ITEM 1B - UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2
ITEM 2 - PROPERTIES
We do not own any real estate. We lease our principal corporate offices adjacent to the John Wayne Airport in Newport Beach, California. We have approximately 31,000 square feet of office space in this location and the term of our lease expires in June 2012. We believe our offices are adequate for our present and anticipated near-term need.
Included in discontinued operations is one office lease totaling 48,000 square feet which has been subleased under non-cancelable leases. Both the lease and related subleases expire in June 2007.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
We are involved in routine litigation incidental to the conduct of our business. There are currently no material pending litigation proceedings to which we are a party or to which any of our property is subject.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our common stock trades on the NASDAQ National Market under the symbol “WINS.” The following table sets forth, for the quarters indicated, the high and low closing sale prices as reported on NASDAQ.
As of January 31, 2007, there were approximately 78 stockholders of record of our common stock. The closing sale price of our common stock on the NASDAQ National Market on January 31, 2007 was $6.30 per share.
Dividends
We have not declared or paid cash dividends to stockholders of our common stock. We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, capital requirements, and our general financial condition.
Recent Sales of Unregistered Securities
None.
Shares Reserved for Future Issuance
The following table provides information as of December 31, 2006 about our Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans.
Issuer Purchases of Equity Securities
In May 2004, the Company’s Board of Directors authorized a plan to repurchase the Company’s common stock. The Company intends to repurchase shares from time to time, at prevailing prices, in the open market. The timing and amount of the share repurchases will be at the discretion of management and
will be based on such factors as the stock price, general economic and market conditions, and other factors. The share repurchase plan may be suspended or discontinued at any time.
Information about securities purchased under the Company’s share repurchase program is incorporated by reference to Note 9 to the Company’s annual report to security holders and the Company’s condensed consolidated financial statements contained herein in Item 15 of Part IV.
Performance Graph
The following graph presents a comparison of the cumulative total stockholder return since December 31, 2001 of the Company’s Common Stock, the SIC Code for “Management Consulting Services” and the NASDAQ Market Index. The graph assumes an initial investment of $100 at December 31, 2001 and reinvestment of all dividends.
COMPARISION OF CUMULATIVE FIVE-YEAR TOTAL RETURN
ITEM 6
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conj unction with the consolidated financial statements and notes thereto and the information contained herein in Item 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
SM&A’s discussion and analysis of its financial condition and results of operations are based upon SM&A’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Note that preparation of this Annual Report on Form 10-K requires SM&A to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of its financial statements, and the reported amounts of revenue and expenses during the reporting period. SM&A bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily derived from other sources. There can be no assurance that actual amounts will not differ from those estimates.
SM&A has identified the policies below as critical to its business operations and the understanding of its results of operations.
Revenue Recognition. We recognize revenue from services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collection is reasonably assured. The majority of our services are provided under “time and expenses” billing arrangements and revenue is recognized on the basis of hours worked plus other reimbursable contract costs incurred during the period. Revenue is directly related to the total number of hours billed to clients and the associated hourly billing rates. A limited amount of revenue is also derived from success fees, offered to clients as a pricing option, and recorded as revenue only upon attainment of the specified incentive criteria. Success fees are not billable and revenue is not recorded until the client wins a contract.
Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Estimates made in preparing the financial statements include the allowance for doubtful accounts, reserves for discontinued operations, and income tax valuation allowances.
Stock-Based Compensation. We recognize stock-based compensation expense in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.” Prior to 2006, we accounted for stock awards under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment” relating to SFAS 123(R). We did not recognize stock-based compensation expense in its statement of operations for periods prior to the adoption of SFAS 123(R) unless options granted had an exercise price greather than the market value of the underlying common stock on the date of grant. The fair value for each option granted is estimated at the date of grant using a Black-Scholes-Merton option pricing model. We estimate the expected life, expected volatility and expected forfeitures of the stock options based upon historical data.
Expected Life. The expected life of options granted represents the period of time for which the options are expected to be outstanding.
Expected Volatility. The estimated expected volatility is measured on historical realized volatility.
Risk-Free Interest Rate. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the date of grant.
Dividends. The Company does not currently anticipate paying any cash dividends on its common stock. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model.
Forfeitures. SFAS 123(R) requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. To determine an expected forfeiture rate, the Company examined the historical employee turnover rate since inception. Forfeitures are based on historical data specific to employee characteristics. For purposes of calculating pro forma information under SFAS No. 123 for periods prior to January 1, 2006, the Company accounted for forfeitures as they occurred.
Overview
SM&A is the world’s leading provider of Competition Management (business capture and proposal development) services, and a leading provider of Program Services (post-award risk mitigation and profit maximizing) services. Under these two service lines, our approximately 330 employees and consultants provide strategy, proposal management, program management, systems engineering, program planning, and other high-value technical support to major industrial customers in the defense, homeland security, aerospace, information technology, and engineering sectors.
One of our initiatives over the past three years has been to reduce our customer concentration risk by penetrating new markets and providing our services to new customers within our existing markets. As the table below reveals, our strategy of mitigating our customer concentration risk has worked as our concentration on our top clients has been declining. It should still be noted that a loss of one or more of these major clients, a decrease in orders by one or more of these clients or a change in the combination of services purchased by one or more these clients could adversely affect our revenues, net income and margins.
Project concentration risk is defined as having a significant amount of the Company’s revenue being generated on one Program Services project. A recent example was when one of our current Program Services projects, which we staffed with more than 35 of our associates and generated approximately 15% of our total revenue in 2005. While we continue to provide our services to this program, our client unexpectedly reduced our services over a three month period which led to a reduction in our services by approximately $7.8 million in fiscal 2006 compared to fiscal 2005. While this risk is not evident today, the possibility to provide a significant volume of our solutions and services on any one given program has a high probability to occur.
Our effort to expand into new markets over the past few years has also improved. As the “Revenues by Market Vertical” table below reveals, our revenues in our less mature non-aerospace and defense vertical realized a decline in revenue after four years of year-over-year growth. This decline was due to concentration risk at our largest client in this vertical. This one client, for which we provide our Competition Management services through a business process outsourcing arrangement, reduced our services by approximately $5.1 million due to their internal budget pressures. We are working on
diversifying our risk within this one client by providing our services across multiple divisions so that no one division can have a significant impact on the total services being provided.
We also realize that our heritage, brand name awareness, and value proposition has historically been tied to our Competition Management services. We have helped our clients win over 1,000 proposals worth more than $330 billion with an 85% win rate on dollars awarded. We are executing towards a strategy that will establish our reputation as not only providing valuable Competition Management services, but also our ability to provide a broad range of high value solutions and leadership on those programs which our clients have been awarded. We feel that we are uniquely positioned to provide our senior leadership and solutions throughout the entire life cycle of a program; from the initial strategy development to the delivery of the product by our client to their customer. Our end-to-end solutions and senior leadership and experience will help our clients not only win more business, but increase their profitability on their programs through the efficient and effective execution of their program.
