##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from      to
 Commission file number 0-23585.
 
 When You Must Win
 SM&A
  Delaware
    
    33-0080929(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)4695 MacArthur Court, 8thFloor, Newport Beach, California
    
    92660(Address of principal executive offices)
    
    (Zip Code)
 (949) 975-1550
 Not applicable
  þ o
  o þ o o
   o þ




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##### 



SM&A
 INDEX


PagePART I. FINANCIAL INFORMATIONCautionary Statement Related to Forward Looking Statements
    
    
    3How to Obtain SM&A SEC Filings
    
    
    3Item 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Income
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    14PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    15Item 1A.
    
    Risk Factors
    
    
    15Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3.
    
    Defaults Upon Senior Securities
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16Item 5.
    
    Other Information
    
    
    16Item 6.
    
    Exhibits
    
    
    17Signatures
    
    
    19EXHIBIT 2.4EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS
 This Quarterly Report on Form 10-Q includes certain forward-looking statements as defined
within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, relating to revenue, revenue composition, earnings, projected
plans, performance, contract procurement, demand trends, future expense levels, trends in average
headcount and gross margins, and the level of expected capital expenditures. Such forward-looking
statements are based on the beliefs of, estimates made by, and information currently available to
SM&A (the Company) management and are subject to certain risks, uncertainties and assumptions.
Any statements contained herein (including without limitation statements to the effect that the
Company or management estimates, expects, anticipates, plans, believes, projects,
continues, may, will, could, or would or statements concerning potential or
opportunity or variations thereof or comparable terminology or the negative thereof) that are not
statements of historical fact should be construed as forward-looking statements. The actual results
of SM&A may vary materially from those expected or anticipated in these forward-looking statements.
The realization of such forward-looking statements may be impacted by certain important
unanticipated factors including those discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations, at pages 12-14. Because of these and other factors
that may affect SM&As operating results, past performance should not be considered as an indicator
of future performance, and investors should not use historical results to anticipate results or
trends in future periods. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers
should carefully review the risk factors described in this and other documents that SM&A files from
time to time with the Securities and Exchange Commission (SEC), including subsequent Current
Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
 
 HOW TO OBTAIN SM&A SEC FILINGS
 All reports filed by SM&A with the SEC are available free of charge via EDGAR through the SEC
website at www.sec.gov. In addition, the public may read and copy materials filed by the Company
with the SEC at the SECs public reference room located at 450 Fifth St., N.W., Washington, D.C.
20549. SM&A also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge
to investors upon request and makes electronic copies of its most recently filed reports available
through its website at www.smawins.com as soon as reasonably practicable after filing such material
with the SEC.
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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SM&A
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,251
    
    
    $
    5,422Investments
    
    
    7,455
    
    
    
    10,610Accounts receivable, net
    
    
    22,373
    
    
    
    18,171Prepaid expenses and other current assets
    
    
    2,772
    
    
    
    2,011Total current assets
    
    
    35,851
    
    
    
    36,214Fixed assets, net
    
    
    3,306
    
    
    
    3,399Goodwill
    
    
    8,374
    
    
    
    8,278Intangibles, net
    
    
    1,781
    
    
    
    1,892Other assets
    
    
    1,369
    
    
    
    895$
    50,681
    
    
    $
    50,678LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,156
    
    
    $
    1,925Accrued compensation and related benefits
    
    
    4,992
    
    
    
    3,508Accrued contingent consideration
    
    
    
    
    
    
    1,750Other current liabilities
    
    
    138
    
    
    
    127Total current liabilities
    
    
    7,286
    
    
    
    7,310Other liabilities
    
    
    748
    
    
    
    785Total liabilities
    
    
    8,034
    
    
    
    8,095Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    46,048
    
    
    
    45,450Treasury stock
    
    
    (2,540
    )
    
    
    (1,506
    )Accumulated deficit
    
    
    (863
    )
    
    
    (1,363
    )Total stockholders equity
    
    
    42,647
    
    
    
    42,583$
    50,681
    
    
    $
    50,678
 See accompanying notes to condensed consolidated financial statements.
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SM&A
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three Months EndedMarch 31,2008
    
    
    2007Revenue
    
    $
    25,423
    
    
    $
    23,624Cost of revenue
    
    
    15,685
    
    
    
    14,417Gross margin
    
    
    9,738
    
    
    
    9,207Selling, general and administrative expenses
    
    
    8,957
    
    
    
    6,894Operating income
    
    
    781
    
    
    
