded down to the nearest whole share, of (i) the number of shares of SM&A common stock subject to the assumed option immediately prior to the effective time of the merger multiplied by (ii) an option exchange ratio (as described below), at an exercise price per share of Parent common stock equal to the quotient, rounded down to the nearest whole cent, of (x) the exercise price per share of SM&A common stock applicable under such assumed option immediately prior to the effective time of the merger divided by (y) the option exchange ratio; provided, however, that the foregoing adjustments will comply with Sections 424(a) and 409A of the Code and the rules and regulations promulgated thereunder. The “option exchange ratio” applicable to the assumed options will be a fraction, the numerator of which is $6.25 and the denominator of which is the per share fair market value of Parent common stock as of immediately following the effective time of the merger (as determined in good faith by Parent).

 

Restricted Stock Units

 

At the effective time of the merger, each outstanding SM&A restricted stock unit will become fully vested and be cancelled in exchange for the right to receive, as soon as reasonably practicable after the effective time of the merger (but in any event no later than three business days after the effective time), an amount in cash equal to the product of (A) the total number of shares of SM&A common stock subject to such SM&A restricted stock unit immediately prior to the effective time of the merger, multiplied by (B) $6.25, less any applicable withholding taxes.

 

We have agreed that, at or prior to the effective time of the merger, our board of directors and our compensation committee, as applicable, will adopt resolutions and take all other actions reasonably required to implement the foregoing treatment of our outstanding equity awards and to ensure that (i) our Amended and Restated Employee Stock Purchase Plan will terminate and (ii) no holder of any options to purchase common stock of SM&A or any restricted stock units or any participant in any of our equity incentive plans or other employee benefit arrangement of SM&A will have any rights to acquire, or other rights in respect of, the capital stock of SM&A, the surviving corporation or any of their subsidiaries following the effective time of the merger, except as specifically contemplated by the merger agreement.

 

At the effective time of the merger, Parent and/or Merger Sub will deposit with a paying agent cash in an amount necessary for the paying agent to make all required payments of the merger consideration to our stockholders, option holders and holders of restricted stock units pursuant to the terms of the merger agreement. Promptly after the effective time of the merger, Parent is required to cause the paying agent to mail to each holder of record of our common stock that was issued and outstanding immediately prior to the effective time of the merger a letter of transmittal in customary form and instructions for use in effecting the surrender of certificates or book-entry shares in exchange for the merger consideration payable. Until surrendered, each stock certificate or book-entry share will be deemed to represent only the right to receive, upon its surrender, the merger consideration into which the shares of our common stock previously represented by such certificate have been converted. No interest will be paid or will accrue on the cash payable upon the surrender of any certificate or book-entry shares. Any portion of the exchange fund deposited with the paying agent that remains unclaimed by our security holders for 180 days after the effective time of the merger will be delivered to the surviving corporation, and thereafter security holders will only be able to look to the surviving corporation for the payment of any applicable merger consideration they may be due in connection with the merger.

 

Notwithstanding anything in the merger agreement to the contrary, shares issued and outstanding immediately prior to the effective time of the merger that are held by any holder who has not voted in favor of the merger and who is entitled to demand and properly demands, exercises, and perfects his or her demand for appraisal of such shares pursuant to Section 262 of the DGCL will not be converted into the right to receive the merger consideration, but

instead shall be converted into the right to receive payment from the surviving corporation with respect to such dissenting shares in accordance with the DGCL, unless and until such holder shall have effectively withdrawn or lost such holder’s right to appraisal under the DGCL. Shares subject to a demand for appraisal will be treated in accordance with Section 262 of the DGCL and will be entitled to receive such consideration thereunder. If any such holder fails to perfect or effectively withdraws or loses any such right to appraisal, each such holder’s shares will be converted into and become exchangeable only for the right to receive the merger consideration.

 

The merger agreement contains representations and warranties of SM&A, Parent and Merger Sub customary for agreements of this nature with regard to their respective businesses, financial condition and other facts pertinent to the merger. The representations made by SM&A relate to the following:

 

 

 

In the merger agreement, Parent and Merger Sub made representations and warranties to SM&A relating to the following:

 

 

The assertions embodied in our representations and warranties contained in the merger agreement, including those identified above, are qualified by information contained in a confidential disclosure schedule that we provided to Parent in connection with the signing of the merger agreement. The disclosure schedule contains information that modifies, qualifies and creates exceptions to the representations and warranties of SM&A contained in the merger agreement, including certain nonpublic information. Accordingly, you should not rely on our representations and warranties as characterizations of the actual state of facts, since they are modified in part by the underlying disclosure schedule. Moreover, information concerning the subject matter of our representations and warranties may have changed since the date of the merger agreement and the representations and warranties will not reflect any such subsequent changes in facts.

 

Several of the representations and warranties made by SM&A in the merger agreement and certain conditions to Parent’s and Merger Sub’s performance of their respective obligations under the merger agreement, as well as certain other provisions of the merger agreement, are qualified by reference to whether the item in question would have a “Company Material Adverse Effect” on SM&A.

 

The merger agreement provides that a “Company Material Adverse Effect” means an event, change, effect, development, condition or occurrence that materially impairs the ability of SM&A to perform its obligations under the merger agreement or to consummate the transactions contemplated thereby, or is materially adverse to the business, assets, liabilities, financial condition or results of operations of SM&A and its subsidiaries taken as a whole; provided that no event, change, effect, development, condition or occurrence, to the extent resulting from any of the following events, changes, effects, developments, conditions or occurrences, will constitute or be taken into account in determining whether there has been or would reasonably be expected to be a Company Material Adverse Effect except, in the cases of clauses items (A) and (C) below, to the extent that any such event, change,

effect, development, condition or occurrence has a disproportionately adverse effect on SM&A or any of its subsidiaries as compared to businesses generally:

 

(A) changes in the economy or financial markets, or in the political environment, generally in the United States or other countries in which SM&A or any of its subsidiaries conduct operations;

 

(B) the performance by SM&A of its obligations under the merger agreement;

 

(C) changes in GAAP or any interpretation thereof after the date of the merger agreement;

 

(D) any failure by SM&A to meet any estimates of revenues or earnings for any period; and

 

(E) a decline in the price or trading volume of SM&A’s common stock on The NASDAQ Stock Market.

 

In the case of (D) and (E) above, however, the facts or occurrences giving rise to or contributing to such change that are not otherwise excluded from the definition of “Company Material Adverse Effect” may be taken into account in determining whether there has been a Company Material Adverse Effect.