During the past two years we have developed new solutions and consulting services under our Program Services business in order to broaden our offerings. While we have had success in the development of these services and solutions internally, the Company is continuing to search for niche solution providers that complement our existing offering. The following table summarizes our Program Services revenue breakdown.
* Denotes percent increase of initial year of service offering.
Lastly, we have spent the last few years building our infrastructure to support our expected growth. We started fiscal 2004 by hiring our first Executive Vice President of Sales & Marketing who in turn has hired the most senior and professional sales force our Company has ever had. This senior relationship based professional sales force has not experienced any turnover in the past 12 months. We invested in marketing and new solutions and services collateral; we invested in the creation of numerous training courses and quality initiatives to make sure we were delivering a consistent quality service or solution; we invested in the implementation of an Oracle enterprise resource planning software system and a knowledge management software system; we invested in our recruiting capabilities in order to source quality candidates to provide our broad array of services; and lastly we invested in the development of our new solutions and service offerings. We now believe that we have invested in what is required to manage our expected growth and therefore we are likely to save a targeted $2.0 million in selling, general and administrative expenses in fiscal 2007.
On February 9, 2007, the Company completed an acquisition of Project Planning, Inc. (“PPI”). The acquisition continues our focus on adding capabilities to provide end-to-end customer solutions. During 2006, PPI generated approximately $7.5 million in revenue.
We feel confident that our strategy of providing end-to-end high value solutions and services to our customers across the program life cycle is the correct growth strategy. Our planned fiscal year 2007 growth coupled with our targeted reduction in costs of approximately $2.0 million in fiscal 2007 and our continuing share repurchase program should lead to increasing stockholder value.
Results of Operations
We present the table below to show how the operating results have changed over the past three years. Next to each year’s results of operations, we provide the relevant percentage of total revenues so that you can make comparisons about the relative change in revenues and expenses.
Comparison of Fiscal Years Ended December 31, 2006, 2005 and 2004
Revenue. Revenue decreased $4.9 million or 6.4% to $71.8 million in fiscal 2006, compared to $76.7 million for 2005. The decrease in our revenue was realized in our non-aerospace and defense business and due primarily to one client who reduced our service levels due to their internal budget pressures. We have increased our service levels with this client at the end of the third quarter of 2006 as the customer entered their new fiscal year. This reduction accounted for a decrease of $5.1 million, or 32.3% compared to the prior year. Total non-aerospace and defense revenue declined $4.3 million, or 19% to $18.3 million as compared to $22.6 million in the prior year. Total aerospace and defense revenue declined 1.2% to $53.5 million compared to $54.1 million for fiscal 2006 and 2005, respectively. During 2006, revenues from our Competition Management and Program Services service lines were 63.0% and 37.0%, respectively, as compared to 57.6% and 42.4% in 2005. During the second half of 2005 we experienced a significant reduction in services on a Program Services project. The reduction resulted from a client who is experiencing budget pressure on one of their programs. This budget pressure continued throughout 2006 which impacted our ability to continue to service the client at the levels maintained during the first nine months of fiscal 2005. This reduction was offset by an increase in new solution and offering revenue of $1.2 million. We added 22 and 27 new customers in fiscal 2006 and 2005, respectively. These new customers accounted for 6% and 8% of our total revenues in 2006 and 2005, respectively. Revenue from success fees remained consistent at $900,000 in 2006 and 2005.
Revenue increased $7.7 million or 11.2% to $76.7 million in fiscal 2005, compared to $69.0 million for 2004. Through our sales and marketing efforts, we achieved a 5% growth in our traditional aerospace and defense markets and 31% in our non-aerospace and defense markets. As displayed above, revenues from
our Competition Management and Program Services service lines was 57.6% and 42.4%, respectively, as compared to 56.5% and 43.5% in 2004. We added 27 and 29 new customers in fiscal 2005 and 2004, respectively. Of the 27 and 29 new customers, they accounted for 8% and 9% of our total revenues in 2005 and 2004, respectively. Revenue from success fees decreased to $900,000 in 2005 as compared to $1.8 million in 2004. The timing and amounts recorded are dependent on award announcements and the mix of our business which utilizes this pricing model. During the second half of 2005 we experienced a significant reduction in services on a Program Services project. The reduction resulted from a client who is experiencing budget pressure on one of their programs. This budget pressure continued throughout the quarter and impacted our ability to continue to service the client at the levels maintained during the first nine months of fiscal 2005.
Gross Margin. Gross margin decreased $3.2 million, or 10.0% to $28.8 million for fiscal 2006 compared to $32.0 million for 2005. As a percentage of revenue, fiscal 2006 gross margin declined to 40.1% as compared to 41.7% in 2005. The decrease in gross margin as a percentage of revenue was due to our mix of services, increased benefit costs, and some moderate increases in some labor rates paid to our associates. We expect that our future gross margins will be consistent with current year.
Gross margin increased $815,000, or 2.6% to $32.0 million for fiscal 2005 compared to $31.2 million for 2004. As a percentage of revenue, fiscal 2005 gross margin declined to 41.7% as compared to 45.2% in 2004. The decrease in gross margin as a percentage of revenue was due to two factors. First, in fiscal 2005 we made a planned change to our sales incentive compensation program which increased our cost of sales as a percentage of revenue by 200 basis points. We expect that our future gross margins will be consistent with current year. Second, in fiscal 2005 we received $900,000 in “success fees” compared to approximately $1.8 million in 2004. The timing and amounts recorded are dependent on award announcements and the mix of our business which utilizes this pricing model.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist principally of salary and benefit costs for our executives, sales and administrative personnel, Program Services and other general corporate activities. Selling, general and administrative expenses in fiscal 2006 increased $1.7 million, or 7.9%, to $23.3 million, as compared to $21.6 million for the same period of the prior year. As a percentage of revenue, our selling, general and administrative expenses increased to 32.5% for fiscal 2006, compared to 28.1% for 2005. The $1.7 million increase was due to a $1.2 million planned expense related to the development of new solutions for our Program Services business. In addition, we completed the implementation of our Oracle ERP system which included expenses of approximately $600,000 in 2006. The Company announced that it has targeted an expense reduction of approximately $2.0 million in 2007 as our investments in new solutions and ERP system implementation costs concluded in 2006. In addition, a small reduction in head count in late 2006 is expected to contribute to the decline in payroll costs in fiscal 2007.
For fiscal 2005, selling, general and administrative expenses increased $4.7 million, or 27.8%, to $21.6 million, as compared to $16.9 million for the same period of the prior year. As a percentage of revenue, our selling, general and administrative expenses increased to 28.1% for fiscal 2005, compared to 24.5% for 2004. The $4.7 million increase was due to a $1.3 million increase in our sales and marketing expense related to the increase in hiring of our account executives, including their travel related expenses. In addition, we increased our internal training expenses by $600,000 for our employees delivering our services, and we incurred approximately $800,000 in expenses relating to an employee all hands offsite event held in 2005, but not in 2004. Lastly, in fiscal 2005, we recorded a non-cash stock-based compensation expense charge of $2.2 million related to the exercise of stock options, as required under accounting guidance EITF 00-23.
