UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,June 30, 2008
OR
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-23585.
When You Must WinSM&A
(Exact name of registrant as specified in its charter)
| | |
Delaware | | 33-0080929 |
(State or other jurisdiction of incorporation or organization) | | 33-0080929 (I.R.S. Employer Identification No.) |
| | |
4695 MacArthur Court, 8th Floor, Newport Beach, California | | 92660 |
(Address of principal executive offices) | | 92660 (Zip Code) |
(949) 975-1550
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero Accelerated filerþ Non-accelerated filero Smaller reporting companyo
(Do not check if a smaller reporting company)
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $0.0001 par value—18,813,82118,400,785 shares outstanding as of AprilJune 30, 2008
2
CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to revenue, revenue composition, earnings, projected plans, performance, contract procurement, demand trends, future expense levels, trends in average headcount and gross margins, and the level of expected capital expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to SM&A (the “Company”) management and are subject to certain risks, uncertainties and assumptions. Any statements contained herein (including without limitation statements to the effect that the Company or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. The actual results of SM&A may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” at pages 12-14. Because of these and other factors that may affect SM&A’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that SM&A files from time to time with the Securities and Exchange Commission (“SEC”), including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
HOW TO OBTAIN SM&A SEC FILINGS
All reports filed by SM&A with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. SM&A also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and makes electronic copies of its most recently filed reports available through its website at www.smawins.com as soon as reasonably practicable after filing such material with the SEC.
3
PART I –— FINANCIAL INFORMATION
Item 1. Financial Statements
SM&A
SM&A
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| | | | | | | | | | | | | | | | |
| | March 31, | | December 31, | | | June 30, | | December 31, | |
| | 2008 | | 2007 | | | 2008 | | 2007 | |
| | (unaudited) | | | (unaudited) | |
ASSETS | | |
Assets: | | |
Current assets: | | |
Cash and cash equivalents | | $ | 3,251 | | $ | 5,422 | | | $ | 3,315 | | $ | 5,422 | |
Investments | | 7,455 | | 10,610 | | | 5,653 | | 10,610 | |
Accounts receivable, net | | 22,373 | | 18,171 | | | 24,056 | | 18,171 | |
Prepaid expenses and other current assets | | 2,772 | | 2,011 | | | 1,526 | | 2,011 | |
| | | | | | | | | | |
Total current assets | | 35,851 | | 36,214 | | | 34,550 | | 36,214 | |
Fixed assets, net | | 3,306 | | 3,399 | | | 3,318 | | 3,399 | |
Goodwill | | 8,374 | | 8,278 | | | 8,374 | | 8,278 | |
Intangibles, net | | 1,781 | | 1,892 | | | 1,670 | | 1,892 | |
Other assets | | 1,369 | | 895 | | | 1,890 | | 895 | |
| | | | | | | | | | |
| | $ | 50,681 | | $ | 50,678 | | | $ | 49,802 | | $ | 50,678 | |
| | | | | | | | | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
Liabilities and Stockholders’ Equity: | | |
Current liabilities: | | |
Accounts payable | | $ | 2,156 | | $ | 1,925 | | | $ | 2,331 | | $ | 1,925 | |
Accrued compensation and related benefits | | 4,992 | | 3,508 | | | 4,470 | | 3,508 | |
Accrued contingent consideration | | — | | 1,750 | | | — | | 1,750 | |
Other current liabilities | | 138 | | 127 | | | 148 | | 127 | |
| | | | | | | | | | |
Total current liabilities | | 7,286 | | 7,310 | | | 6,949 | | 7,310 | |
Other liabilities | | 748 | | 785 | | | 711 | | 785 | |
| | | | | | | | | | |
Total liabilities | | 8,034 | | 8,095 | | | 7,660 | | 8,095 | |
| | |
Commitments and contingencies | | |
| | |
Stockholders’ equity: | | |
Preferred stock | | — | | — | | | — | | — | |
Common stock | | 2 | | 2 | | | 2 | | 2 | |
Additional paid-in capital | | 46,048 | | 45,450 | | | 46,586 | | 45,450 | |
Treasury stock | | | (2,540 | ) | | | (1,506 | ) | | | (4,595 | ) | | | (1,506 | ) |
Accumulated deficit | | | (863 | ) | | | (1,363 | ) | |
Retained earnings (accumulated deficit) | | | 149 | | | (1,363 | ) |
| | | | | | | | | | |
Total stockholders’ equity | | 42,647 | | 42,583 | | | 42,142 | | 42,583 | |
| | | | | | | | | | |
| | $ | 50,681 | | $ | 50,678 | | | $ | 49,802 | | $ | 50,678 | |
| | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
3
SM&A
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(UNAUDITED)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Revenue | | $ | 26,009 | | | $ | 25,568 | | | $ | 51,432 | | | $ | 49,192 | |
Cost of revenue | | | 15,728 | | | | 15,663 | | | | 31,413 | | | | 30,080 | |
| | | | | | | | | | | | |
Gross margin | | | 10,281 | | | | 9,905 | | | | 20,019 | | | | 19,112 | |
| | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | 8,553 | | | | 6,631 | | | | 17,510 | | | | 13,525 | |
| | | | | | | | | | | | |
Operating income | | | 1,728 | | | | 3,274 | | | | 2,509 | | | | 5,587 | |
| | | | | | | | | | | | | | | | |
Interest income, net | | | 22 | | | | 78 | | | | 117 | | | | 221 | |
| | | | | | | | | | | | |
Income before income taxes | | | 1,750 | | | | 3,352 | | | | 2,626 | | | | 5,808 | |
| | | | | | | | | | | | | | | | |
Income tax expense | | | 738 | | | | 1,349 | | | | 1,114 | | | | 2,354 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 1,012 | | | $ | 2,003 | | | $ | 1,512 | | | $ | 3,454 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.05 | | | $ | 0.11 | | | $ | 0.08 | | | $ | 0.18 | |
Diluted | | $ | 0.05 | | | $ | 0.11 | | | $ | 0.08 | | | $ | 0.18 | |
| | | | | | | | | | | | | | | | |
Shares used in calculating earnings per share: | | | | | | | | | | | | | | | | |
Basic | | | 18,603 | | | | 18,787 | | | | 18,797 | | | | 18,698 | |
Diluted | | | 18,698 | | | | 18,964 | | | | 18,901 | | | | 18,882 | |
See accompanying notes to condensed consolidated financial statements.