 

We have agreed with Parent that, after the date of the merger agreement and prior to the effective time of the merger (unless Parent shall otherwise approve in writing, which approval is not to be unreasonably withheld, conditioned or delayed, and except as otherwise expressly required or permitted under the merger agreement) and except as required by applicable law, the business of SM&A and its subsidiaries will be conducted in the ordinary and usual course consistent with past practice and we will use reasonable efforts to preserve intact our business organization, preserve our assets, rights and properties in good repair and condition, keep available the services of our current officers, employees and consultants and preserve our goodwill and our relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with us. Without limiting the generality of the foregoing, from the date of the merger agreement until the effective time of the merger, except (i) as Parent may approve in writing, which approval is not to be unreasonably withheld; (ii) as is expressly required or permitted by the merger agreement; (iii) as is required by applicable law or by any governmental entity, or (iv) as disclosed in writing to Parent in connection with our execution of the merger agreement, we will not and will not permit our subsidiaries to, undertake certain actions prohibited by the terms of the merger agreement, including:

 

 

 

Pursuant to the terms of the merger agreement, Parent has agreed to use its commercially reasonable efforts to take, or cause Merger Sub to take, all actions reasonably necessary, proper or advisable to arrange, and consummate in a timely manner, the equity and debt financing related to the merger on the terms and conditions described in the financing commitments Parent received prior to its execution of the merger agreement, including using commercially reasonable efforts to (i) maintain in effect the financing commitments it received, subject to limited replacement and amendment rights, (ii) satisfy on a timely basis all conditions applicable to Parent and Merger Sub to obtaining the financing set forth in the financing commitments that are within their control, (iii) enter into definitive agreements with respect thereto on the terms and conditions contemplated by the financing commitments or on other terms acceptable to Parent that would not adversely impact in any material respect the ability of Parent or Merger Sub to consummate the transactions contemplated by the merger agreement, and (iv) consummate the debt and equity financing at or prior to the closing date, but in no event later than the April 30, 2009 outside date (including using commercially reasonable efforts to cause the lenders and other parties providing the financing to provide such financing). Parent further agreed to not, and to cause Merger Sub not to, without the prior written consent of SM&A, amend, modify or supplement (including in the definitive documents) (x) any of the conditions or contingencies to funding contained in the financing commitments, or (y) any other provision of the financing commitments, in either case to the extent it could reasonably be expected to materially adversely affect the ability of Parent or Merger Sub to timely consummate the transactions contemplated by the merger agreement. In the event that any portion of the financing contemplated by the financing commitments becomes unavailable other than due to the breach of representations and warranties or covenants of SM&A or a failure of a condition to be satisfied by SM&A after providing notice to SM&A and a reasonable opportunity to cure, Parent and Merger Sub will notify SM&A and use their commercially reasonable efforts to arrange alternative financing from the same or other sources on terms not less beneficial to Parent and Merger Sub (as determined in the reasonable judgment of Parent), and in an amount sufficient to timely consummate the transactions contemplated by the merger agreement on the terms and conditions set forth therein. In the event all conditions applicable to the financing commitments (other than in connection with the debt financing, the availability or funding of the equity financing) have been satisfied, Parent and Merger Sub have agreed to use their commercially reasonable efforts to cause the lenders and the other parties providing the financing to fund the financing required to consummate the merger on the closing date. Parent and Merger Sub have agreed to use their commercially reasonable efforts to satisfy on or before the closing all requirements of the definitive agreements pursuant to which the financing will be obtained, and to keep SM&A informed on a reasonably current basis in reasonable detail of the status of the financing.

 

SM&A has agreed to, prior to the closing, provide to Parent and Merger Sub, and to cause its subsidiaries to, and to use commercially reasonable efforts to cause the respective officers, employees and advisors, including legal and accounting, of SM&A and its subsidiaries to, provide to Parent and Merger Sub all cooperation reasonably requested by Parent that is necessary, proper or advisable in connection with the financing or any alternative financing. Parent has agreed to, promptly upon request by SM&A, reimburse SM&A for all out-of-pocket accounting costs incurred by SM&A or its subsidiaries in connection with that cooperation.

 

Go-Shop

 

Notwithstanding any other provision of the merger agreement to the contrary, during the period beginning on the date of the merger agreement and continuing until 11:59 p.m. (Los Angeles time) on December 15, 2008 (which we refer to as the “Solicitation Period End-Date”), SM&A and its directors, officers, employees, affiliates, investment bankers, attorneys, accountants and other advisors or representatives (collectively, “Representatives”) have the right to directly or indirectly: (i) initiate, solicit and encourage Acquisition Proposals (as defined in the merger agreement, see “The Merger Agreement — Definitions of Acquisition Proposal and Superior Proposal” below), including by way of providing access to non-public information pursuant to one or more acceptable confidentiality agreements, provided that SM&A must promptly provide to Parent any material non-public information relating to SM&A or its subsidiaries that is provided to any third party given such access which was not previously made available to Parent; and (ii) enter into and maintain discussions or negotiations with

respect to potential Acquisition Proposals or otherwise cooperate with or assist or participate in, or facilitate, any such inquiries, proposals, discussions or negotiations.

 

Non-Solicitation

 