Operating Income. Operating income for fiscal 2006 decreased by $4.9 million, or 47.1%, to $5.5 million compared to $10.4 million for 2005. As a percentage of revenue for fiscal 2006, operating
income decreased to 7.7% compared to 13.6% for 2005. The decrease in amount and as a percentage of revenue in fiscal 2006 was due to the increase in selling, general and administrative expenses as described above, offset by the increase in gross margin dollars.
For fiscal 2005, operating income decreased by $3.9 million, or 27.0%, to $10.4 million compared to $14.3 million for 2004. As a percentage of revenue for fiscal 2005, operating income decreased to 13.6% compared to 20.7% for 2004. The decrease in amount and as a percentage of revenue in fiscal 2005 was due to the increase in selling, general and administrative expenses as described above, offset by the increase in gross margin dollars.
Interest Income. Interest income in fiscal 2006 and 2005 increased by $187,000 and $394,000, or 31.9% and 205.2%, to $773,000 and $586,000, respectively. This increase is attributable to interest earned on our increased cash and cash equivalents and investment balances.
Income Tax Expense. Our effective income tax rate for fiscal 2006 was 42.0% compared to 35.8% in 2005. During 2006, the Company recorded an increase to income tax expense of approximately $40,000, which related to an increase in tax expense from an income tax examination.
Our effective income tax rate for fiscal 2005 was 35.8% compared to 34.9% in 2004. During 2005, the Company recorded a reduction of income tax expense of approximately $160,000, which related to the reduction of a federal income tax liability that was reversed due to the expiration of a statute of limitations.
Liquidity and Capital Resources
A key element of the Company’s cash flows for the last three years follows:
Net decrease in net cash provided by operating activities in fiscal 2006 as compared to 2005 and 2004 was due primarily to the change in accounts receivable of $5.3 million in fiscal 2006. Accounts receivable increased due to the increase in sales in the fourth quarter. In 2005 we improved on our timing of our collection cycle which generated $2.8 million compared to an outflow of cash of $1.0 million in fiscal 2004. The decrease in fiscal 2006 was offset by an increase in prepaid income taxes of $675,000 and a reduction of accounts payable of $429,000.
Net cash provided by investing activities was $3.2 million in 2006, up from the cash used of $6.8 million from 2005 and 718,000 from 2004. Most of the increase in cash used in investing activities was a result of $5.0 million cash inflows from the disposal of short term investments in marketable securities. The remaining outflow in 2006 of $1.8 million was for additional implementation costs of our Enterprise Resource Planning software program.
Net cash used in financing activities was $8.2 million in fiscal 2006 compared to $8.1 million and $2.5 million in 2005 and 2004, respectively. We received cash proceeds from the issuance of common stock of $519,000, $2.0 million and $2.1 million in fiscal 2005 and 2004, respectively. This increase was offset by cash outflows of $8.7 million, $10.1 million and 4.6 million in fiscal 2006, 2005 and 2004 related to management’s share repurchase program.
In May 2004, the Company’s Board of Directors authorized a plan to repurchase up to $7.0 million of the Company’s common stock. In April and October 2005, the Company’s Board of Directors authorized
an increase of an additional $5.0 million and $8.0 million, respectively, increasing the total authorization to repurchase the Company’s common stock to $20.0 million. In January 2006, the Company’s Board of Directors authorized an increase of an additional $10.0 million increasing the total authorization to repurchase the Company’s common stock to $30.0 million. The Company intends to repurchase shares from time to time, at prevailing prices, in the open market. The timing and amount of the share repurchases will be at the discretion of management and will be based on such factors as the stock price, general economic and market conditions, and other factors. The share repurchase plan may be suspended or discontinued at any time. Shares repurchased under the plan prior to our reincorporation in the state of Delaware were cancelled. After the date of reincorporation (November 30, 2006), the shares are included in treasury shares. For the year ended December 31, 2006, the Company repurchased 1,402,277 shares at a total cost of $8.7 million. Since the inception of the share repurchase plan, the Company has repurchased 3,215,443 shares at a total cost of $23.4 million. The Company currently has approximately $6.6 million remaining in share repurchase authorization.
Cash and cash equivalents decreased $4.0 million during the year to $15.1 million at the end of 2006. Based on projected cash flows from operations and existing credit facilities, management believes the Company has available sufficient liquidity to fund operations and capital requirements for at least the next twelve months.
The Company has a revolving credit agreement which allows for borrowings up to $10.0 million at the prime rate minus one half of one percent (-0.50%) per annum or LIBOR plus two and one quarter percent (2.25%) per annum. The revolving credit agreement is renewable annually on April 30th of each year. Borrowings under the revolving credit agreement are unsecured. The agreement requires the Company to comply with certain financial covenants pertaining to its tangible net worth, ratio of total liabilities to tangible net worth, and ratio of current assets to current liabilities (as defined in the agreement). The agreement also contains certain negative covenants which, among other things, restrict the 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. At December 31, 2006, the Company was in compliance with its covenants and had no outstanding borrowings under the line of credit, the bank had issued a letter of credit for $64,000 and $9.9 million was available.
On February 9, 2007, the Company completed an acquisition of Project Planning, Inc. (“PPI”). At closing, SM&A paid total consideration valued at approximately $5.5 million, including $3.5 million in cash, and would pay up to an additional $9.5 million over a three year period upon satisfaction of certain revenue goals for SM&A’s Project Planning division.
We believe we have sufficient working capital available under the line of credit and cash generated by continuing operations will be sufficient to fund operations for at least the next twelve months.
Contractual Obligations
The payments due on our contractual obligations at December 31, 2006 are as follows:
Included in discontinued operations is one office lease totaling 48,000 square feet which has been subleased under non-cancelable leases. Both the lease and related subleases expire in June 2007.
Off-Balance Sheet Arrangements
None.
Recently Issued Financial Accounting Standards
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure related to uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will be required to adopt FIN 48 in the first quarter of 2007. The Company is still evaluating the impact that the adoption of FIN 48 will have, if any, on its consolidated financial statements and notes thereto. However, the Company does not expect the adoption of FIN 48 to have a material effect on its financial position or operating results.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will adopt SFAS 157 in 2007 and does not expect these provisions to have a material impact on it’s our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” to permit all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. SFAS 159 also applies to eligible items existing at November 15, 2007 (or early adoption date). The Company will adopt SFAS 159 in 2007 and does not expect these provisions to have a material impact on it’s our financial position and results of operations.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary objective in managing our cash balances is preservation of principal and maintenance of liquidity to meet our operating needs. Our excess cash balances are invested in money market accounts and short-term municipal bonds in which there is minimal interest rate risk.