4
SM&A
SM&A
CONDENSED CONSOLIDATED STATEMENTS OF INCOMECASH FLOWS
(in thousands, except per share amounts)thousands)
(UNAUDITED)
| | | | | | | | |
| | Three Months Ended | |
| | March 31, | |
| | 2008 | | | 2007 | |
Revenue | | $ | 25,423 | | | $ | 23,624 | |
Cost of revenue | | | 15,685 | | | | 14,417 | |
| | | | | | |
Gross margin | | | 9,738 | | | | 9,207 | |
| | | | | | | | |
Selling, general and administrative expenses | | | 8,957 | | | | 6,894 | |
| | | | | | |
Operating income | | | 781 | | | | 2,313 | |
| | | | | | | | |
Interest income, net | | | 95 | | | | 143 | |
| | | | | | |
Income before income taxes | | | 876 | | | | 2,456 | |
| | | | | | | | |
Income tax expense | | | 376 | | | | 1,005 | |
| | | | | | |
| | | | | | | | |
Net income | | $ | 500 | | | $ | 1,451 | |
| | | | | | |
| | | | | | | | |
Net income per share: | | | | | | | | |
Basic | | $ | 0.03 | | | $ | 0.08 | |
Diluted | | $ | 0.03 | | | $ | 0.08 | |
| | | | | | | | |
Shares used in calculating net income per share: | | | | | | | | |
Basic | | | 18,990 | | | | 18,609 | |
Diluted | | | 19,100 | | | | 18,800 | |
| | | | | | | | |
| | Six Months Ended | |
| | June 30, | |
| | 2008 | | | 2007 | |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 1,512 | | | $ | 3,454 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 611 | | | | 589 | |
Loss on disposal of assets | | | 32 | | | | — | |
Stock-based compensation expense | | | 855 | | | | 898 | |
Excess tax benefits from stock-based compensation | | | — | | | | (118 | ) |
Deferred income taxes | | | (1,067 | ) | | | (199 | ) |
Changes in operating assets and liabilities, net of business acquisitions: | | | | | | | | |
Accounts receivable | | | (5,885 | ) | | | (7,096 | ) |
Prepaid expenses and other assets | | | 557 | | | | 46 | |
Accounts payable | | | 406 | | | | 238 | |
Accrued compensation and related benefits | | | 962 | | | | 784 | |
Other liabilities | | | (1,803 | ) | | | (2 | ) |
| | | | | | |
Net cash used in operating activities | | | (3,820 | ) | | | (1,406 | ) |
| | | | | | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchases of fixed assets | | | (340 | ) | | | (729 | ) |
Purchases of marketable securities | | | (7,771 | ) | | | (12,500 | ) |
Proceeds from sale of marketable securities | | | 12,728 | | | | 6,000 | |
Cost of acquisitions, net of cash acquired | | | (96 | ) | | | (4,465 | ) |
| | | | | | |
Net cash provided by (used in) investing activities | | | 4,521 | | | | (11,694 | ) |
| | | | | | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Proceeds from issuance of common stock | | | 281 | | | | 460 | |
Excess tax benefits from stock-based compensation | | | — | | | | 118 | |
Payment for repurchase of shares | | | (3,089 | ) | | | (842 | ) |
| | | | | | |
Net cash used in financing activities | | | (2,808 | ) | | | (264 | ) |
| | | | | | |
| | | | | | | | |
Net decrease in cash and cash equivalents from continued operations | | | (2,107 | ) | | | (13,364 | ) |
Net cash used in discontinued operations by operating activities | | | — | | | | (42 | ) |
| | | | | | |
Net decrease in cash and cash equivalents | | | (2,107 | ) | | | (13,406 | ) |
Cash and cash equivalents at beginning of period | | | 5,422 | | | | 15,143 | |
| | | | | | |
Cash and cash equivalents at end of period | | $ | 3,315 | | | $ | 1,737 | |
| | | | | | |
| | | | | | | | |
Supplemental information—cash paid for: | | | | | | | | |
Income taxes | | $ | 1,696 | | | $ | 2,135 | |
| | | | | | | | |
Supplemental disclosure of non-cash transactions: | | | | | | | | |
Common stock issued for an acquisition | | $ | — | | | $ | 2,213 | |
Common stock issued to an employee | | $ | — | | | $ | 50 | |
Common stock issued to non-employee directors | | $ | 39 | | | $ | — | |
See accompanying notes to condensed consolidated financial statements.
5
SM&A
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
| | | | | | | | |
| | Three Months Ended | |
| | March 31, | |
| | 2008 | | | 2007 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 500 | | | $ | 1,451 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 289 | | | | 274 | |
Loss on disposal of assets | | | 32 | | | | — | |
Stock-based compensation expense | | | 421 | | | | 400 | |
Deferred income taxes | | | (489 | ) | | | (49 | ) |
Changes in operating assets and liabilities, net of business acquisitions: | | | | | | | | |
Accounts receivable | | | (4,202 | ) | | | (7,877 | ) |
Prepaid expenses and other assets | | | (746 | ) | | | (64 | ) |
Accounts payable | | | 231 | | | | 432 | |
Accrued compensation and related benefits | | | 1,484 | | | | 2,749 | |
Other liabilities | | | (1,776 | ) | | | (2 | ) |
| | | | | | |
Net cash used in operating activities | | | (4,256 | ) | | | (2,686 | ) |
| | | | | | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchases of fixed assets | | | (117 | ) | | | (402 | ) |
Purchases of marketable securities | | | (3,355 | ) | | | (6,000 | ) |
Proceeds from sale of marketable securities | | | 6,510 | | | | 2,000 | |
Cost of acquisitions, net of cash acquired | | | (96 | ) | | | (2,674 | ) |
| | | | | | |
Net cash provided by (used in) investing activities | | | 2,942 | | | | (7,076 | ) |
| | | | | | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from issuance of common stock | | | 177 | | | | 148 | |
Payment for repurchase of shares | | | (1,034 | ) | | | (842 | ) |
| | | | | | |
Net cash used in financing activities | | | (857 | ) | | | (694 | ) |
| | | | | | |
|
Net decrease in cash and cash equivalents from continued operations | | | (2,171 | ) | | | (10,456 | ) |
Net cash used in discontinued operations by operating activities | | | — | | | | (42 | ) |
| | | | | | |
Net decrease in cash and cash equivalents | | | (2,171 | ) | | | (10,498 | ) |
Cash and cash equivalents at beginning of period | | | 5,422 | | | | 15,143 | |
| | | | | | |
Cash and cash equivalents at end of period | | $ | 3,251 | | | $ | 4,645 | |
| | | | | | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: | | | | | | | | |
Common stock issued for an acquisition | | $ | — | | | $ | 2,213 | |
Common stock issued to non-employee directors | | $ | 39 | | | $ | — | |
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended March 31,June 30, 2008 and 2007
(UNAUDITED)
Note 1. Basis of Presentation
The condensed consolidated financial statements included herein are unaudited; such financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the consolidated financial position of SM&A at March 31,June 30, 2008, the consolidated results of operations for the three and six months ended March 31,June 30, 2008 and 2007, and cash flows for the threesix months ended March 31,June 30, 2008 and 2007, respectively. Comprehensive income is equivalent to net income for the three and six month periods ended March 31,June 30, 2008 and 2007, respectively.
Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended March 31,June 30, 2008 are not necessarily indicative of the results to be expected for the full fiscal year.
The accompanying unaudited condensed consolidated financial statements do not include footnotes and certain financial presentations normally required under generally accepted accounting principles. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2007, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2008.
Recent Accounting Pronouncements
In MarchMay 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161,162, “Disclosures about Derivative Instruments and Hedging Activities, an amendmentThe Hierarchy of FASB Statement No. 133,Generally Accepted Accounting Principles.” which requires additional disclosures about the objectivesThe purpose of the derivative instruments and hedging activites,new standard is to provide a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements. Previous guidance did not properly rank the method of accounting for such instruments under SFAS 133 and its related interpretations, and a tabular disclosureliterature. The new standard is effective 60 days following the SEC’s approval of the effectsPublic Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS 161 is effective for us beginning January 1, 2009. Present Fairly in Conformity With Generally Accepted Accounting Principles.”The adoption of SFAS 161162 is not expected to have a material impact on our financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. However, on February 12, 2008, the FASB issued proposed FASB Staff Position (“FSP”) SFAS No. 157-2, “Effective Date of FASB Statement No. 157,” which defers the effective date for adoption of fair value measurements for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 on January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities as noted in proposed FSP No. 157-2. The adoption of SFAS No. 157 did not have a material impacteffect on the Company’s financial position, results of operations or cash flows.statements.