Subject to certain limitations and except with respect to any third party who made an Acquisition Proposal received by SM&A on or prior to the Solicitation Period End-Date with respect to which specified requirements of the merger agreement have been satisfied as of the Solicitation Period End-Date and continuously thereafter (any third party so submitting such Acquisition Proposal being referred to herein as an “Excluded Party”), from the Solicitation Period End-Date until the effective time of the merger or, if earlier, the termination of the merger agreement in accordance with its terms, SM&A cannot, and must cause its subsidiaries and must exercise its reasonable best efforts to cause its representatives not to, directly or indirectly: (i) initiate or solicit or knowingly encourage or facilitate (including by way of providing non-public information) the submission of any inquiries, proposals or offers that constitute or may reasonably be expected to lead to, any Acquisition Proposal, (ii) enter into, continue or otherwise engage in any discussions or negotiations with respect thereto or otherwise knowingly cooperate with or knowingly assist or participate in, or knowingly facilitate or knowingly encourage any such inquiries, proposals, discussions or negotiations, or (iii) approve or recommend, or publicly propose to approve or recommend, an Acquisition Proposal or enter into any merger agreement, letter of intent, agreement in principle, share purchase agreement, asset purchase agreement or share exchange agreement, option agreement or other similar agreement relating to an Acquisition Proposal or enter into any agreement or agreement in principle requiring SM&A to abandon, terminate or fail to consummate the transactions contemplated by the merger agreement or breach its obligations thereunder or propose or agree to do any of the foregoing. Except with respect to any Acquisition Proposal received on or prior to the Solicitation Period End-Date with respect to which specified requirements of the merger agreement have been satisfied as of the Solicitation Period End-Date and continuously thereafter, as determined, with respect to any Excluded Party, by SM&A’s board of directors no later than the later of (A) the Solicitation Period End-Date and (B) only if such Acquisition Proposal is received less than two (2) business days prior to the Solicitation Period End-Date, the second business day following the date on which SM&A received such Excluded Party’s Acquisition Proposal, SM&A must immediately cease, and must cause its subsidiaries and must exercise its reasonable best efforts to cause its representatives to terminate, any solicitation, knowing encouragement, discussion or negotiation or knowing cooperation with or knowing assistance or participation in, or knowing facilitation or knowing encouragement of, any such inquiries, proposals, discussions or negotiations with any parties conducted theretofore by SM&A, its subsidiaries or any of its representatives with respect to any Acquisition Proposal, and must request to be returned or destroyed all non-public information provided by or on behalf of SM&A or any of its subsidiaries to such third party. An Excluded Party will cease to be an Excluded Party for all purposes under the merger agreement with respect to any Acquisition Proposal immediately at such time as such Acquisition Proposal made by such third party is withdrawn, terminated or fails in the determination by SM&A’s board of directors to satisfy specified requirements of the merger agreement.

 

Certain Exceptions

 

If at any time following the date of the merger agreement and prior to obtaining the required approval of the agreement of merger by SM&A’s stockholders (i) SM&A has received a written Acquisition Proposal from a third party that SM&A’s board of directors believes in good faith to be bona fide, (ii) such Acquisition Proposal did not occur as a result of a breach of SM&A’s non-solicitation obligations contained in the merger agreement, (iii) SM&A’s board of directors determines in good faith, after consultation with its financial advisors and outside counsel, that such Acquisition Proposal constitutes or may reasonably be expected to lead to a Superior Proposal (as defined in the merger agreement, see “The Merger Agreement — Definitions of Acquisition Proposal and Superior Proposal” below) and (iv) after consultation with its outside counsel, SM&A’s board of directors determines in good faith that the failure to take such actions or any of the actions described in the following clauses (A) and (B) would be inconsistent with its fiduciary duties to SM&A’s stockholders under applicable law, then SM&A may (A) furnish information (including non-public information) with respect to SM&A and its subsidiaries to the third party making such Acquisition Proposal and (B) participate in discussions or negotiations with the third party making such Acquisition Proposal regarding the Acquisition Proposal; provided that SM&A (x) must not, and must not allow its subsidiaries to, and has agreed to use reasonable best efforts to cause its representatives not to, disclose any non-

public information to such third party without first entering or having entered into an acceptable confidentiality agreement and (y) will promptly provide to Parent any material non-public information concerning SM&A or its subsidiaries provided to such third party which was not previously made available to Parent. Subject to specified limitations, prior to obtaining the requisite vote of its stockholders with respect to the merger agreement, SM&A is permitted to take the actions described in clauses (A) and (B) above with respect to any Excluded Party.

 

Notice to Parent

 

SM&A has agreed, within two business days following the Solicitation Period End-Date, to notify Parent in writing of the identity of each Excluded Party, if any, and provide Parent a copy of the Acquisition Proposal received from such Excluded Party (or a summary of its material terms if no copy is available). From and after the Solicitation Period End-Date, in the event that SM&A or any of its subsidiaries or representatives receives any of the following, SM&A has agreed to promptly (but not more than one business day after such receipt) notify Parent in writing thereof: (i) any Acquisition Proposal or indication by any third party that it is considering making an Acquisition Proposal; (ii) any request (other than from an Excluded Party) for non-public information relating to SM&A or any of its subsidiaries other than requests for information in the ordinary course of business and unrelated to an Acquisition Proposal; or (iii) any inquiry or request for (other than from or by an Excluded Party) discussions or negotiations regarding any Acquisition Proposal. In addition, following the Solicitation Period End-Date, SM&A is obligated to keep Parent reasonably informed in all material respects on a timely basis (and in any event no later than one business day after the occurrence of any significant changes, developments, discussions or negotiations) of the status and details of any Acquisition Proposal, indication, inquiry or request (including the material terms and conditions thereof and of any material modification thereto), and any material developments, discussions and negotiations, including furnishing copies of any material written inquiries and correspondence. Without limiting the foregoing, SM&A has agreed to promptly (within one business day) notify Parent if it determines to provide non-public information or to engage in discussions or negotiations concerning an Acquisition Proposal pursuant to the merger agreement other than with an Excluded Party, in each case after the Solicitation Period End-Date. SM&A has agreed to not, and to cause its subsidiaries not to, enter into any confidentiality agreement with any third party subsequent to the date of the merger agreement that prohibits SM&A from providing such information to Parent. Subject to the terms of the merger agreement, SM&A has agreed to not, and to cause each of its subsidiaries not to, terminate, waive, amend or modify any provision of, or grant permission or request under, any standstill or confidentiality agreement to which it or any of its subsidiaries is a party, and SM&A will, and must cause its subsidiaries to, use reasonable best efforts to enforce the provisions of any such agreement; provided, however, that SM&A may permit a proposal to be made under a standstill or confidentiality agreement if it determines in good faith, after consultation with outside counsel, that its failure to do so would be inconsistent with the fiduciary duties of its board of directors to its stockholders under applicable law.

 

Accepting Superior Proposals; Parent Match Rights

 