ITEM 8
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Our Consolidated Financial Statements are annexed to this Report as pages through. An index to such materials appears on page.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On June 21, 2006, the Company engaged BDO Seidman, LLP (“BDO”), as the Company’s independent registered public accounting firm, replacing Ernst & Young LLP (“EY”), which resigned as our independent accountants effective May 18, 2006. The change in independent accountants was approved by the Company’s board of directors upon the recommendation of the audit committee.
The audit reports of EY on the consolidated financial statements for the Company as of and for the years ended December 31, 2005 and 2004 did not contain an adverse opinion or a disclaimer of opinion, or were qualified or modified as to uncertainty, audit scope, or accounting principles. As noted below, these financial statements were restated in an Amendment No. 1 to Form 10-K/A on May 15, 2006.
During the audits of the Company’s financial statements for the two years ended December 31, 2005 and 2004 and in connection with EY’s review of the subsequent interim period through May 18, 2006, there have been no disagreements with EY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of EY, would have caused it to make reference to the subject matter of the disagreement in connection with its report, except for the following:
· In March 2006, the Company received a comment letter from the Securities and Exchange Commission staff in connection with the staff’s review of the Company’s Form 10-K for the year ended December 31, 2005 that, among other things, asked the Company to explain the accounting for certain share repurchase transactions. Following receipt of the comment letter, the Company’s management, the Chairman of the Company’s Audit Committee of its Board of Directors, and EY had numerous and lengthy discussions, and disagreed regarding possible errors in accounting for transactions that occurred in 2004 and 2005. The Company believed that these share repurchases were not compensatory and EY supported a contrary opinion. At no time did EY assert that the Company failed to provide its auditors all relevant facts with respect to the transactions during the completion of the audits for fiscal years 2004 and 2005. Ultimately, the SEC staff orally stated to the Company that the staff believed that the transactions were compensatory and requested that the Company restate its financial statements for the year ended December 31, 2005, and to review and consider whether the Company should restate its financial statements for the year ended December 31, 2004. Subsequently, the Company restated its consolidated financial statements for the years ended December 31, 2005 and 2004 in Amendment No.1 to Form 10-K/A filed on May 15, 2006. EY issued an opinion with respect to the restated financial statements without qualification as stated above.
The Company has authorized EY to respond fully to the inquiries of the Company’s subsequent accountants concerning the subject matter of the disagreement referenced above. In the registrant’s two most recent fiscal years and in the subsequent interim period through May 18, 2006, there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K, except as follows:
· EY advised the Company that the internal controls necessary to develop reliable financial statements did not exist as of December 31, 2005, because of a material weakness consisting of inadequate levels of review of complex accounting issues, resulting in a restatement of historical financial statements to record additional stock compensation charges.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management (under the supervision and with the participation of the chief executive officer and the chief financial officer) has conducted an evaluation of its internal control over financial reporting based on the criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. Based on this evaluation, management has determined that the Company’s internal control over financial reporting was effective as of December 31, 2006.
BDO Seidman, LLP, the independent registered public accounting firm that audited the Company’s financial statements included in the Form 10-K, has issued an attestation report on management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, which is included below.
Changes in Internal Control
The Company began using a new enterprise accounting system in the second quarter of 2006. The implementation of the new accounting system required us to modify and add numerous internal controls and processes. There have been no other changes in the Company’s internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are likely to materially effect, the Company’s internal control over financial reporting.
Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
To the Board of Directors and Stockholders
SM&A
Newport Beach, CA
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that SM&A maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). SM&A’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that SM&A maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, SM&A maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2006, and the related consolidated statement of income, stockholders’ equity, and cash flows for the year ended December 31, 2006 of SM&A and our report dated March 12, 2007 expressed an unqualified opinion thereon.
/s/ BDO Seidman LLP
Costa Mesa, California
March 12, 2007
ITEM 9B
ITEM 9B - OTHER INFORMATION
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item is incorporated herein by reference to the registrant’s Definitive Proxy Statement with respect to the 2007 Annual Meeting of Stockholders to be filed with the SEC in April 2007, pursuant to Regulation 14A.
Code of Business Conduct
The Company has adopted a Code of Business Conduct applicable to all employees. This Code is applicable to Senior Financial Executives including the principal executive officer, principal financial officer and principal accounting officer of the Company. SM&A’s Code of Business Conduct is available on the Company’s Web site at www.smawins.com under “Investor Relations > Corporate Governance.” The Company intends to post on its web site any amendments to, or waivers from its Code of Business Conduct applicable to Senior Financial Executives. A free copy is available upon request.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference to the registrant’s Definitive Proxy Statement with respect to the 2007 Annual Meeting of Stockholders to be filed with the SEC in April 2007, pursuant to Regulation 14A.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Issuer Purchases of Equity Securities:
In May 2004, the Company’s Board of Directors authorized a plan to repurchase the Company’s common stock. The Company intends to repurchase shares from time to time, at prevailing prices, in the open market. The timing and amount of the share repurchases will be at the discretion of management and will be based on such factors as the stock price, general economic and market conditions, and other factors. The share repurchase plan may be suspended or discontinued at any time.
Information about securities purchased under the Company’s share repurchase program is incorporated by reference to Note 9 to the Company’s annual report to security holders and the Company’s condensed consolidated financial statements contained herein in Item 15 of Part IV.
Additional information required by this item is incorporated herein by reference to the registrant’s Definitive Proxy Statement with respect to the 2007 Annual Meeting of Stockholders to be filed with the SEC in April 2007, pursuant to Regulation 14A.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference to the registrant’s Definitive Proxy Statement with respect to the 2007 Annual Meeting of Stockholders to be filed with the SEC in April 2007, pursuant to Regulation 14A.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated herein by reference to the registrant’s Definitive Proxy Statement with respect to the 2007 Annual Meeting of Stockholders to be filed with the SEC in April 2007, pursuant to Regulation 14A.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Index to Consolidated Financial Statements
Report of the Independent Registered Public Accounting Firm, BDO Seidman, LLP.
Report of the Independent Registered Public Accounting Firm, Ernst & Young LLP.
Consolidated Balance Sheets at December 31, 2006 and 2005.
Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004.
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts for the Years Ended December 31, 2006, 2005 and 2004.
All other financial statement schedules have been omitted because they are not applicable, not required, or the information is included in the Consolidated Financial Statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SM&A
Newport Beach, CA
We have audited the accompanying consolidated balance sheet of SM&A as of December 31, 2006 and the related consolidated statement of income, stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 2006 listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SM&A at December 31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein for the year ended December 31, 2006.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) “Share-based Payment.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of SM&A’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2007 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Costa Mesa, California
March 12, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SM&A
We have audited the accompanying consolidated balance sheet of SM&A as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SM&A at December 31, 2005, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
February 20,
SM&A
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
SM&A
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
See accompanying notes to consolidated financial statements.
SM&A
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
See accompanying notes to consolidated financial statements.
SM&A
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to consolidated financial statements.
SM&A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006, 2005, and 2004
As used herein, “SM&A,” “Company,” “its,” and similar terms include SM&A and subsidiaries, unless the context indicates otherwise.