Note 2. Net IncomeEarnings Per Share
The following table illustrates the number of shares used in the computation of basic and diluted net incomeearnings per share (in thousands)(“EPS”):
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2008 | | 2007 |
Denominator for basic income per common share: | | | | | | | | |
Weighted-average shares outstanding during the period | | | 18,990 | | | | 18,609 | |
Incremental shares attributable to dilutive outstanding stock options | | | 110 | | | | 191 | |
| | | | | | | | |
Denominator for diluted income per share | | | 19,100 | | | | 18,800 | |
| | | | | | | | |
Anti-dilutive shares excluded from the foregoing reconciliation | | | 2,136 | | | | 1,329 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(in thousands, except per share amounts) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Numerator: | | | | | | | | | | | | | | | | |
Net income | | $ | 1,012 | | | $ | 2,003 | | | $ | 1,512 | | | $ | 3,454 | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 18,603 | | | | 18,787 | | | | 18,797 | | | | 18,698 | |
Effect of dilutive outstanding stock options | | | 95 | | | | 177 | | | | 104 | | | | 184 | |
| | | | | | | | | | | | |
Denominator for diluted income per share | | | 18,698 | | | | 18,964 | | | | 18,901 | | | | 18,882 | |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 0.05 | | | $ | 0.11 | | | $ | 0.08 | | | $ | 0.18 | |
| | | | | | | | | | | | |
Dilutive earnings per share | | $ | 0.05 | | | $ | 0.11 | | | $ | 0.08 | | | $ | 0.18 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Anti-dilutive shares excluded from the foregoing reconciliation | | | 2,303 | | | | 1,149 | | | | 2,289 | | | | 1,493 | |
| | | | | | | | | | | | |
7
Note 3. Investments in Marketable Securities
During the threesix months ended March 31,June 30, 2008, the Company purchased additional short-term state issued variable rate demand note securities for $3.4$7.8 million and sold $6.5$12.7 million of its marketable securities for investmentoperating activities. There were no unrealized gains or losses at March 31,June 30, 2008. For the three and six months ended March 31,June 30, 2008 and 2007, our interest income on these investments was approximately $64,000$24,000, $88,000, $32,000 and $32,000,$74,000, respectively.
6
Note 4. Stock-Based Compensation
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three and six months ended March 31,June 30, 2008 and 2007:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | Six Months Ended |
| | March 31, | | June 30, | | June 30, |
| | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 |
Expected life (in years) | | 2.6 | | 3.8 | | |
Stock price volatility | | | 34.0 | % | | | 78.6 | % | | | 39.1 | % | | | 42.0 | % | | | 35.1 | % | | | 67.2 | % |
Risk-free interest rate | | | 2.5 | % | | | 4.9 | % | | | 2.8 | % | | | 4.5 | % | | | 2.6 | % | | | 4.8 | % |
Expected life (in years) | | | 4.8 | | 3.7 | | 3.1 | | 3.8 | |
Forfeiture rate | | | 10.6 | % | | | 9.8 | % | | | 10.0 | % | | | 9.1 | % | | | 10.5 | % | | | 9.5 | % |
Stock dividend yield | | N/A | | N/A | | | N/A | | N/A | | N/A | | N/A | |
Weighted-average fair value per option granted | | $ | 1.36 | | $ | 3.67 | | | $ | 1.58 | | $ | 2.68 | | $ | 1.41 | | $ | 3.36 | |
The following table summarizes stock option activity for the threesix months ended March 31,June 30, 2008:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted- | | | | | Weighted- | | Weighted-Average | | Aggregate | |
| | | | Weighted- | | Average | | Aggregate | | | Average | | Fair Value of | | Intrinsic | |
| | Average | | Fair Value of | | Intrinsic | | |
| | Shares | | Exercise Price | | Options Granted | | Value | | |
| | | |
Activity | | | Shares | | Exercise Price | | Options Granted | | Value | |
Outstanding at December 31, 2007 | | 2,272,448 | | $ | 7.43 | | | 2,272,448 | | $ | 7.43 | |
Granted | | 450,428 | | 5.58 | | $ | 1.36 | | | 572,428 | | 5.37 | | $ | 1.41 | |
Exercised | | — | | — | | | — | | — | |
Cancelled, Forfeited or Expired | | | (135,750 | ) | | 8.19 | | | | (204,050 | ) | | 7.65 | |
| | | | | | | | | | | | |
Outstanding at March 31, 2008 | | 2,587,126 | | 7.07 | | $ | 361,000 | | |
Outstanding at June 30, 2008 | | | 2,640,826 | | 6.97 | | $ | 489,000 | |
| | | | | | | | | | | | | | |
Exercisable at March 31, 2008 | | 1,298,676 | | $ | 7.70 | | $ | 361,000 | | |
Exercisable at June 30, 2008 | | | 1,358,926 | | $ | 7.67 | | $ | 465,000 | |
| | | | | | | | | | | | | | |
The total intrinsic value of options exercised during the threesix months ended March 31,June 30, 2008 and 2007 was $0 and $18,000,$439,000, respectively.
The Company recorded $421,000$434,000, $855,000, $448,000 and $400,000$848,000 in stock-based compensation expense before income tax benefit for stock options in its results of operations for the three and six months ended March 31,June 30, 2008 and 2007, respectively. As of March 31,June 30, 2008, there was $3.1$2.8 million of total unrecognized compensation cost related to unvested awards which willnon-vested stock options is expected to be amortized to expenserecognized over thea weighted-average period of 2.5approximately 2.4 years.
The Company received $0 and $30,000$236,000 in cash from option exercises during the threesix months ended March 31,June 30, 2008 and 2007, respectively. The Company received $138,000$241,000 and $118,000$223,000 from the purchase of shares under the employee stock purchase plan (“ESPP”) during the threesix months ended March 31,June 30, 2008 and 2007, respectively. Upon the exercise of options and stock purchase shares granted under the ESPP, the Company issues new common stock from its authorized shares.
Note 5. Acquisitions
Project Planning, Incorporated.
On February 9, 2007, the Company completed an acquisition of Project Planning, Incorporated.Incorporated (“PPI”) pursuant to a Stock Purchase Agreement, as amended. As part of the agreement, as amended, the Company could pay up to an additional $9.5 million over a three year period upon satisfaction of certain revenue goals. As of March 31,June 30, 2008, the selling shareholder of PPI earned approximately $3.7$4.3 million of the remaining cash portion of the purchase price, of which $876,000$733,000 and $1.6 million was recorded as a selling, general and administrative expense during the three and six months ended March 31, 2008.
8
Performance Management Associates, Inc.June 30, 2008, respectively.
On September 14, 2007, the Company completed an acquisition of Performance Management Associates, Inc. (“PMA”) pursuant to a Stock Purchase Agreement, as amended. As part of the agreement, as amended, the Company could pay up to an additional $1.3 million over a three year period upon satisfaction of certain revenue goals. If earned, the additional payment will be allocated to goodwill. No amount was earned as of March 31,June 30, 2008.
Unaudited Pro Forma Financial Information
The pro forma combined results set forth below are not necessarily indicative of the results that actually would have occurred if the acquisitions had been completed as of the beginning of 2007, nor are they necessarily indicative of future consolidated results.
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The following presents the unaudited pro forma combined results of operations of the Company with the acquisitions.acquisitions:
| | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | Six Months Ended |
(in thousands, except for share information) | | March 31, 2007 | |
| |
(in thousands, except per share amounts) | | | June 30, 2007 | | June 30, 2007 |
Revenue | | $ | 25,509 | | | $ | 27,097 | | $ | 52,606 | |
Net income | | $ | 1,445 | | | $ | 1,986 | | $ | 3,431 | |
Pro forma net income per common share: | | |
Pro forma earnings per share: | | |
Basic | | $ | 0.08 | | | $ | 0.11 | | $ | 0.18 | |
Diluted | | $ | 0.08 | | | $ | 0.10 | | $ | 0.18 | |
Note 6. Intangible Assets and Goodwill
Intangible Assets
The Company recorded amortization expense related to the acquired amortizable intangibles of $111,000, $222,000, $50,000 and $27,000$77,000 during the three and six months ended March 31,June 30, 2008 and 2007, respectively.