Notwithstanding anything in the merger agreement to the contrary, if SM&A receives an Acquisition Proposal which its board of directors concludes in good faith, after consultation with outside counsel and its financial advisor, and taking into account adjustments to the terms of the merger agreement that may be offered by Parent, constitutes a Superior Proposal, SM&A’s board of directors may at any time prior to obtaining the requisite vote of SM&A’s stockholders with respect to the merger agreement, if it determines in good faith, after consultation with outside counsel, that the failure to take such action or any of the actions described in the following clauses (x), (y) and (z) would be inconsistent with its fiduciary duties to SM&A’s stockholders under applicable law, (x) withhold, withdraw, modify, qualify, or amend or propose publicly to withhold, withdraw, modify, qualify, or amend, in a manner adverse to Parent or Merger Sub, the board of director’s recommendation to stockholders as set forth in this proxy statement (which we refer to as a “Change of Company Recommendation”), (y) approve or recommend such Superior Proposal, and/or (z) terminate the merger agreement to enter into a definitive agreement with respect to such Superior Proposal. However, SM&A’s board of directors may not take the foregoing actions unless (A) such Superior Proposal did not result from a breach by SM&A of its non-solicitation obligations contained in the merger agreement; (B) SM&A provides prior written notice (containing information specified in the merger agreement) to Parent of its intention to take any action with respect to a Superior Proposal at least four business days in advance of taking such action, and contemporaneously provides a copy of the relevant proposed transaction agreements with

the party making such Superior Proposal and other material documents, and (C) during such four business day period, SM&A negotiates, and causes its financial and legal advisors to negotiate, with Parent in good faith (to the extent Parent seeks to negotiate) to make such adjustments to the terms and conditions of the merger agreement so that the applicable Superior Proposal ceases to constitute a Superior Proposal. SM&A has agreed not to withhold, withdraw, qualify, modify or amend the recommendation of its board of directors to its stockholders in a manner adverse to Parent and Merger Sub if, prior to the expiration of the applicable four business day period, Parent makes a proposal to adjust the terms and conditions of the merger agreement that SM&A’s board of the directors determines in good faith (after consultation with outside counsel and its financial advisor) causes such Superior Proposal to cease to constitute a Superior Proposal, after giving effect to, among other things, the payment of any applicable termination fee payable pursuant to the merger agreement.

 

Nothing contained in the merger agreement prohibits SM&A from (i) taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) and 14d-9 promulgated under the Exchange Act, or (ii) disclosing the fact that its board of directors has received an Acquisition Proposal and the terms of such proposal, if its board of directors determines, after consultation with its outside legal counsel, that the failure to take any such actions would be inconsistent with its fiduciary duties under applicable law or to comply with obligations under federal securities Laws or the rules and regulations of The NASDAQ Stock Market or any U.S. securities exchange upon which the capital stock of SM&A is listed; provided, however, that any such disclosure (other than a “stop, look and listen” communication or similar communication of the type contemplated by Section 14d-9(f) under the Exchange Act) will be deemed to be a Change of Company Recommendation for the purposes of the merger agreement unless SM&A’s board of directors expressly reaffirms its recommendation to its stockholders in favor of the adoption of the merger agreement and the merger at least two business days prior to the special stockholders meeting.

 

SM&A has agreed not to take any action to exempt any third party (other than Parent, Merger Sub and their respective affiliates) from the restrictions on “business combinations” contained in Section 203 of the DGCL (or any similar provision of any similar takeover statute) or otherwise cause such restrictions not to apply, or agree to do any of the foregoing, unless such actions are taken substantially concurrently with a permitted termination of the merger agreement in accordance with its terms.

 

No Change in Company Recommendation

 

Other than in accordance with the terms summarized in the section above or in this section, SM&A has agreed that its board of directors will not:

 

 

However, notwithstanding anything to the contrary contained in the merger agreement, prior to the receipt of the requisite approval of SM&A’s stockholders with respect to the merger, SM&A’s board of directors has the right to withhold, withdraw, qualify, modify or amend its recommendation in a manner adverse to Parent and Merger Sub if the board of directors determines in good faith, after consultation with its outside counsel and financial advisors, that the failure to take such action would be inconsistent with its fiduciary duties to SM&A’s stockholders under applicable law; provided that SM&A must have provided at least four business days’ prior written notice to Parent of its board of directors’ intention to take any such action.

 

As used in the merger agreement, “Acquisition Proposal” means any inquiry, offer or proposal, or any indication of interest in making an offer or proposal, made by a party or group at any time which is structured to permit such party or group to acquire beneficial ownership of at least 15% of the assets of, equity interest in, or businesses of, SM&A and its subsidiaries, taken as a whole, pursuant to a merger, consolidation or other business combination, sale of shares of capital stock, sale of assets, tender offer or exchange offer or similar transaction, including any single or multi-step transaction or series of related transactions, in each case other than the merger.

 

As used in the merger agreement, “Superior Proposal” means any bona fide Acquisition Proposal made in writing that is on terms that SM&A’s board of directors has determined in good faith (after consultation with SM&A’s outside counsel and financial advisor), taking into account all legal, financial, regulatory and other aspects of the proposal and third party making the proposal, including the financing terms thereof and the degree to which such financing is then committed, (A) are more favorable to SM&A’s stockholders from a financial point of view than the transactions contemplated by the merger agreement, and (B) is reasonably likely to be consummated (if accepted) on such terms on a timely basis; provided, that, for purposes of the definition of “Superior Proposal,” references in the term “Acquisition Proposal” to “15%” are deemed to be references to “75%.”

 

We have agreed, subject to applicable law and certain limitations, to (and to cause our subsidiaries to) afford Parent’s officers and other authorized representatives reasonable access, during normal business hours throughout the period prior to the effective time of the merger, to our officers and other senior employees, properties, books, contracts and records and, during such period, to furnish promptly to Parent all information concerning our business, properties and personnel as may reasonably be requested.

 

The merger agreement obligates SM&A and Parent to use reasonable best efforts to make appropriate filings under and take all reasonable steps as may be necessary to receive approval from, or to avoid an action or proceeding under, any antitrust law and to supply as promptly as reasonably practicable any additional information and documentary material that may be requested pursuant to the HSR Act, and to obtain all approvals, consents, registrations, licenses, permits, authorizations and other confirmations from any governmental entity or third party necessary, proper or advisable to consummate the transactions contemplated by the merger agreement and to preserve the benefits of any contracts or agreements to which we or any of our subsidiaries are a party after the consummation of the transactions contemplated by the merger agreement.

 

On November 21, 2008, SM&A and Parent filed HSR Act notification forms with the Department of Justice and the Federal Trade Commission. Early termination of the applicable waiting periods under the HSR Act was granted on December 2, 2008.

 

We are not aware of any other regulatory approvals or actions that are required for completion of the merger.

 

Parent has agreed that, during the period commencing at the effective time of the merger and ending on the first anniversary thereafter, the employees of SM&A and its subsidiaries as of the effective time will be provided with (i) base salary and bonus opportunities (excluding equity-based incentive opportunities) which are no less than the aggregate base salary and bonus opportunities provided to each employee immediately prior to the effective time, (ii) other employee benefits (excluding equity and equity-based benefits) that are no less favorable in the aggregate than those provided by SM&A and its subsidiaries immediately prior to the effective time and (iii) severance benefits that are no less favorable than those set forth in SM&A’s executive severance plan or any employment or severance agreement between SM&A and any employee or any severance policy of SM&A or its subsidiaries with respect to such employees in effect on the date of the merger agreement.