    2,313Interest income, net
    
    
    95
    
    
    
    143Income before income taxes
    
    
    876
    
    
    
    2,456Income tax expense
    
    
    376
    
    
    
    1,005Net income
    
    $
    500
    
    
    $
    1,451Net income per share:Basic
    
    $
    0.03
    
    
    $
    0.08Diluted
    
    $
    0.03
    
    
    $
    0.08Shares used in calculating net income per share:Basic
    
    
    18,990
    
    
    
    18,609Diluted
    
    
    19,100
    
    
    
    18,800
 See accompanying notes to condensed consolidated financial statements.
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##### Table of Contents



SM&A
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    500
    
    
    $
    1,451Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    289
    
    
    
    274Loss on disposal of assets
    
    
    32
    
    
    
    Stock-based compensation expense
    
    
    421
    
    
    
    400Deferred income taxes
    
    
    (489
    )
    
    
    (49
    )Changes in operating assets and liabilities, net of business acquisitions:Accounts receivable
    
    
    (4,202
    )
    
    
    (7,877
    )Prepaid expenses and other assets
    
    
    (746
    )
    
    
    (64
    )Accounts payable
    
    
    231
    
    
    
    432Accrued compensation and related benefits
    
    
    1,484
    
    
    
    2,749Other liabilities
    
    
    (1,776
    )
    
    
    (2
    )Net cash used in operating activities
    
    
    (4,256
    )
    
    
    (2,686
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of fixed assets
    
    
    (117
    )
    
    
    (402
    )Purchases of marketable securities
    
    
    (3,355
    )
    
    
    (6,000
    )Proceeds from sale of marketable securities
    
    
    6,510
    
    
    
    2,000Cost of acquisitions, net of cash acquired
    
    
    (96
    )
    
    
    (2,674
    )Net cash provided by (used in) investing activities
    
    
    2,942
    
    
    
    (7,076
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    177
    
    
    
    148Payment for repurchase of shares
    
    
    (1,034
    )
    
    
    (842
    )Net cash used in financing activities
    
    
    (857
    )
    
    
    (694
    )Net decrease in cash and cash equivalents from continued operations
    
    
    (2,171
    )
    
    
    (10,456
    )Net cash used in discontinued operations by operating activities
    
    
    
    
    
    
    (42
    )Net decrease in cash and cash equivalents
    
    
    (2,171
    )
    
    
    (10,498
    )Cash and cash equivalents at beginning of period
    
    
    5,422
    
    
    
    15,143Cash and cash equivalents at end of period
    
    $
    3,251
    
    
    $
    4,645SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:Common stock issued for an acquisition
    
    $
    
    
    
    $
    2,213Common stock issued to non-employee directors
    
    $
    39
    
    
    $
    
 See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2008 and 2007
 Note 1. Basis of Presentation
    Recent Accounting Pronouncements
 Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133,
 Fair Value Measurements Effective Date of FASB Statement No. 157
 Note 2. Net Income Per Share
  Three Months EndedMarch 31,2008
    
    2007Denominator for basic income per common share:Weighted-average shares outstanding during the period
    
    
    18,990
    
    
    
    18,609Incremental shares attributable to dilutive outstanding stock options
    
    
    110
    
    
    
    191Denominator for diluted income per share
    
    
    19,100
    
    
    
    18,800Anti-dilutive shares excluded from the foregoing reconciliation
    
    
    2,136
    
    
    
    1,329
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Note 3. Investments in Marketable Securities
  Note 4. Stock-Based Compensation
  Three Months EndedMarch 31,2008
    
    2007Expected life (in years)
    
    
    2.6
    
    
    
    3.8Stock price volatility
    
    
    34.0
    %
    
    
    78.6
    %Risk-free interest rate
    
    
    2.5
    %
    
    
    4.9
    %Forfeiture rate
    
    
    10.6
    %
    
    
    9.8
    %Stock dividend yield
    
    
    N/A
    
    
    
    N/AWeighted-average fair value per option granted
    
    $
    1.36
    
    
    $
    3.67
  Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Fair Value of
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Options Granted
    
    
    ValueOutstanding at December 31, 2007
    
    
    2,272,448
    
    
    $
    7.43Granted
    
    
    450,428
    
    
    
    5.58
    
    
    $
    1.36Exercised
    
    
    
    
    
    
    Cancelled, Forfeited or Expired
    
    
    (135,750
    )
    