Goodwill
The Company recorded $96,000 of additional goodwill related to the PPI earn-out provision during the threesix months ended March 31,June 30, 2008.
Note 7. Income Taxes
Our effective income tax rates for the three and six months ended March 31,June 30, 2008 and 2007 were 42.9%42.2%, 42.4%, 40.2% and 40.9%40.5%, respectively. The increase in the income tax rate for the three and six months ended March 31,June 30, 2008 was related toincreased over the costsame periods of the prior year as the Company could not recognize the full benefit of stock-based compensation andexpense until the related options are exersied with a disqualifying disposition. The corresponding increase in deferred taxes is primarily due to the timing of recognizing the related tax benefits.
Note 8. Credit Facility
The Company has a revolving credit agreement which allows for unsecured borrowings up to $10.0 million at the Company’s option of prime rate minus one half of one percent (-0.50%) per annum or LIBOR plus two and one quarter percent (2.25%) per annum. The revolving credit agreement is renewable annually on May 1st of each year. Borrowings under the revolving credit agreement are unsecured. The agreement requires the Company to comply with certain financial covenants pertaining to its tangible net worth, ratio of total liabilities to tangible net worth, and ratio of current assets to current liabilitiesnegative covenants (as defined in the agreement). The agreement also contains certain negative covenants which, among other things, restrict the Company’s ability to incur additional indebtedness of more than $1.0 million in excess of the $10.0 million limit set forth in the credit agreement and make capital expenditures in excess of $3.0 million without the prior written approval of the lender. On May 1, 2008 the credit line was renewed and the financial institution required the following provision; in the event of default whereby the individuals who, as the date of the agreement, constitute the Company’s Board of Directors; (the incumbent Board) cease for any reason to constitute at least 75 percent of the Board of Directors; provided, however, that any individual who becomes a director subsequent to the date of this agreement whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual was a member of the Incumbent Board.on May 1, 2008. At March 31,June 30, 2008, the Company was in compliance with its covenants and had no outstanding borrowings under the line of credit and $10.0 million was available.
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Note 9. Stockholders’ Equity
The Company’s Board of Directors (“Board”) has previously authorized a plan to repurchase up to $30.0 million of the Company’s common stock. For the threesix months ended March 31,June 30, 2008 and 2007, the Company repurchased 241,200654,236 shares at a total cost of $1.0$3.1 million and 139,417 shares at a total cost of $842,000, respectively. Since the inception of the share repurchase plan, the Company has repurchased 3,596,0604,009,096 shares at a total cost of $25.2$27.3 million. The Company intends to repurchase shares from time to time, at prevailing prices, in the open market. The share repurchase plan may be suspended or discontinued at any time. The Company currently has approximately $4.8$2.7 million remaining in share repurchase authorization.
The Company’s stockholders equity activity for the threesix months ended March 31,June 30, 2008 is presented below:
| | | | | | | | | | | | | | | | | | | | | |
| | Common | | | | | | | | |
| | Stock and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Additional | | | | | | | | | Common Stock and | | Retained Earnings | | | |
| | Common | | Paid-In | | Treasury | | Accumulated | | Stockholders’ | | | Common | | Additional Paid-In | | Treasury | | (Accumulated | | Stockholders’ | |
(in thousands, except share data) | | Shares | | Capital | | Stock | | Deficit | | Equity | | | Shares | | Capital | | Stock | | Deficit) | | Equity | |
| |
Balances at December 31, 2007 | | 18,998,110 | | $ | 45,452 | | $ | (1,506 | ) | | $ | (1,363 | ) | | $ | 42,583 | | | 18,998,110 | | $ | 45,452 | | $ | (1,506 | ) | | $ | (1,363 | ) | | $ | 42,583 | |
Proceeds from the issuance of common stock | | 31,911 | | 177 | | — | | — | | 177 | | | 56,911 | | 281 | | — | | — | | 281 | |
Stock-based compensation expense | | — | | 421 | | — | | — | | 421 | | |
Stock-based compensation expense. | | | — | | 855 | | — | | — | | 855 | |
Repurchased treasury shares | | | (241,200 | ) | | — | | | (1,034 | ) | | — | | | (1,034 | ) | | | (654,236 | ) | | — | | | (3,089 | ) | | — | | | (3,089 | ) |
Net income | | — | | — | | — | | 500 | | 500 | | | — | | — | | — | | 1,512 | | 1,512 | |
| | | | | | | | | | | | | | | | | | | | | | |
Balances at March 31, 2008 | | 18,788,821 | | $ | 46,050 | | $ | (2,540 | ) | | $ | (863 | ) | | $ | 42,647 | | |
Balances at June 30, 2008 | | | 18,400,785 | | $ | 46,588 | | $ | (4,595 | ) | | $ | 149 | | $ | 42,142 | |
| | | | | | | | | | | | | | | | | | | | | | |
In 2007, the Company’s Compensation Committee approved the Executive Incentive Plan (the “Plan”) which includes a long-term incentive based compensation component titled Long Term Incentive Plan (“LTIP”). This Plan is designed to drive behavior to reach revenue, net income, and earnings per share targets established by the Compensation Committee. The LTIP will reward sustained performance over a three-year period that substantially increases shareholder value and will cover the calendar period 2008 through 2010. The Compensation Committee intends to issue performance stock on an annual basis with successive three-year performance
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periods. The criteria in the LTIP will be the achievement of $0.79 earnings per share (“EPS”),EPS, over a twelve month period, on or before December 31, 2010. If the $0.79 EPS is met prior to December 31, 2010, the performance stock will be issued within 30 days of reaching the maximum target. Determination that the EPS target has been achieved will be by Audit Committee of the Board. If the criteria are not met by December 31, 2010, the number of shares granted will be determined in accordance with a predetermined sliding scale. EPS performance below $0.54 a share will receive no award. There was no expense recorded as of March 31,June 30, 2008.
Note 10. CommitmentCommitments and Contingencies
From time to time, the Company may be involved in legal proceedings and claims that arise in the ordinary course of business. The Company is currently unaware of any legal proceedings or claims against it that management believes will have, individually or in the aggregate, a materially adverse effect on its business, financial condition or operating results.
The Company has entered into employment agreements with its President and Chief Executive Officer and its Chief Financial Officer and into benefit agreements with other executives of the Company (collectively “Agreements”). Under the terms of each of the Agreements, the Company may be obligated to pay a severance payment ranging from three months to one year of the respective employee’s base salary, depending on the date of termination, if the employment is terminated by the Company without cause. In addition, the Agreements have change of control provisions that may require the Company to pay up to eighteen months of current annual base salary, target bonus and health and life insurance benefits.
The Company has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of March 31,June 30, 2008.
The former Chairman of the Board and CEO of SM&A, who retired from the Company and the Board in March 2007, is soliciting stockholders to vote for a dissident slate of four directors he is recommending to replace four independent incumbent directors. The Board of Directors of SM&A are opposed to the slate of directors presented by Mr. Myers.