 

Parent has also agreed to cause any employee benefit plans of Parent or the surviving corporation which such employees are entitled to participate in from and after the effective time to take into account for purposes of

eligibility and vesting and benefit accrual thereunder, service by the employees with SM&A or any of its subsidiaries prior to the effective time as if such service were with Parent, to the same extent such service was credited under a comparable plan of SM&A or any of its subsidiaries prior to the effective time.

 

Parent has agreed that, subject to certain limitations, from and after the effective time of the merger, it will, and will cause the surviving corporation to, indemnify and hold harmless (and advance expenses as incurred) to the fullest extent permitted under applicable law and the applicable certificate of incorporation or bylaws (or similar governing documents) of SM&A and its subsidiaries, each present and former director (or person in a similar position) and officer of SM&A and its subsidiaries (which we collectively refer to as “indemnified parties”) against costs or expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages or liabilities (which we collectively refer to as “costs”) incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or related to such indemnified parties’ service as a director or officer of SM&A or its subsidiaries or services performed by such persons at the request thereof at or prior to the effective time, including the transactions contemplated by the merger agreement.

 

Prior to the Effective Time, SM&A has agreed to and, if SM&A is unable to, Parent has agreed to cause the surviving corporation to, obtain and maintain an extension of (i) the Side A coverage part (directors’ and officers’ liability) of SM&A’s existing directors’ and officers’ insurance policies, and (ii) SM&A’s fiduciary liability insurance policies, in each case for a claims reporting or discovery period of at least six years from and after the effective time of the merger, with terms, conditions, retentions and limits of liability that are at least as favorable as SM&A’s existing policies with respect to any actual or alleged error, misstatement, misleading statement, act, omission, neglect, breach of duty or any matter claimed against a director or officer of SM&A or any of its subsidiaries by reason of him or her serving in such capacity that existed or occurred at or prior to the effective time (including in connection with the merger agreement or the transactions or actions contemplated hereby). If SM&A and the surviving corporation for any reason fail to obtain such “tail” insurance policies as of the effective time of the merger, the surviving corporation will, and Parent has agreed to cause the surviving corporation to, continue to maintain in effect for a period of at least six years from and after the effective time the insurance SM&A had in place as of the date of the merger agreement with terms, conditions, retentions and limits of liability that are at least as favorable to SM&A’s directors and officers as provided in SM&A’s existing policies as of the date of the merger agreement, or the surviving corporation will, and Parent has agreed to cause the surviving corporation to, use reasonable best efforts to purchase comparable insurance for such six-year period with terms, conditions, retentions and limits of liability that are at least as favorable to SM&A’s directors and officers as provided in SM&A’s existing policies as of the date of the merger agreement. However, in no event will the surviving corporation be required to expend for such policies an annual premium amount in excess of 150% of the annual premiums currently paid by SM&A for such insurance, and if the annual premiums of the insurance coverage exceed such amount, the surviving corporation is required to obtain a policy with the greatest coverage available for a cost not exceeding such amount.

 

We have agreed to take all reasonable action necessary to convene the special meeting of our stockholders referred to in this proxy statement as promptly as practicable after this proxy statement is cleared by the SEC for mailing to our stockholders (but in any event within 22 business days after the date that this proxy statement is first mailed to stockholders, or later if necessary to accommodate any amendments of this proxy statement needed to be filed with the SEC after this proxy statement is first mailed) to consider and vote upon the approval of the merger agreement.

 

Conditions to Each Party’s Obligation to Effect the Merger

 

Each party’s obligation to effect the merger is subject to the satisfaction or waiver in writing at or prior to the effective time of each of the following conditions, each of which may be waived in whole or in part by the party to whose benefit they inure:

 

 

 

Conditions to Obligations of Parent and Merger Sub to Effect the Merger

 

The obligations of Parent and Merger Sub to effect the merger are also subject to the satisfaction or waiver in writing by Parent at or prior to the effective time of the following conditions, each of which may be waived in whole or in part by Parent:

 

 

Conditions to Obligation of SM&A to Effect the Merger

 

The obligation of SM&A to effect the merger is also subject to the satisfaction or waiver in writing by SM&A at or prior to the effective time of the merger of the following conditions, each of which may (to the extent permitted by applicable law) be waived in whole or in part by SM&A:

 

 

The merger agreement may be terminated and the merger may be abandoned at any time (notwithstanding approval of the merger agreement by our stockholders) prior to the effective time of the merger by:

 

(A) the mutual written consent of SM&A and Parent;

 

(B) either SM&A or Parent upon any legal restraint permanently restraining, enjoining, otherwise prohibiting, or imposing materially burdensome conditions on, consummation of the merger becoming final and non-appealable, subject to the terminating party having used its reasonable best efforts to oppose, or to have vacated, the legal restraint in accordance with its obligations under the merger agreement;

 

(C) either SM&A or Parent, if the merger is not consummated by April 30, 2009, provided that neither party may exercise its right to terminate the merger agreement if the terminating party is in material breach of the merger agreement at that time;

 

(D) either SM&A or Parent, if the special stockholders meeting (including any adjournments or postponements thereof) has been convened and a vote to approve the merger agreement has been taken thereat and the approval of the merger agreement by the required vote of our stockholders is not obtained;

 

(E) SM&A, if there has been any breach of any of the covenants or agreements or any of the representations or warranties set forth in the merger agreement on the part of Parent or Merger Sub, which breach, either individually or in the aggregate, would reasonably be expected to result in the failure of SM&A’s closing conditions set forth in the merger agreement to be satisfied and which is not cured by the earlier of (i) April 30, 2009 and (ii) 15 days following written notice to Parent from SM&A, or which by its nature or timing cannot be cured within that time period, provided, that we will not have the right to terminate the merger agreement under this provision if we are then in material breach of any of our covenants or agreements or representations and warranties contained in the merger agreement;

 

(F) Parent, if there has been a breach of any of the covenants or agreements or any of the representations or warranties set forth in the merger agreement on the part of SM&A, which breach, either individually or in the aggregate, would reasonably be expected to result in the failure of Parent’s closing conditions set forth in the merger agreement to be satisfied and which is not cured by the earlier of (i) April 30, 2009 and (ii) 15 days following written notice to SM&A from Parent, or which by its nature or timing cannot be cured within such time period, provided that Parent will not have the right to terminate the merger agreement under this provision

if Parent or Merger Sub is then in material breach of any of its covenants or agreements or representations and warranties contained in the merger agreement;