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business. SM&A is a leading provider of Competition Management (business capture and proposal development) services, and a leading provider of Program Services (post-award risk mitigation and profit maximizing) services. Under these two service lines, our approximately 330 employees and consultants provide strategy, proposal management, program management, systems engineering, program planning, and other high-value technical support to major industrial customers in the defense, homeland security, aerospace, systems integration/information technology, and engineering sectors. The Company operates in one business segment and conducts substantially all of its business in the United States.
Principles of Consolidation. The consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications. In 2005 and 2004 amounts have been reclassified out of common stock to additional paid-in capital to conform to the current period $0.0001 common stock par value presentation in accordance with the Company’s reincorporating in Delaware. In addition, all references to “shareholders” have been changed to “stockholders” in accordance with the reincorporation in Delaware.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Estimates made in preparing the financial statements include the allowance for doubtful accounts, reserves for discontinued operations, and income tax valuation allowances.
Cash and Cash Equivalents. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Investments. Securities investments that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities. Investments held to maturity mature between one and twelve months and are reported at amortized cost.
Revenue Recognition. The Company recognizes revenue from services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured. The majority of the Company’s services are provided under “time and expenses” billing arrangements and revenue is recognized on the basis of hours utilized, and other reimbursable contract costs incurred during the period. Revenue is directly related to the total number of hours billed to clients and the associated hourly billing rates. A limited amount of revenue is also derived from success fees offered to clients as a pricing option, and recorded as revenue only upon the attainment of the specified incentive criteria. Success fees are not billable and revenue is not recorded until the customer wins a contract.
Concentrations of Credit Risk and Major Customers. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company’s accounts receivable are derived from revenue earned from customers primarily in the United States. The majority of the Company’s receivables are from large companies in the aerospace and defense industries. The Company controls credit risk through credit approvals and monitoring procedures and, generally, does not require collateral or other security to support financial instruments subject to credit risk. Management must make estimates regarding the collection of its accounts receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Credit losses have historically been within management’s expectations. Included in accounts receivable at December 31, 2006 and 2005, is $2.0 million and $209,000, respectively, of unbilled receivables related to earned revenues for which invoices have not yet been sent to clients.
Customers representing more than 10% of the Company’s revenue and accounts receivable are as follows:
* Did not meet 10% criteria.
Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, accounts receivable, payables, and accrued liabilities are measured at cost and approximate their respective fair values because of the short maturities of these instruments.
Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company measures fair value based on quoted market prices or based on discounted estimates of future cash flows. Long-lived assets to be disposed of are carried at fair value less costs of sale.
Fixed Assets. Fixed assets are stated at cost less accumulated depreciation, and are depreciated on a straight-line basis over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are being amortized over the shorter of the useful life or lease term.
Marketing and Advertising Expense. Marketing expenses consist of advertising, promotional and public relations expenditures. The Company expenses general media advertising costs as incurred. Advertising expense and other promotional costs were $291,000, $435,000 and $406,000 in 2006, 2005 and 2004, respectively.
Stock-Based Compensation. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.” Prior to 2006, we accounted for
stock awards under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment” relating to SFAS 123(R). The Company did not recognize stock-based compensation expense in its statement of operations for periods prior to the adoption of SFAS 123(R) unless options granted had an exercise price greater than the market value of the underlying common stock on the date of grant. However, we modified the stock option grants of a former officer and director upon their respective resignation and retirement from SM&A, which resulted in combined compensation expense of $2.2 million and $0.4 million during 2005 and 2004, respectively. The pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation for all periods presented:
The fair value for each option granted was estimated at the date of grant using a Black-Scholes-Merton option pricing model, assuming no expected dividends and the following weighted average assumptions:
The expected life of options granted represents the period of time for which the options are expected to be outstanding. The estimated expected volatility is measured on historical realized volatility. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the date of grant. The Company does not currently anticipate paying any cash dividends on its common stock. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model. SFAS 123(R) requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. To determine an expected forfeiture rate, the Company examined the historical employee turnover rate since inception. Forfeitures are based on historical data specific to employee characteristics. For purposes of calculating pro forma information under SFAS No. 123 for periods prior to January 1, 2006, the Company accounted for forfeitures as they occurred.
For the year ended December 31, 2006, $1.3 million was recognized as stock-based compensation expense under SFAS 123(R). Unrecognized compensation costs related to stock options as of December 31, 2006 was $2.3 million and the weighted-average life of these options is approximately 4 years.
On June 8, 2005, the Board of Directors (the “Board”) of SM&A (the “Company”), upon recommendation of the Board’s Audit and Compensation Committees, approved the accelerated vesting of certain unvested and “out-of-the-money” options held by current employees, officers and directors (the “Acceleration”). The options accelerated were granted under the Company’s Second Amended and Restated Equity Incentive Plan (the “Plan”).
As a result of the Acceleration, the affected unvested options are those that had exercise prices of greater than $8.87 per share. The closing sales price of the Company’s common stock on the NASDAQ National market on June 8, 2005, the effective date of the Acceleration, was $8.87. Pursuant to the Acceleration, options granted under the Plan to purchase approximately 403,000 shares of the Company’s common stock that would otherwise have vested at various times within the next four years became fully vested. Of the 403,000 options, 200,000 options were granted to current Directors, 100,000 were granted to current Officers, and the remaining 103,000 options were granted to current employees. The options have a range of exercise prices of $9.07 to $12.66. As a result of the Acceleration, each agreement for options subject to the Acceleration is deemed to be amended to reflect the Acceleration as of the effective date, but all other terms and conditions of each such option agreement remain in full force and effect.
The decision to initiate the Acceleration under the Plan was made to reduce compensation expense that would be expected to be recorded in future periods following the Company’s adoption of SFAS 123(R). As a result of the Acceleration under the Plan, the Company effectively reduced its aggregate compensation expense related to the accelerated options by approximately $1.8 million before taxes over the remaining vesting period for the accelerated options (approximately four years). This estimate is based on approximated value calculations using the Black-Scholes-Merton methodology.
Prior to adopting SFAS 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123(R) requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow. As a result of adopting SFAS 123(R), excess tax benefits for the year ended December 31, 2006 have been classified as a financing cash outflow.
Income Taxes. The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” As such, deferred tax assets and liabilities are recognized based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates. The Company provides a valuation allowance when it is more likely than not that some of the deferred tax assets will not be realized.
Net Income Per Share. Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the periods presented. Diluted net income per share is computed by dividing net income available to common stockholders by the weighted average number of common and common equivalent shares outstanding during the periods presented, assuming the exercise of all in-the-money stock options. Common stock equivalent shares have not been included where inclusion would be anti-dilutive.
The following table illustrates the number of shares used in the computation of basic and diluted net income per share:
Comprehensive Income. SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. For the years ended December 31, 2006, 2005 and 2004, comprehensive income equaled net income.