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This on-going proxy contest has demanded management time and corporate resources diverting focus from core business activities. In addition, SM&A has retained a third party proxy solicitor to assist the Company in the solicitation of proxies for a fee not to exceed $200,000, plus reimbursement of out-of-pocket expenses. The Company’s expenses related to the solicitation in excess of those normally spent for an annual meeting with an uncontested director election are estimated to be approximately $500,000, of which approximately $60,000 has been spent as of March 31, 2008. The cost of the Company’s solicitation of proxies will be borne by the Company.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. These statements may be found throughout this report and the documents incorporated by reference herein. Any statements (including without limitation statements to the effect that the Company or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. The actual results of SM&A may vary materially from those expected or anticipated in these forward-looking statements. The information incorporated by reference under the heading “Risk Factors” in this report provides examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. Because of these and other factors that may affect SM&A’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that SM&A files from time to time with the Securities and Exchange Commission, or SEC, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
How to Obtain SM&A SEC Filings
All reports filed by SM&A with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. SM&A also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and makes electronic copies of its most recently filed reports available through its website at www.smawins.com as soon as reasonably practicable after filing such material with the SEC.
Our Company
We support our clients by providing a full array of services that adds to our clients’ top line revenue through the more effective management of their proposals and/or improves their bottom line earnings by applying technical and management leadership to their awarded programs. While the Company operates in one business segment, our business strategy is to classify the world’s leading provider of services we offer under the following two categories:
Competition Management (business captureconsulting services that provide project leadership to help our clients strategically position themselves, identify business opportunities, and proposal development)formulate and prepare competitive bids; and
Program Servicesconsulting services that assist our clients in keeping their programs on schedule and a leading providerunder budget while increasing their probability of Program Services (post-award risk mitigation and profit maximizing) services. successful program delivery.
Under these two service lines, our approximately 400 employees and consultants provide strategy, proposal management, program management, systems engineering, program planning, and other high-value technical support to major industrial customers in the defense, healthcare, homeland security, aerospace, systems integration/information technology, healthcare and engineering sectors.
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Results of Operations
Three and Six Months Ended March 31,June 30, 2008 Compared to Three Months Ended March 31,and 2007
The following table sets forth certain historicalsummarizes operating results (in millions):results:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Three Months Ended | | Six Months Ended | |
| | 2008 | | 2007 | | Change | | June 30, | | June 30, | |
| | $ | | % | | $ | | % | | $ | | % | |
(in millions) | | | 2008 | | 2007 | | Change | | 2008 | | 2007 | | Change | |
Revenue | | 25.4 | | 100.0 | | 23.6 | | 100.0 | | 1.8 | | 7.6 | | | $ | 26.0 | | $ | 25.6 | | | 1.6 | % | | $ | 51.4 | | $ | 49.2 | | | 4.5 | % |
Cost of revenue | | 15.7 | | 61.7 | | 14.4 | | 61.0 | | 1.3 | | 9.0 | | | 15.7 | | 15.7 | | 0.0 | | 31.4 | | 30.1 | | 4.3 | |
| | | | | | | | | | | | | | | | |
Gross margin | | 9.7 | | 38.3 | | 9.2 | | 39.0 | | 0.5 | | 5.4 | | | 10.3 | | 9.9 | | 4.0 | | 20.0 | | 19.1 | | 4.7 | |
Selling, general and administrative expenses | | 9.0 | | 35.4 | | 6.9 | | 29.2 | | 2.1 | | 30.4 | | | 8.6 | | 6.6 | | 30.3 | | 17.5 | | 13.5 | | 29.6 | |
| | | | | | | | | | | | | | | | |
Operating income | | 0.8 | | 3.1 | | 2.3 | | 9.7 | | | (1.5 | ) | | | (65.2 | ) | | 1.7 | | 3.3 | | | (48.5 | ) | | 2.5 | | 5.6 | | | (55.4 | ) |
Interest income, net | | 0.1 | | 0.4 | | 0.1 | | 0.4 | | — | | 0.0 | | | 0.0 | | 0.1 | | | (100.0 | ) | | 0.1 | | 0.2 | | | (50.0 | ) |
Income tax expense | | 0.4 | | 1.6 | | 1.0 | | 4.2 | | | (0.6 | ) | | | (60.0 | ) | | 0.7 | | 1.3 | | | (46.2 | ) | | 1.1 | | 2.4 | | | (54.2 | ) |
| | | | | | | | | | | | | | | | |
Net income | | 0.5 | | 2.0 | | 1.4 | | 5.9 | | | (0.9 | ) | | | (64.3 | ) | | $ | 1.0 | | $ | 2.0 | | | (50.0 | )% | | $ | 1.5 | | $ | 3.5 | | | (57.1 | )% |
| | | | | | | | | | | | | | | | |
Revenue.RevenueRevenue increased $1.8 million, or 7.6%, to $25.4 million for the three months ended March 31, 2008 compared to $23.6 million for the same period of the prior year. The acquisitions completed in fiscal 2007 contributed approximately $3.8 million or 15% of total revenue for the three months ended March 31, 2008.
The following table is provided to display our revenue resultspresents selected financial information compared to the same period of the prior year.year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
(in millions) | | 2008 | | 2007 | | % Growth | | | 2008 | | 2007 | | Change | | 2008 | | 2007 | | Change | |
Revenues by Market Vertical | | |
Aerospace and Defense (A&D) | | $ | 19.5 | | $ | 19.9 | | | (2 | %) | |
Non Aerospace and Defense (SIIT) | | 5.9 | | 3.7 | | 60 | | |
Aerospace and defense | | | $ | 21.0 | | $ | 20.1 | | | 4.5 | % | | $ | 40.5 | | $ | 40.0 | | | 1.3 | % |
Non-aerospace and defense | | | 5.0 | | 5.5 | | | (9.1 | ) | | 10.9 | | 9.2 | | 18.5 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 25.4 | | $ | 23.6 | | | 8 | % | | $ | 26.0 | | $ | 25.6 | | | 1.6 | % | | $ | 51.4 | | $ | 49.2 | | | 4.5 | % |
| | | | | | | | | | | | | | | | |
| | |
Revenues by Service Line | | |
Competition Management | | $ | 13.3 | | $ | 14.4 | | | (8 | %) | | $ | 10.8 | | $ | 14.9 | | | (27.5 | )% | | $ | 24.1 | | $ | 29.3 | | | (17.7 | )% |
Program Services | | 12.1 | | 9.2 | | 32 | | | 15.2 | | 10.7 | | 42.1 | | 27.3 | | 19.9 | | 37.2 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 25.4 | | $ | 23.6 | | | 8 | % | | $ | 26.0 | | $ | 25.6 | | | 1.6 | % | | $ | 51.4 | | $ | 49.2 | | | 4.5 | % |
| | | | | | | | | | | | | | | | |
Total aerospace and defense client revenue was slightly downRevenue increased 1.6% or $0.4 million to $19.5$26.0 million for the three months ended March 31,June 30, 2008 compared to the same period of the prior year, and increased 4.5% or $2.2 million to $51.4 million for the six months ended June 30, 2008 compared to the same period of the prior year. We attribute these revenue trends to the execution on our corporate strategy to diversify our services and solutions across our clients’ program life cycle.
Total aerospace and defense (“A&D”) client revenue was up slightly to $21.0 million and $40.5 million for the three and six months ended June 30, 2008 as compared to $19.9$20.1 million and $40.0 million compared to the same periods in 2007. A&D revenues in the prior year. Non-aerospace and defensesecond quarter of 2008 were the highest in the history of the company. Non-A&D client revenues increased 60%decreased 9.1% to $5.9$5.0 million from $3.7$5.5 million for the three months ended March 31,June 30, 2008 and 2007, respectively. The Company is building momentumrespectively, but increased 18.5% to $10.9 million for the six months ended June 30, 2008 compared to $9.2 million for the same period in the Program Services business in the non-A&D market, as well as in its Competition Management business. The further diversification of revenues is attributable to the Company’s ongoing efforts to more fully implement its strategic business plan.2007.