 

(G) Parent, if (i) our board of directors changes or is deemed to have changed its recommendation to our stockholders regarding the merger agreement, (ii) our board of directors withholds, withdraws, qualifies, modifies or amends its recommendation to our stockholders regarding the merger agreement in a manner adverse to Parent or Merger Sub, (iii) our board of directors (or any committee thereof) approves, adopts or recommends, or enters into or allows SM&A or any of our subsidiaries to enter into, a letter of intent, agreement in principle or definitive agreement for, any Superior Proposal or Acquisition Proposal, (iv) our board of directors fails publicly to reaffirm its recommendation of the merger within 10 business days after the date any Acquisition Proposal or any material modification thereto is first published or sent or given to our stockholders (with the understanding being that taking no position with respect to the acceptance of an Acquisition Proposal or modification thereto will constitute a failure to reject the Acquisition Proposal), or (v) we breach specified obligations under the merger agreement (generally relating to non-solicitation, our board of directors’ recommendation and the special meeting) in any manner that adversely affects Parent or Merger Sub;

 

(H) SM&A, at any time prior to receipt of our stockholders’ approval of the merger agreement, in accordance with, and subject to the terms and conditions of, certain provisions of the merger agreement relating to our entry into a competing transaction that constitutes a Superior Proposal, provided that we must simultaneously with such termination enter into a definitive agreement relating to the Superior Proposal;

 

(I) SM&A, if (i) all of the conditions to the obligations of Parent and Merger Sub to consummate the merger (other than the condition relating to the debt financing) have been satisfied or waived, and (ii) Parent or Merger Sub fails for any reason to consummate the closing on the second business day following the day on which the last to be satisfied or waived of all of the closing conditions set forth in the merger agreement (other than conditions that by their nature are to be satisfied at the closing, but subject to the fulfillment or waiver of those conditions) are satisfied or waived in accordance with the merger agreement; or

 

(J) Parent, if (i) all of the conditions to the obligations of Parent and Merger Sub to consummate the merger (other than the applicable conditions relating to the debt financing, our cash position and indebtedness and our delivery of the required solvency certificate) have been satisfied or waived, and (ii) we fail for any reason to satisfy either the condition related to our cash position and indebtedness or the condition related to our delivery of the required solvency certificate after Parent has requested that such conditions be satisfied, provided that in the case of the condition related to our delivery of the required solvency certificate, Parent must furnish the confirmation contemplated by that condition, and provided further that Parent will not have the right to terminate the merger agreement as described in this paragraph if Parent or Merger Sub is then in material breach of any of its covenants or agreements or representations or warranties contained in the merger agreement.

 

The party desiring to terminate the merger agreement (other than as described under paragraph (A) above), must give written notice of termination to each other party in accordance with the terms of the merger agreement, specifying the provision or provisions pursuant to which the termination is effected.

 

Generally

 

With limited exceptions regarding specified covenants, including those regarding publicity and expenses, if the merger agreement is terminated in accordance with its terms it will, to the fullest extent permitted by applicable law, become void and of no force or effect without liability of any party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) in respect thereof. However,

 

(A) subject to the liability limitations set forth below, no party will be relieved from liability for any breach of the merger agreement that occurs prior to the date of termination;

(B) if (i) either Parent or SM&A terminates the merger agreement as described in paragraph (C) or (D) under “The Merger Agreement — Termination” above, (ii) an Acquisition Proposal (whether or not conditional) has been made directly to our stockholders, otherwise publicly disclosed or otherwise communicated to our senior management or board of directors, and not withdrawn, prior to the special stockholders meeting or the outside date, as applicable, and (iii) within 180 days after the date of such termination, we enter into, or submit to our stockholders for adoption, an agreement in respect of any Acquisition Proposal or a transaction in respect of an Acquisition Proposal is consummated (which, in each case, need not be the same Acquisition Proposal that had been made, publicly disclosed or communicated prior to the special stockholders meeting or the outside date, as applicable), within five business days after the consummation of that definitive agreement, we must pay the applicable “Termination Fee” (as defined below) (less the amount of any expenses of Parent previously paid pursuant to the terms of the merger agreement) to Parent;

 

(C) if (i) Parent terminates this the merger agreement as described in paragraphs (F) or (J) under “The Merger Agreement — Termination” above, (ii) an Acquisition Proposal (whether or not conditional) has been made directly to our stockholders, otherwise publicly disclosed or otherwise communicated to our senior management or board of directors, and (iii) within 12 months after the date of such termination, we enter into, or submit to our stockholders for adoption, an agreement in respect of any Acquisition Proposal or a transaction in respect of an Acquisition Proposal is consummated (which, in each case, need not be the same Acquisition Proposal that had been made, publicly disclosed or communicated prior to termination of the merger agreement), within five business days after the consummation of that definitive agreement, SM&A must pay the applicable Termination Fee to Parent;

 

(D) if Parent terminates the merger agreement (x) upon the occurrence of an event described in clauses (i) or (ii) of paragraph (G) under “The Merger Agreement — Termination” above and, prior to such occurrence an Acquisition Proposal (whether or not conditional) has been made directly to our stockholders, otherwise publicly disclosed or otherwise communicated to our senior management or our board of directors, and not withdrawn prior to such termination of the merger agreement or (y) upon the occurrence of an event described in clauses (iii), (iv) or (v) of paragraph (G) under “The Merger Agreement — Termination” above, within five business days after the date of such termination of the merger agreement, SM&A must pay the applicable Termination Fee to Parent;

 

(E) if SM&A terminates the merger agreement as described in paragraph (H) under “The Merger Agreement — Termination” above, at or prior to the time of such termination, SM&A must pay the applicable Termination Fee to Parent; and

 

(F) if SM&A terminates the merger agreement as described in paragraph (E) under “The Merger Agreement — Termination” above based on a breach by Parent or Merger Sub of covenants applicable to them, or as described in paragraph (I) under “The Merger Agreement — Termination” above, within five business days after the date of such termination, Parent must pay the Parent Termination Fee to SM&A. For purposes of the merger agreement, the “Parent Termination Fee” means $4,185,112.

 

For purposes of the provisions described above regarding the effect of termination of the merger agreement, the term “Acquisition Proposal” (including, for the purposes of paragraph (D) above, as such term is used in the definition of “Superior Proposal”) has the meaning described above under “The Merger Agreement — Definition of Acquisition Proposal and Superior Proposal,” except that the phrase “at least 15%” therein is deemed to state “more than 50%.”