Recent Accounting Pronouncements. In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure related to uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will be required to adopt FIN 48 in the first quarter of 2007. The Company is still evaluating the impact that the adoption of FIN 48 will have, if any, on its consolidated financial statements and notes thereto. However, the Company does not expect the adoption of FIN 48 to have a material effect on its financial position or operating results.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will adopt SFAS 157 in 2007 and does not expect these provisions to have a material impact on it’s our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” to permit all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. SFAS 159 also applies to eligible items existing at November 15, 2007 (or early adoption date). The Company will adopt SFAS 159 in 2007 and does not expect these provisions to have a material impact on it’s our financial position and results of operations.
Note 2. Fixed Assets
A summary of fixed assets follows at December 31:
In January 2005, the Company capitalized tenant improvement incentives of $255,000, which is included in leasehold improvements. Amortization expense for this addition was $34,000 and $34,000 in 2006 and 2005, respectively. Depreciation expense was $888,000, $604,000 and $368,000 in 2006, 2005 and 2004, respectively, of which $51,000, $64,000 and $43,000 are included in cost of sales, and $836,000, $540,000 and $325,000 are included in selling, general and administrative expenses for the years ended December 31, 2006, 2005 and 2004, respectively.
Note 3. Related Party Transactions
The Company periodically leases aircraft from SummitJets, Inc., which is owned by the Company’s Chairman and Chief Executive Officer. The lease rate was determined through a review of prevailing market rates for such services. During the years ended December 31, 2006, 2005 and 2004, the Company recorded an expense of $149,000, $121,000 and $139,000, respectively. The expense is included in selling, general and administrative expenses. Of the amount expensed in 2006, no balance remained in accounts payable as of December 31, 2006.
In March 2005, the Company facilitated the exercising of stock options upon the retirement of a former member of the Board of Directors. Upon the exercising of the options, the Company repurchased 15,000 shares for a total discounted cost of $117,000. In April 2005, the Company facilitated the exercising of stock options upon the retirement of a former member of the Board of Directors. Upon the exercising of the options, the Company repurchased 200,000 shares for a total discounted cost of $1.7 million. In April 2005, the Company facilitated the exercising of stock options upon the resignation of the former President and Chief Operating Officer. Upon the exercising of the options, the Company repurchased 150,625 shares for a total discounted cost of $1.2 million. The Company purchased all the shares at a 3.6% discount. The Company recorded $2.2 million of stock compensation expenses for these transactions as a result of guidance in Emerging Issues Task Force No. 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44 (“EITF 00-23”).
During 2004, the Company facilitated the exercising of stock options upon the retirement of a former member of the Board of Directors. Upon the exercising of the options, the Company repurchased 87,500 shares for a total discounted cost of $595,000. The Company recorded $424,000 of stock compensation expense for this transaction as a result of guidance in EITF 00-23.
Two officers of the Company serve on the Board of Directors of two not-for-profit agencies. The Company has provided charitable donations to these two not-for-profit agencies in the amount of $18,000, $18,000 and $28,000 in 2006, 2005 and 2004, respectively.
Note 4. Investments in Marketable Securities
In November 2005, the Company purchased short-term state issued marketable securities for $5.0 million. In September 2006, the Company disposed of its marketable securities. There were no realized gains or losses upon disposal. Interest income was $97,000 and $21,000 in 2006 and 2005, respectively.
Note 5. Revolving Line of Credit
The Company has a revolving credit agreement which allows for borrowings up to $10.0 million at the prime rate minus one half of one percent (-0.50%) per annum or LIBOR plus two and one quarter percent (2.25%) per annum. The revolving credit agreement is renewable annually on April 30th of each year. Borrowings under the revolving credit agreement are unsecured. The agreement requires the Company to comply with certain financial covenants which includes tangible net worth, ratio of total liabilities to tangible net worth, and ratio of current assets to current liabilities (as defined in the agreement). The agreement also contains certain negative covenants which, among other things, restrict the 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. At December 31, 2006, the Company was in compliance with its covenants and had no outstanding borrowings under the line of credit, the bank had issued a letter of credit for $64,000 and $9.9 million was available.
Note 6. Discontinued Operations
Prior to fiscal year 2004, the Company sold and dissolved two of its business segments. The balance accrued at December 31, 2006 of $42,000 represents the remaining office lease commitment, net of subleases, over the remaining term of the lease. During the year ended December 31, 2006, the Company paid $354,000, net of sublease receipts, related to the leased property.
Note 7. Income Taxes
Significant components of income tax expense attributable to income from continuing operations consist of:
The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate:
Significant components of deferred tax assets and liabilities are as follows:
In assessing the viability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes that it is more likely than not the Company will realize the benefits of these deductible differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.
During 2004, the Company received a federal income tax refund related to the 1998 IRS audit of one of its discontinued operations, which was higher than previously accrued for. During 2003, the Internal Revenue Service completed their examination related to the years 1998 through 2001. Based on the favorable conclusion of their examination, the Company recorded a reduction in its tax contingency of $1.5 million.
During 2004, the Company completed and filed its federal and state income tax returns for the calendar year ended December 31, 2003. Based on the income tax returns filed, the Company recorded an
adjustment to its state effective tax rate in the second quarter resulting in a reduction of income tax expense of $182,000. This reduction of $182,000, coupled with a current year state tax provision rate adjustment of $125,000, resulted in a reduction of income tax expense of approximately $307,000.
During 2005, the Company recorded a reduction of income tax expense of approximately $160,000, which related to the reduction of a federal income tax liability that was reversed due to the expiration of a statute of limitations. During 2006, the Company’s capital loss carryover of approximately $3.5 million expired. The Company recorded the expired deferred tax asset against the valuation allowance.
Note 8. Stock-Based Compensation and Employee Benefit Plans
Stock Option Plan. In 1997, the Company adopted the 1997 Stock Option Plan, later amended and restated (the “Option Plan”), under which incentive and non-statutory stock options to acquire shares of the Company’s common stock may be granted to officers, employees, and consultants. The Option Plan is administered by the Board of Directors and permits the issuance of up to 5,000,000 shares of the Company’s common stock. Incentive stock options must be issued at an exercise price not less than the fair market value of the underlying shares on the date of grant. Options granted under the Option Plan vest over various terms up to ten years and are exercisable over a period of time, not to exceed ten years, and are subject to other terms and conditions specified in each individual employee option agreement. A summary of employee stock options is as follows:
The total intrinsic value of options exercised during the years ended December 31, 2006, 2005, and 2004 were $38,000, $4.5 million, and $2.4 million, respectively.
The following table summarizes information concerning stock options outstanding at December 31, 2006:
Employee Stock Purchase Plan. In 1999, the Company adopted an Employee Stock Purchase Plan (the “ESPP”), later amended and restated. Under the ESPP, shares of the Company’s common stock may be purchased at three-month intervals at 95% of the lower of the fair market value on the first or the last day of each three-month period. Employees may elect to have a maximum of 15% of their gross bi-weekly compensation withheld during any offering period. The total authorized shares currently allocated to the ESPP reserve are 1,500,000 and as of December 31, 2006, of which 1,337,170 shares have been distributed to participants.