Revenues from our Competition Management and Program Services service lines were 52.4%41.5% and 47.6%,58.5% of total revenues, respectively, for the three months ended March 31,June 30, 2008 as compared to 61.0%58.2% and 39.0%41.8% in 2007. While the level of activity within Competition Management was solid inDuring the first quarter, there were fewer large Federalhalf of 2008, the competitive procurement opportunities that were released were generally smaller in the first quarter of 2008 assize compared to the first quarterhalf of 2007. LargeThis attribute is generally expected in election years when a change of administration is expected. Larger Federal procurement opportunities have the tendency to drive higher revenue levels due to the larger and more complex proposals that are required. Large Federal procurement opportunities trends have been variable and have traditionally contributed to inconsistent Competition Management revenue within SM&A. We recorded successSuccess fees of $226,000 and $0 for the three and six months ended March 31,June 30, 2008 were $0 and 2007,$226,000 compared to $118,000 and $118,000 for the same periods of the prior year, respectively.
During 2008, ourThe Company has continued its Program Services revenue has been positively impactedmomentum by the acquisitionsaddition of Project Planning, Inc. (“PPI”)acquired planning and Performance Management Associates, Inc. (“PMA”) in 2007.scheduling and earned-value management systems service revenues. These acquisitions, along with our solution offerings, have generated consistent sequential quarterly Program Services revenue growth. Our growth has also been generated by
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Gross Margin
The following table presents our Account Executives’ abilitygross margin results compared to build valued long term relationships with our clients. Our clients repeatedly engage us for our services as they understand how valuable we are in helping them pursue, win and profitably perform on their competitive procurement projects.the same period of the prior year:
Gross Margin. | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(in millions) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Revenue | | $ | 26.0 | | | $ | 25.6 | | | $ | 51.4 | | | $ | 49.2 | |
Cost of revenue | | | 15.7 | | | | 15.7 | | | | 31.4 | | | | 30.1 | |
| | | | | | | | | | | | |
Gross margin | | $ | 10.3 | | | $ | 9.9 | | | $ | 20.0 | | | $ | 19.1 | |
| | | | | | | | | | | | |
Gross margin percentage | | | 39.6 | % | | | 38.7 | % | | | 38.9 | % | | | 38.9 | % |
| | | | | | | | | | | | |
Gross margin increased $0.5$0.4 million, or 5.4%4.0%, to $9.7$10.3 million for the three months ended March 31,June 30, 2008 compared to $9.2$9.9 million for the same period of the prior year. The increaseyear, and increased $0.9 million, or 4.7%, to $20.0 million for the six months ended June 30, 2008 compared to $19.1 million for the same period in gross margin dollars is due to the increase in sales as discussed above offset by a decrease in gross margin as a percentage of revenue.2007. As a percentage of revenue, gross margin decreasedincreased to 38.3%39.6% and 38.9% for the three and six months ended March 31, 2007June 30, 2008 compared to 39.0%38.7% and 38.9% for the same
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period of the prior year.2007. The declineCompany’s continuous efforts to improve margins, was due to revenue mix andoffset by pricing structures offered to some of our largest customers,clients, which included $66,000 and $189,000 for the three and six months ended June 30, 2008, respectively, of financial investments on key client investments of $122,000proposals to secure futurefollow-on services. We recorded success fees of $226,000 and $118,000 for the six months ended June 30, 2008 and 2007, respectively. We expect the gross margins to be approximatelyapproximate 39.5% for fiscal year 2008.
Selling, General and Administrative Expenses.Selling, general and administrative expensesExpenses (“SG&A”)
SG&A consist principally of salary and benefit costs for executive, sales and administrative personnel, stock-based compensation, depreciation and amortization, training and recruiting, professional services and other general corporate activities. SG&A expenditures increased $2.1$2.0 million or 30.4%30.3% and $4.0 million or 29.6%, to $9.0 millionrespectively, for the three and six months ended March 31,June 30, 2008 compared to $6.9 million for the same period of the prior year. Included inThese increases are due primarily to higher stock-based compensation expense, the SG&A increase was an earn-out amount earned byCompany’s expansion thru acquisitions and the principal of PPI of $876,000, $1.1 million attributable torelated earn-outs, the Company’s offsite training conference held in March 2008 and approximately $60,000 of legalprofessional fees related to the recent proxy contest, as of March 31, 2008. Stock-based compensation includedoffset by the expenditures related to the changes in SG&A was $421,000management incurred in 2007 including the retirement payment to the Company’s former Chairman and $400,000 for the three months ended March 31, 2008 and 2007, respectively.Chief Executive Officer.
On March 31, 2007, the Company’sThe former Chairman and Chief Executive Officer Steven S. Myers, retiredof SM&A solicited stockholders to vote for a dissident slate of four directors he recommended replacing four independent incumbent directors. We settled the contest in May 2008, prior to our annual meeting of stockholders. This contest demanded management’s time and on April 1, 2007,corporate resources diverting focus from core business activities. SM&A retained a third party proxy solicitor to assist the Company in the solicitation of proxies for a fixed fee. The Company’s expenses related to the solicitation in excess of those normally spent for an annual meeting with an uncontested director election were approximately $880,000, of which $820,000 and $880,000 was replaced by Cynthia Davis as Chief Executive Officer, who resigned in July 2007 and was replaced by Cathy McCarthy as President and Chief Executive Officer. The expense associated with Mr. Myers transition to Ms. Davis, which includes a retirement payment of $500,000 and legal and professional fees of approximately $200,000, are included in SG&A forexpensed during the three and six months ended March 31, 2007.June 30, 2008, respectively.
The following table is provided to displaypresents our SG&A results segregating these areas of cost for comparison purposes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
(in millions) | | 2008 | | 2007 | | % Growth | | | 2008 | | 2007 | | Change | | 2008 | | 2007 | | Change | |
SG&A before the segregated expenses below | | $ | 5.7 | | $ | 5.5 | | | 4 | % | | $ | 5.5 | | $ | 5.7 | | | (3.5 | )% | | $ | 10.5 | | $ | 11.2 | | | (6.2 | )% |
Stock-based compensation | | 0.4 | | 0.4 | | 0 | | | 0.4 | | 0.4 | | 0.0 | | 0.9 | | 0.8 | | 12.5 | |
PPI and PMA SG&A | | 0.9 | | 0.3 | | 200 | | | 1.1 | | 0.4 | | 175.0 | | 2.0 | | 0.7 | | 185.7 | |
Strategic Advisors SG&A | | | 0.1 | | — | | 100.0 | | 0.5 | | — | | 100.0 | |
Earn-out amount earned by the principal of PPI | | 0.9 | | — | | 100 | | | 0.7 | | — | | 100.0 | | 1.6 | | — | | 100.0 | |
Company-wide offsite training conference fees | | 1.1 | | — | | 100 | | |
Management transition expenses | | — | | 0.7 | | | (100 | ) | |
Proxy contest expenses | | | 0.8 | | — | | 100.0 | | 0.9 | | — | | 100.0 | |
Company-wide offsite training conference fees. | | | — | | — | | N/A | | 1.1 | | — | | 100.0 | |
Management transition related expenses | | | — | | 0.1 | | | (100.0 | ) | | — | | 0.8 | | | (100.0 | ) |
| | | | | | | | | | | | | | | | |
Total SG&A | | $ | 9.0 | | $ | 6.9 | | | 30 | % | | $ | 8.6 | | $ | 6.6 | | | 30.3 | % | | $ | 17.5 | | $ | 13.5 | | | 29.6 | % |
| | | | | | | | | | | | | | | | |
Excluding the anticipated expenses including, stock-based compensation, acquisitionsitems detailed above, SG&A earn-out expenses, fees associated with our Company-wide offsite training conference, and management transition expenses; SG&A was held primarily constant by slightly increasing $0.2 million or 4% over the prior year and as a percentage of revenue decreased to 22%21.2% and 20.4% for the three and six months ended March 31,June 30, 2008, asrespectively, over the comparable period of 2007.