 

For purposes of the merger agreement, “Termination Fee” means $4,185,112; provided that, if the merger agreement is terminated (i) by Parent as described in paragraph (G) under “The Merger Agreement — Termination” above in a circumstance in which the event giving rise to the right of termination is based on the submission of an Acquisition Proposal by an Excluded Party (and which is an Excluded Party as of the date of termination), or (ii) by SM&A as described in paragraph (H) under “The Merger Agreement — Termination” above in order to enter into an agreement with respect to an alternative acquisition with an Excluded Party (and which is an Excluded Party as of the date of termination), the term “Termination Fee” means an amount equal to the sum of $1,195,746 plus all reasonably documented expenses of Parent, which sum will not exceed $3,578,384 in the aggregate.

Limited Guaranty

 

Concurrently with the execution and delivery of the merger agreement by the parties thereto, Odyssey Investment Partners Fund III, LP executed and delivered to SM&A a limited guaranty with respect to Parent’s obligation to pay the Parent Termination Fee, if applicable, pursuant to the terms of the merger agreement.

 

Limitation of Liability

 

Notwithstanding anything in the merger agreement to the contrary:

 

 

In the event of a termination of the merger agreement in connection with which SM&A is entitled to receive the Termination Fee, SM&A’s right to receive payment of the Termination Fee from Parent, or from Odyssey Investment Partners Fund III, LP pursuant to its limited guaranty described above, will be the sole and exclusive remedy of SM&A and its affiliates against Parent, Merger Sub, Odyssey Investment Partners Fund III, LP and any of their respective former, current or future directors, officers, general or limited partners, stockholders, members, managers, controlling persons, affiliates, employees or agents (which we collectively refer to as the “Parent Parties”) for any loss or damage suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform hereunder or otherwise in connection with the merger agreement (which we refer to as the “Company Damages”), and upon payment of the Termination Fee, none of Parent, Merger Sub, Odyssey Investment Partners Fund III, LP or any of such other parties will have any further liability or obligation arising out of or relating to the merger agreement or the transactions contemplated thereby.

 

The maximum aggregate liability of Parent and Merger Sub for all Company Damages is limited to $4,185,112 (inclusive of the Termination Fee), the maximum liability of Odyssey Investment Partners Fund III, LP, directly or indirectly, is limited to its express obligations under its limited guaranty and in no event may SM&A or any of its affiliates seek any equitable remedies (including specific performance) or money damages (including consequential, indirect or punitive damages) of any kind in excess of $4,185,112, in each case against or from Parent, Merger Sub, Odyssey Investment Partners Fund III, LP or any of their respective affiliates or representatives. The parties have further agreed that recourse against Odyssey Investment Partners Fund III, LP under the limited guaranty is the sole and exclusive remedy of SM&A and its affiliates against Odyssey Investment Partners Fund III, LP and its affiliates and representatives in respect of any liabilities or obligations arising in connection with the merger agreement, including by piercing of the corporate veil or by a claim by or on behalf of Parent.

 

In the event of a termination of the merger agreement in connection with which Parent is entitled to receive the Termination Fee, Parent’s right to receive payment of the Termination Fee from SM&A will be the sole and exclusive remedy of the Parent Parties against SM&A, and any of its former, current or future directors, officers, stockholders, controlling persons, affiliates, employees or agents for any loss or damage suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform hereunder or otherwise in connection with the merger agreement, and upon payment of the Termination Fee, neither SM&A nor any of such other parties will have any further liability or obligation arising out of or relating to the merger agreement or the transactions contemplated thereby.

 

Prior to the closing date, we have agreed to cooperate with Parent and use reasonable best efforts to take, or cause to be taken, all actions, and do or cause to be done all things, reasonably necessary, proper or advisable on our

part under applicable laws and rules and policies of The NASDAQ Stock Market and the other exchanges on which our common stock is listed to enable the delisting by the surviving corporation of our shares of common stock from The NASDAQ Stock Market and the other exchanges on which our common stock is listed and the deregistration of such shares under the Exchange Act as promptly as practicable after the effective time of the merger. From and after the effective time of the merger, our common stock will no longer be publicly traded.

 

Except for the termination fee payable by either party under certain circumstances in a termination of the merger agreement, whether or not the merger is completed, Parent and SM&A are each responsible for all of their respective costs and expenses incurred in connection with the merger and the other transactions contemplated in the merger agreement. Parent will, or will cause either Merger Sub or the surviving corporation to, pay the fees of the payment agent in connection with the merger. Parent and Merger Sub have agreed to pay all transfer, documentary, sales, use, stamp, registration and other such taxes and fees incurred in connection with the merger. In the event of any dispute, claim or action arising out of, relating to or in connection with the merger agreement, or the merger or other transactions contemplated by the merger agreement, each party to the merger agreement will bear all attorney’s fees and expenses and other related costs incurred by it or on its behalf in connection therewith.

 

Except with respect to the indemnification and directors’ and officer’s insurance provisions discussed above, each party to the merger agreement has agreed that its respective representations, warranties and covenants set forth therein are solely for the benefit of the other parties thereto, and that the merger agreement is not intended to, and does not, confer upon any third party any rights or remedies thereunder.

 

Subject to applicable law, at any time prior to the effective time of the merger, the merger agreement may be amended or modified only by a written agreement duly executed and delivered by Parent and SM&A. However, after approval of the merger agreement and the merger by SM&A’s stockholders pursuant to the DGCL, no amendment may be made to the merger agreement which would have the effect of reducing the amount or changing the type of consideration into which the shares are converted into the right to receive upon consummation of the merger.

 

We are submitting a proposal for consideration at the special meeting to authorize the named proxies to approve any adjournments of the special meeting if there are not sufficient votes to approve and adopt the merger agreement at the time of the special meeting or any adjournment or postponement of that meeting. Even though a quorum may be present at the special meeting or any such adjournment or postponement, it is possible that we may not have received sufficient votes to approve and adopt the merger agreement by the time of the special meeting or such adjournment or postponement. In that event, we would need to adjourn the special meeting in order to solicit additional proxies. The adjournment proposal relates only to an adjournment of the special meeting for purposes of soliciting additional proxies to obtain the requisite stockholder approval to adopt the merger agreement. Any other adjournment of the special meeting (e.g., an adjournment required because of the absence of a quorum) would be voted upon pursuant to the discretionary authority granted by the proxy.

 

The proposal to approve one or more adjournments of the special meeting requires the affirmative vote of holders of a majority of the shares of our common stock present or represented at the special meeting in person or by proxy and entitled to vote on the proposal.