Defined Contribution Plans. The SM&A 401(k) Plan and Trust (the “Plan”) is a defined contribution plan. The Plan includes a tax-deferred 401(k) provision and applies to all employees. Contributions are made to the Plan by employees and the Company. The Plan permits employee contributions up to 20% of eligible compensation with Company matching, supplemental contributions for certain classes of employees based on performance criteria, and profit sharing under certain conditions. The Company’s matching contribution was $348,000, $318,000 and $360,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
Shares Reserved for Future Issuance. At December 31, 2006, the Company had reserved 1,555,605 shares for future issuance under the stock option plan and 162,830 shares under the employee stock purchase plan.
Note 9. Stockholders’ Equity
In May 2004, the Company’s Board of Directors authorized a plan to repurchase up to $7.0 million of the Company’s common stock. In April and October 2005, the Company’s Board of Directors authorized an increase of an additional $5.0 million and $8.0 million, respectively, increasing the total authorization to repurchase the Company’s common stock to $20.0 million. In January 2006, the Company’s Board of Directors authorized an increase of an additional $10.0 million increasing the total authorization to repurchase the Company’s common stock to $30.0 million. The Company intends to repurchase shares from time to time, at prevailing prices, in the open market. The timing and amount of the share repurchases will be at the discretion of management and will be based on such factors as the stock price, general economic and market conditions, and other factors. The share repurchase plan may be suspended or discontinued at any time. Shares repurchased under the plan prior to our reincorporation in the state of Delaware were cancelled. After the date of reincorporation (November 30, 2006), the shares are included in treasury shares. For the year ended December 31, 2006, the Company repurchased 1,402,277 shares at a total cost of $8.7 million. Since the inception of the share repurchase plan, the Company has repurchased 3,215,443 shares at a total cost of $23.4 million. The Company currently has approximately $6.6 million remaining in share repurchase authorization.
On November 30, 2006, SM&A, a California corporation (“SM&A-California”), consummated a merger (the “Reincorporation”) with and into its wholly owned subsidiary, SM&A, a Delaware corporation (“SM&A-Delaware” or the “Company”). As a result of the Reincorporation, the Company is now a Delaware corporation. As provided by the Merger Agreement, each outstanding share of SM&A-California common stock was automatically converted into one share of SM&A-Delaware common stock, $0.0001 par value. Each stock certificate representing issued and outstanding shares of SM&A-California common stock continues to represent the same number of shares of SM&A-Delaware common stock. In accordance with Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Common Stock, $0.0001 per share, of SM&A-Delaware, are deemed to be registered under Section 12(b) of the Exchange Act. Following the Reincorporation, SM&A-Delaware common stock continues to be quoted on the NASDAQ National Market under the same symbol (“WINS”) as the shares of SM&A-California common stock had been traded. Stockholders do not need to exchange share certificates based upon the reincorporation. The Company’s reincorporating in Delaware had no impact on the Company’s financial statements.
Note 10. Commitments and Contingencies
Commitments.
Leases. The Company currently leases office facilities and property and equipment under non-cancelable operating leases, which include escalation clauses. Rental expense under operating lease agreements relating to continuing operations for 2006, 2005 and 2004 was $1.0, $1.3 and $0.7 million, respectively. The aggregate future minimum rental to be received under non-cancelable subleases relating to discontinued operations as of December 31, 2006 was $330,000. Future minimum lease payments are as follows for the years ending December 31:
Contingencies.
From time to time, the Company may be involved in legal proceedings and claims that arise in the ordinary course of business. The Company is currently unaware of any legal proceedings or claims against it that management believes will have, individually or in the aggregate, a materially adverse effect on its business, financial condition, or operating results.
The Company entered into employment agreements with its Chairman and Chief Executive Officer and its President and Chief Operating Officer and into benefit agreements with other executives of the Company (collectively “Agreements”). Under the terms of each of the Agreements, the Company may be obligated to pay a severance payment ranging from nine months to two years of the respective employee’s base salary, depending of 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 twelve months of current annual base salary and up to eighteen months of health and life insurance benefits.
Indemnifications
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 furture 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 December 31, 2006.
Note 11. Quarterly Financial Data (Unaudited)
The following summarized unaudited quarterly financial data has been prepared using the Company’s consolidated financial statements. Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R).
Note 12. Subsequent Events
On February 9, 2007, the Company acquired privately held Project Planning Inc. (“PPI”), a leading provider of consulting, education, implementation and support services for enterprise project management solutions. Under the terms on the agreement with PPI, SM&A acquired all of PPI for cash and common shares. On February 9, 2007, the Board of Directors of SM&A unanimously approved the terms of the transaction.
The Stock Purchase Agreement by and among PPI, Richard Bowe, its Shareholder, and SM&A, entered into as of January 31, 2007, was subject to customary closing conditions, including the continued employment of key personnel and the absence of a material adverse change in PPI’s business. At closing, SM&A paid total consideration valued at approximately $5.5 million, consisting of cash of $3.5 million and 333,333 shares of the Company stock, and could pay up to an additional $9.5 million over a three year period upon satisfaction of certain revenue goals for SM&A’s Project Planning division. Richard Bowe and other key personnel provided SM&A with covenants not to compete against the acquired business. SM&A was indemnified by the seller for breaches of representations, warranties and covenants, subject to certain limitations more fully set forth in the Stock Purchase Agreement.
At closing, Richard Bowe, the President of PPI, entered into an employment agreement with SM&A and became President of SM&A’s Project Planning division, which will deploy resources from both the acquired business and SM&A’s current base of associates.
On March 13, 2007, the Company announced that Steven S. Myers, who is currently Chairman of the Board of Directors and CEO, will retire on March 31, 2007. Mr. Myers will also retire from the Company’s Board of Directors. Cynthia A. Davis-Sailar has been named Chief Executive Officer effective April 1, 2007 and will also join the SM&A Board of Directors. Dwight Hanger, a member of the SM&A Board of Directors since 2005, was elected to become Chairman of the Board, effective April 1, 2007. In addition, Cathy L. McCarthy, current President and Chief Operating Officer, will be leaving SM&A to pursue a new business venture after a transition period that will be completed by year end.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
The Company specifically analyzes accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Based on this analysis, no adjustment to the allowance for doubtful accounts was required in 2006 or 2005, and the Company did reduce the allowance for doubtful accounts by $140,000 in 2004.
During 2006, the Company’s capital loss carryover of approximately $3.5 million expired. The Company recorded the expired deferred tax asset against the valuation allowance.
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.
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven S. Myers and Steve D. Handy his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
Exhibits (numbered in accordance with item 601 of Regulation S-K).