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Operating Income
Operating income decreased $1.6 million or 48.5% to $1.7 million and $3.1 million or 55.4% to $2.5 million for the three and six months ended June 30, 2008 compared to 23% for the same period of the prior year.
Operating Income. Operating income decreased $1.5 million, or 65.2% to $0.8 million for the three months ended March 31, 2008, compared to $2.3 million for the same period of the prior year.2007. As a percentage of revenue, operating income decreased to 3.1%6.5% and 4.9% for the three and six months ended March 31,June 30, 2008 as compared to 9.7% for the same period of the prior year. Operating income primarily decreased due to the increase in SG&A offset by an increase in sales and gross profit, asexpenditures discussed above.
Income Tax Expense.
Our effective income tax rates for the three and six months ended March 31,June 30, 2008 and 2007 were 42.9%42.2%, 42.4%, 40.2% and 40.9%40.5%, respectively. The increase in the income tax rate for the three and six months ended March 31,June 30, 2008 was related toincreased over the costsame periods of the prior year as the Company could not recognize the full benefit of stock-based compensation andexpense until the related options are exercised with a disqualifying disposition. The corresponding increase in deferred taxes is primarily due to the timing of recognizing the related tax benefits. We estimate the tax rate for the full year 2008 will be approximately 42 percent.
Liquidity and Capital Resources
The following table presents selected financial information and Liquidity
statistics for each of the periods ended presented:
Our working capital decreased to $28.6 | | | | | | | | |
(in thousands) | | June 30, 2008 | | December 31, 2007 |
Cash, cash equivalents, and short-term investments | | | 8,968 | | | | 16,032 | |
Accounts receivable, net | | | 24,056 | | | | 18,171 | |
Prepaid expenses and other current assets | | | 1,526 | | | | 2,011 | |
Working capital | | | 27,601 | | | | 28,904 | |
As of June 30, 2008, the Company had $9.0 million at March 31, 2008 from $28.9 million at December 31, 2007. Cash andin cash, cash equivalents, plusand short-term investments, decreased to $10.7 million at March 31, 2008,a decrease from $16.0 million at December 31, 2007. The principal components of this net decrease were cash used in cashoperating activities of $3.8 million, including the increase in the number of day’s sales outstanding (“DSO”) to 84 days from 69 days at June 30, 2008 and cash equivalents plus investments was primarily due toDecember 31, 2007, respectively, the $3.6 million payment on the earn-out amount earned by the principal of PPI the share buyback activity in which the Company repurchased $1.0 million of common shares during the three months ended March 31, 2008, which approximated the daily maximum volume limit under SEC rules during the quarter, and approximately $500,000$900,000 of expenses paid on the total $1.1 million of fees related to the Company’s offsite training event, and the cash used in financing activities for the share buyback activity in which the Company repurchased $3.1 million of common shares during the six months ended June 30, 2008, which approximated the daily maximum volume limit under SEC rules during the quarter. The cash used for these expenditures was partially offset by the increase inproceeds from the numbersale of day’s sales outstanding (“DSO”) to 80 days from 69 days at March 31, 2008 and December 31, 2007, respectively.marketable securities. The increase in DSO’s at March 31,June 30, 2008, was primarilyattributed to the $2.8 million increase in unbilled revenues at June 30, 2008 from December 31, 2007 due to approximately $2.0 millionthe cut-off of the $4.5 millionbilling cycle at period end. Excluding the unbilled portion of unbilled revenue, included in net accounts receivable, related to accrued
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revenue on fixed price agreements, where the clients will be invoiced upon the passing of time, and other isolated projects. Excluding these accruals, our DSO’s are at our historical average of 74 days. We expect to reduce our DSO’s to a level at or below our historical average of 74 days before the end of this fiscal year.
We plan to use approximately $400,000 of cash on hand to implement additional modules and functionality to our existing Enterprise Resource Planning Software during the balance of fiscal year 2008.
We believe we have sufficient working capital available under the line of credit and that cash generated by continuing operations will be sufficient to fund operations for at least the next twelve months.
The former Chairman of the Board and CEO of SM&A, who retired from the Company and the Board in March 2007, is soliciting stockholders to vote for a dissident slate of four directors he is recommending to replace four independent incumbent directors. The Board of Directors of SM&A are opposed to the slate of directors presented by Mr. Myers. This on-going proxy contest has demanded management time and corporate resources diverting focus from core business activities. In addition, SM&A has retained a third party proxy solicitor to assist the Company in the solicitation of proxies for a fee not to exceed $200,000, plus reimbursement of out-of-pocket expenses. The Company’s expenses related to the solicitation in excess of those normally spent for an annual meeting with an uncontested director election are estimated to be approximately $500,000, of which approximately $60,000 has been spent as of March 31, 2008. The cost of the Company’s solicitation of proxies will be borne by the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently has no instruments that are sensitive to market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the requisite time periods.
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While the Company’s disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well designed and administered.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in connection with the evaluation of our internal control performed during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II –— OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in ordinary routine litigation incidental to the conduct of our business. There are currently no material pending legal proceedings to which we are a party or of which any of our property is the subject.
Item 1A. Risk Factors
Principal stockholder has significant control and has initiated a proxy contest forThere have been no material changes to the election of directors.
As of April 30, 2008, Steven S. Myers, our former Chief Executive Officer and Chairman of the Board, beneficially owned or controlled approximately 16%risk factors disclosed in Item 1A. to Part I of our outstanding common stock and will have the ability to control or significantly influence the election of directors and the results of other matters submitted to a vote of stockholders. This concentration of ownership may have the effect of delaying or preventing a change in control and may adversely affect the ability of other holders of our common stock to pass stockholder resolutions and control our actions.
As previously announced by Mr. Myers and by the Company, Mr. Myers has provided notice that he intends to nominate his own slate of four nominees for election as directors at our annual meeting of our stockholders. Mr. Myers has solicited proxies for this purpose for use at our annual meeting of our stockholders.
Mr. Myers’ actions in this regard have resulted in the Company incurring significant legal and other advisory expenses. Mr. Myers’ continued actions, and the Company’s responses to those actions, may:
| • | | further divert the attention of our Board of Directors and management from the conduct of the Company’s business and enhancing stockholder value, |
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| • | | cause competitors to negatively use his filings against us in sales proposals, |
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| • | | cause employees to seek other employment outside the Company, |
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| • | | cause current customers to look for alternative vendors, |
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| • | | disrupt any strategic initiatives or transactions in which the Company is involved, |
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| • | | expose the Company to litigation, and |
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| • | | cause the Company to incur additional significant legal, advisory and other expenses. |
Accordingly, the continuation of Mr. Myers’ activities could materially and adversely affect our business, operating results and financial condition.2007 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
InformationThe following table provides information about securities purchased during the three months ended June 30, 2008 under the Company’s share repurchase program is incorporated by reference to Note 9 to the condensed consolidated financial statements.program.