 

To allow the proxies that have been received by SM&A at the time of the special meeting to be voted for an adjournment, if determined necessary by SM&A, we are submitting a proposal to approve one or more adjournments, and only under those circumstances, to you for consideration. Our board recommends that you vote “FOR”

the adjournment proposal so that proxies may be used for that purpose, should SM&A determine it is necessary. Properly executed proxies will be voted “FOR” the adjournment proposal, unless otherwise indicated on the proxies. If the special meeting is adjourned for 30 days or less, we are not required to give notice of the time and place of the adjourned meeting unless our board fixes a new record date for the special meeting.

 

The adjournment proposal relates only to an adjournment of the special meeting occurring for purposes of soliciting additional proxies for approval and adoption of the merger agreement proposal in the event that there are insufficient votes to approve and adopt that proposal. Our board retains full authority to the extent set forth in our bylaws and Delaware law to adjourn the special meeting for any other purpose, or to postpone the special meeting before it is convened, without the consent of any of our stockholders.

 

Our common stock is currently quoted on The NASDAQ Stock Market under the symbol “WINS.” The following table shows, for the periods indicated, the range of high and low sale prices for our common stock as quoted on The NASDAQ Stock Market:

 

 

On October 30, 2008, the last full trading day prior to the public announcement of the proposed merger, our common stock closed at $2.41 per share as quoted on The NASDAQ Stock Market. On December 5, 2008, the last trading day prior to the date of this proxy statement, our common stock closed at $5.79 per share as quoted on The NASDAQ Stock Market.

 

We have never declared or paid cash dividends on our common stock. We do not anticipate paying dividends on our common stock in the foreseeable future. Following the merger, there will be no further market for our common stock.

 

Principal Holders

 

As of December 1, 2008, we had 18,450,860 shares of common stock outstanding. The only persons known by us, as of this date, to be beneficial owners of more than five percent of our common stock are noted below.

 

 

 

 

 

 

 

 

 

Current Named Executive Officers and Directors

 

The following table sets forth the shares of our common stock beneficially owned by our current named executive officers and directors as of December 1, 2008. All current named executive officers and directors as a group, consisting of twelve (12) persons, beneficially owned, 1,638,859 shares of our common stock, which amount represents 8.88% of the total outstanding shares of our common stock as of that date.

 

 

 

 

 

 

 

 

Former Named Executive Officers

 

The following table sets forth the shares of our common stock beneficially owned, to our knowledge, as of December 1, 2008, by our former named executive officers who served during 2007 but are no longer executive officers of our company. All former named executive officers as a group, consisting of six (6) persons, to our knowledge, beneficially owned 2,845,374 shares of our common stock, which represented 15.42% of the total outstanding shares of our common stock as of December 1, 2008.

 

 

 

 

 

 

 

If the merger is completed, we will have no public stockholders and no public participation in any of our future stockholder meetings. If the merger is not completed, you will continue to be entitled to attend and participate in our stockholder meetings so long as you are a beneficial owner of our common stock, and we will hold a 2009 Annual Meeting of Stockholders.

 

If we hold a 2009 Annual Meeting of Stockholders, stockholders are advised (as previously indicated in our proxy statement for our 2008 Annual Meeting of Stockholders) that any stockholder proposals and director nominations intended for consideration at the 2009 Annual Meeting of Stockholders and for consideration for inclusion in the proxy materials for that meeting, must be received by SM&A no later than December 19, 2008, and must be in accordance with the requirements of our bylaws. Stockholders submitting proposals must direct them to our Corporate Secretary. It is recommended that stockholders utilize certified mail, return-receipt requested, in order to ensure timely delivery, at: Corporate Secretary, SM&A, 4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660.

 

Our board of directors currently knows of no other business that will be presented for consideration at the special meeting. Nevertheless, should any business other than that set forth in the notice of special meeting of stockholders properly come before the special meeting, the enclosed proxy confers discretionary authority to vote with respect to such matters, including matters that our board of directors does not know, a reasonable time before proxy solicitation, are to be presented at the special meeting. If any of these matters are presented at the special meeting, then the proxy agents named in the enclosed proxy card will vote in accordance with their judgment.

 

The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies. Each stockholder who participates in householding will continue to receive a separate proxy card.

 

Some brokers with account holders who are our stockholders will be “householding” our proxy materials. A single proxy statement report will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy statement, please notify your broker, and direct a request to Corporate Secretary, SM&A, 4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660, (949) 975-1550. If any stockholders in your household wish to receive a separate copy of this proxy statement, please contact us, and we will provide such additional copies. Stockholders who currently receive multiple copies of the proxy statement at their address and would like to request “householding” of their communications should contact their broker.

 

We are subject to the informational requirements of the Exchange Act. We file reports, proxy statements and other information with the SEC. You may read and copy these reports, proxy statements and other information at the SEC’s Public Reference Section at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website, located at www.sec.gov, that contains reports, proxy statements and other information regarding companies and individuals that file electronically with the SEC. Our SEC filings are also available at the office of

The NASDAQ Stock Market. For further information on obtaining copies of our public filings at The NASDAQ Stock Market, you should call (212) 656-5060.

 

The information contained in this proxy statement speaks only as of the date indicated on the cover of this proxy statement unless the information specifically indicates that another date applies.

 

This proxy statement does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is not lawful to make any offer or solicitation in that jurisdiction. The delivery of this proxy statement should not create an implication that there has been no change in our affairs since the date of this proxy statement or that the information herein is correct as of any later date.

 

Our stockholders should not send in their SM&A stock certificates until they receive the transmittal materials from the payment agent. Our stockholders of record who have further questions about their share certificates or the exchange of our common stock for cash should contact the payment agent.

 

If you would like additional copies, without charge, of this proxy statement or if you have questions about the merger, including the procedures for voting your shares, you should contact MacKenzie Partners, Inc. at (800) 322-2885 (toll-free) if you are an individual stockholder or at (212) 929-5500 (collect) if you are a bank or broker, or by e-mail at winsproxy@mackenziepartners.com, or you can contact SM&A at SM&A, 4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660, (949) 975-1550.

 

Whether or not you intend to be present at the special meeting, we urge you to promptly submit your signed proxy card or vote by telephone or the Internet by following the instructions on the enclosed proxy card.

 

ANNEX A

 

 

AGREEMENT AND PLAN OF MERGER
by and among
SM&A,
PROJECT VICTOR HOLDINGS, INC.
and
PROJECT VICTOR MERGER SUB, INC.
Dated as of October 31, 2008

 

 

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