2.1
Stock Purchase and Sale Agreement, by and among the Registrant, Steven Myers Holding Inc. and L-3 Communications Corporation.(1)
2.2
Amendment No.1 to Stock Purchase and Sale Agreement, by and among the Registrant, Steven Myers Holding Inc. and L-3 Communications Corporation.(2)
3.1
Amended and Restated Articles of Incorporation.(3)
3.2
Amended and Restated Bylaws of the Registrant.(4)
3.3
Certificate of Incorporation of SM&A, a Delaware corporation.(5)
3.4
Bylaws of SM&A, a Delaware corporation.(6)
3.5
Agreement and Plan of Merger, between SM&A, a California corporation, and SM&A, a Delaware corporation.(7)
10.1
Amended and Restated 1997 Stock Option Plan and related form of Stock Option Agreement.(8)
10.2
Second Amended and Restated Equity Incentive Plan.(9)
10.3
Amended and Restated Employee Stock Purchase Plan.(10)
10.4
Office Facility Lease.(11)
10.5
Amendment No. 1 to Office Facility Lease.(12)
10.6
Employment Agreement of Steven S. Myers.(13)
10.7
Amendment No. 1 to Employment Agreement of Steven S. Myers.(14)
10.8
Amendment No. 2 to Employment Agreement of Steven S. Myers.(15)
10.9
Amendment No. 3 to Employment Agreement of Steven S. Myers.(16)
10.10
Amendment No. 4 to Employment Agreement of Steven S. Myers.(17)
10.11
Amendment No. 5 to Employment Agreement of Steven S. Myers.(18)
10.12
Amendment No. 6 to Employment Agreement of Steven S. Myers.(19)
10.13
Amendment No. 7 to Employment Agreement of Steven S. Myers.(20)
10.14
Retirement Agreement of Steven S. Myers.(21)
10.15
Employment Agreement of Cathy L. Wood.(22)
10.16
Amendment No. 1 to Employment Agreement of Cathy L. Wood.(23)
10.17
Amendment No. 2 to Employment Agreement of Cathy L. Wood.(24)
10.18
Amendment No. 3 to Employment Agreement of Cathy L. Wood.(25)
10.19
Amendment No. 4 to Employment Agreement of Cathy L. Wood.(26)
10.20
Amendment No. 5 to Employment Agreement of Cathy L. McCarthy (formerly Wood).(27)
10.21
Amendment No. 6 to Employment Agreement of Cathy L. McCarthy.(28)
10.22
Employment Agreement of Cynthia Davis-Sailar.(29)
10.24
Accounts Receivable Loan Agreement dated January 10, 2002, by and between the Registrant and City National Bank, a national banking association.(30)
10.25
Commercial Guaranty dated January 10, 2002, executed by Steven Myers & Associates, Inc. in favor of City National Bank, a national banking association.(31)
10.26
Revolving Loan Agreement dated October 14, 2003, by and between the registrant and City National Bank, a national association.(32)
10.27
Revolving Note dated April 10, 2003, executed by SM&A, in favor of City National Bank.(33)
10.28
Renewal of Revolving Note dated April 27, 2004, executed by SM&A, in favor of City National Bank.(34)
10.29
Renewal of Revolving Note dated April 29, 2005, executed by SM&A, in favor of City National Bank.(35)
10.30
Renewal of Revolving Note dated April 24, 2006, executed by SM&A, in favor of City National Bank.(36)
10.31
Consultant Agreement of Bowes Enterprises.(37)
10.32
Consultant Agreement of Joseph B. Reagan.(38)
10.33
Stock Purchase Agreement.(39)
10.34
Indemnification Agreements.(40)
10.35
Employment Agreement of Richard Bowe.(41)
21.1
Subsidiaries of the Registrant.(42)
23.1
Consent of Independent Registered Public Accounting Firm, BDO Seidman, LLP.(43)
23.2
Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP.(44)
31.1
Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(45)
31.2
Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(46)
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.(47)
Footnote#
(1) Filed on November 27, 2001 as Exhibit 10.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(2) Filed on December 14, 2001 as Exhibit 10.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(3) Filed on March 15, 2002 as Exhibit 3.1 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(4) Filed on May 3, 2002 as Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(5) Filed on December 6, 2006 as Exhibit 3.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(6) Filed on December 6, 2006 as Exhibit 3.3 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(7) Filed on December 6, 2006 as Exhibit 2.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(8) Filed on April 17, 2001 as Exhibit 10.1 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(9) Filed on February 24, 2006, as Exhibit 10.2 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(10) Filed on April 29, 2002 as Exhibit C to the registrant’s Annual Proxy Statement on Form 14A and incorporated herein by reference.
(11) Filed on November 21, 1997 as Exhibit 10.3 to the registrant’s Registration Statement 333-4075 on Form S-1 (Registration No. 333-4075) and incorporated herein by reference.
(12) Filed on October 22, 2004 as Exhibit 10.25 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(13) Filed on April 17, 2001 as Exhibit 10.17 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(14) Filed on March 15, 2002 as Exhibit 10.7 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(15) Filed on May 3, 2002 as Exhibit 10.8 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(16) Filed on March 11, 2003 as Exhibit10.7 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(17) Filed on February 6, 2004 as Exhibit 10.8 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(18) Filed on October 22, 2004 as Exhibit 10.21 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(19) Filed on April 21, 2006 as Exhibit 99.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(20) Filed on December 20, 2006 as Exhibit 99.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(21) Filed on March 13, 2007 as Exhibit 10.2 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(22) Filed on March 15, 2002 as Exhibit 10.8 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(23) Filed on November 4, 2002 as Exhibit 10.10 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(24) Filed on March 11, 2003 as Exhibit 10.10 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(25) Filed on February 6, 2004 as Exhibit 10.12 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(26) Filed on October 22, 2004 as Exhibit 10.22 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(27) Filed on April 21, 2006 as Exhibit 99.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(28) Filed on August 23, 2006 as Exhibit 99.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(29) Filed on March 13, 2007 as Exhibit 10.1 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(30) Filed on January 25, 2002 as Exhibit 99.2 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(31) Filed on January 25, 2002 as Exhibit 99.3 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(32) Filed on February 6, 2004 as Exhibit 10.18 to the registrant’s Annual Report on Form 10-K and incorporated herein by reference.
(33) Filed on July 31, 2003 as Exhibit 10.16 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(34) Filed on July 21, 2004 as Exhibit 10.20 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(35) Filed on July 14, 2005 as Exhibit 10.25 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(36) Filed on May 15, 2006 as Exhibit 10.29 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(37) Filed on October 22, 2004 as Exhibit 10.23 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(38) Filed on October 22, 2004 as Exhibit 10.24 to the registrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.
(39) Filed on February 12, 2007 as Exhibit 99.2 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(40) Filed on December 6, 2006 as Exhibits 10.1 through 10.10 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(41) Filed on February 12, 2007, as Exhibit 99.3 to the registrant’s Current Report on Form 8-K and incorporated herein by reference.
(42) Filed herewith.
(43) Filed herewith.
(44) Filed herewith.
(45) Filed herewith.
(46) Filed herewith.
(47) Filed herewith.