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (d) Approximate |
| | | | | | | | | | (c) Total number | | dollar value of |
| | (a) Total | | (b) | | of shares | | shares that may |
| | number of | | Average | | purchased as part | | yet be purchased |
| | shares | | price paid | | of a publicly | | under the plan |
Period | | purchased | | per share | | announced plan | | (in thousands) |
|
Beginning balance at January 1, 2008 | | | 3,354,860 | | | $ | 7.21 | | | | 3,354,860 | | | $ | 5,797 | |
January 2008 | | | — | | | | — | | | | — | | | | — | |
February 2008 | | | — | | | | — | | | | — | | | | — | |
March 2008 | | | 241,200 | | | | 4.29 | | | | 3,596,060 | | | | 4,763 | |
| | |
Total as of March 31, 2008 | | | 3,596,060 | | | $ | 7.02 | | | | 3,596,060 | | | $ | 4,763 | |
| | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Approximate Dollar | |
| | | | | | | | | | | | | | Value of Shares | |
| | | | | | | | | | Total Number of | | | That May Yet Be | |
| | | | | | | | | | Shares Purchased as | | | Purchased Under the | |
| | Total Number of | | | Average Price Paid | | | Part of a Publicly | | | Plan (in thousands) | |
Period | | Shares Purchased | | | Per Share | | | Announced Plan (1) | | | (2) | |
April 2008 | | | — | | | | — | | | | — | | | $ | 4,763 | |
May 2008 | | | 413,036 | | | $ | 4.97 | | | | 413,036 | | | | 2,709 | |
June 2008. | | | — | | | | — | | | | — | | | | 2,709 | |
| | | | | | | | | | | | |
Total | | | 413,036 | | | $ | 4.97 | | | | 413,036 | | | $ | 2,709 | |
| | | | | | | | | | | | |
| | |
(1) | | We repurchased a total of 413,036 shares of our common stock during the quarter ended June 30, 2008 under a share repurchase program that we announced in May 2004. |
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(2) | | Our Board of Directors has approved a share repurchase program for the repurchase of up to $30 million of our common stock from time-to-time. Under the program, management has discretion to determine the number and price of the shares to be repurchased, and the timing of any repurchases in compliance with applicable law and regulation. |
Item 3. Defaults Upon Senior Securities
Not Applicable.
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Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.(a) | | Our Annual Meeting of Shareholders was held on May 23, 2008. |
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(b) | | In the election, nine nominees of the Board of Directors were elected for one-year terms expiring on the date of the annual meeting in 2009. The votes were as follows: |
| | | | | | | | |
| | For | | | Abstain | |
William C. Bowes | | | 14,564,300 | | | | 18,118 | |
Dwight L. Hanger | | | 14,563,952 | | | | 18,466 | |
J. Christopher Lewis | | | 14,563,750 | | | | 18,668 | |
Cathy McCarthy | | | 14,563,952 | | | | 18,466 | |
Peter Pace | | | 14,563,902 | | | | 18,516 | |
Joseph B. Reagan | | | 14,564,300 | | | | 18,118 | |
Robert Rodin | | | 14,563,952 | | | | 18,466 | |
John P. Stenbit | | | 14,564,102 | | | | 18,316 | |
Robert J. Untracht | | | 14,564,102 | | | | 18,316 | |
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(c) | | The results of voting on Proposals 2 through 3 (as numbered in the 2008 Proxy Statement) were as follows: |
| 2. | | Approval of Amendment to the Amended and Restated Employee Stock Purchase Plan was as follows: |
| | | | |
| | Number of Votes | |
For | | | 13,839,083 | |
Against | | | 724,447 | |
Abstain | | | 18,888 | |
Broker non-votes | | | 0 | |
| 3. | | Approval of the ratification of the appointment of BDO Seidman, LLP to serve as the independent registered public accounting firm for the fiscal year ending December 31, 2008 was as follows: |
| | | | |
| | Number of Votes | |
For | | | 14,562,463 | |
Against | | | 8,440 | |
Abstain | | | 11,715 | |
Broker non-votes | | | 0 | |
(d) | | In May 2008, prior to SM&A’s annual stockholder meeting, SM&A and its former Chairman of the Board and CEO entered into an agreement to settle their then pending proxy contest. See the proxy soliciting material contained in SM&A’s Schedule 14A Definitive Revised Proxy filed with the SEC on May 22, 2008, for a description of the terms of the settlement and the anticipated cost to SM&A in connection therewith. |
Item 5. Other Information
Not Applicable.
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Item 6. Exhibits
INDEX TO EXHIBITS
Exhibits (numbered in accordance with Item 601 of Regulation S-K).
2.1 | | Stock Purchase Agreement, by and among Project Planning, Inc., Richard Bowe, its Shareholder, and SM&A&A.. |
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| | Filed on February 12, 2007 as Exhibit 99.2 to the registrant’s Current Report on Form 8-K and incorporated herein by reference. |
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2.2 | | Stock Purchase Agreement, by and among Performance Management Associates, Inc., James A. Wrisley and Paulette Wrisley, its Shareholders, and SM&A. |
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| | Filed on September 19, 2007 as Exhibit 10.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference. |
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2.3 | | Amendment to Stock Purchase Agreement, by and among Performance Management Associates, Inc., James A. Wrisley and Paulette Wrisley, its Shareholders, and SM&A. |
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| | Filed on March 7, 2008 as Exhibit 2.3 to the registrant’s Annual Report on Form 8-K and incorporated herein by reference. |
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2.4 | | Amendment to Stock Purchase Agreement, by and among Project Planning, Inc., Richard Bowe, its Shareholder, and SM&A. |
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| | Filed herewith.on May 9, 2008 as Exhibit 2.4 to the registrant’s report on Form 10-Q and incorporated herein by reference. |
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3.1 | | Certificate of Incorporation of SM&A, a Delaware corporationcorporation.. |
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| | Filed on December 6, 2006 as Exhibit 3.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference. |
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3.2 | | Bylaws of SM&A, a Delaware corporationcorporation.. |
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| | Filed on December 6, 2006 as Exhibit 3.3 to the registrant’s Current Report on Form 8-K and incorporated herein by reference. |
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3.3 | | Agreement and Plan of Merger, between SM&A, a California corporation, and SM&A, a Delaware corporationcorporation.. |
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| | Filed on December 6, 2006 as Exhibit 2.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference. |
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10.2810.1 | | Amendment No. 1 to Employment Agreement of Cathy L. McCarthy. |
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| | Filed on January 17, 2008 as Exhibit 99.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference. |
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10.2910.2 | | Employment Agreement of Peter PacePace.. |
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| | Filed on January 24, 2008 as Exhibit 99.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference. |
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10.4010.3 | | Indemnification AgreementsAgreement entered into as of May 21, 2008 by and between Steven S. Myers and SM&A, a Delaware corporation.. |
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| | Filed on March 10,May 23, 2008 as Exhibit 10.1 to the registrant’s current report on Form 8-K and incorporated herein by reference. |
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10.4110.4 | | Renewal of Revolving NoteCredit Agreement dated April 24, 2006, executed by SM&A, in favor ofMay 1, 2008 between City National Bank and SM&A, a Delaware corporation. |
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| | Filed on May 6, 2008 as Exhibit 10.1 to the registrant’s current report on Form 8-K and incorporated herein by reference. |
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31.1 | | Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002.. |
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| | Filed herewith. |
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31.2 | | Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002.. Filed herewith. |
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| | Filed herewith. |
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32 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| | Filed herewith. |
1817
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| SM&A (Registrant)
| |
| (Registrant) | |
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Dated: May 9,August 8, 2008 | By: | /s/ JAMES R. ECKSTAEDT | |
| | James R. Eckstaedt | |
| | Executive Vice President, Finance and Chief Financial Officer | |
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| | |
Dated: May 9,August 8, 2008 | By: | /s/ CATHY MCCARTHY | |
| | Cathy McCarthy | |
| | President and Chief Executive Officer | |
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