    
    8.19Outstanding at March 31, 2008
    
    
    2,587,126
    
    
    
    7.07
    
    
    
    
    
    
    $
    361,000Exercisable at March 31, 2008
    
    
    1,298,676
    
    
    $
    7.70
    
    
    
    
    
    
    $
    361,000
    Note 5. Acquisitions
 Project Planning, Incorporated.
  8




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Performance Management Associates, Inc.
  Unaudited Pro Forma Financial Information
  Three Months 
Ended(in thousands, except for share information)
    
    March 31, 2007Revenue
    
    $
    25,509Net income
    
    $
    1,445Pro forma net income per common share:Basic
    
    $
    0.08Diluted
    
    $
    0.08
 Note 6. Intangible Assets and Goodwill
 Intangible Assets
  Goodwill
  Note 7. Income Taxes
  Note 8. Credit Facility
  9




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Note 9. Stockholders Equity
   CommonStock andAdditionalCommon
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    Stockholders(in thousands, except share data)
    
    Shares
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    EquityBalances at December 31, 2007
    
    
    18,998,110
    
    
    $
    45,452
    
    
    $
    (1,506
    )
    
    $
    (1,363
    )
    
    $
    42,583Proceeds from the issuance of
common stock
    
    
    31,911
    
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    177Stock-based compensation expense
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    
    
    
    
    421Repurchased treasury shares
    
    
    (241,200
    )
    
    
    
    
    
    
    (1,034
    )
    
    
    
    
    
    
    (1,034
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    500Balances at March 31, 2008
    
    
    18,788,821
    
    
    $
    46,050
    
    
    $
    (2,540
    )
    
    $
    (863
    )
    
    $
    42,647
  Note 10. Commitment and Contingencies
     10




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11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Results of Operations
 Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
  Three Months Ended March 31,2008
    
    2007
    
    Change$
    
    %
    
    $
    
    %
    
    $
    
    %Revenue
    
    
    25.4
    
    
    
    100.0
    
    
    
    23.6
    
    
    
    100.0
    
    
    
    1.8
    
    
    
    7.6Cost of revenue
    
    
    15.7
    
    
    
    61.7
    
    
    
    14.4
    
    
    
    61.0
    
    
    
    1.3
    
    
    
    9.0Gross margin
    
    
    9.7
    
    
    
    38.3
    
    
    
    9.2
    
    
    
    39.0
    
    
    
    0.5
    
    
    
    5.4Selling, general and administrative expenses
    
    
    9.0
    
    
    
    35.4
    
    
    
    6.9
    
    
    
    29.2
    
    
    
    2.1
    
    
    
    30.4Operating income
    
    
    0.8
    
    
    
    3.1
    
    
    
    2.3
    
    
    
    9.7
    
    
    
    (1.5
    )
    
    
    (65.2
    )Interest income, net
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    
    
    
    
    0.0Income tax expense
    
    
    0.4
    
    
    
    1.6
    
    
    
    1.0
    
    
    
    4.2
    
    
    
    (0.6
    )
    
    
    (60.0
    )Net income
    
    
    0.5
    
    
    
    2.0
    
    
    
    1.4
    
    
    
    5.9
    
    
    
    (0.9
    )
    
    
    (64.3
    )
 Revenue.
  Three Months Ended March 31,(in millions)
    
    2008
    
    
    2007
    
    
    % GrowthRevenues by Market VerticalAerospace and Defense (A&D)
    
    $
    19.5
    
    
    $
    19.9
    
    
    
    (2
    %)Non Aerospace and Defense (SIIT)
    
    
    5.9
    
    
    
    3.7
    
    
    
    60Total
    
    $
    25.4
    
    
    $
    23.6
    
    
    
    8
    %Revenues by Service LineCompetition Management
    
    $
    13.3
    
    
    $
    14.4
    
    
    
    (8
    %)Program Services
    
    
    12.1
    
    
    
    9.2
    
    
    
    32Total
    
    $
    25.4
    
    
    $
    23.6
    
    
    
    8
    %
    Gross Margin.
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Selling, General and Administrative Expenses.
   For the three months ended March 31,(in millions)
    
    2008
    
    
    2007
    
    
    % GrowthSG&A before the segregated expenses below
    
    $
    5.7
    
    
    $
    5.5
    
    
    
    4
    %Stock-based compensation
    
    
    0.4
    
    
    
    0.4
    
    
    
    0PPI and PMA SG&A
    
    
    0.9
    
    
    
    0.3
    
    
    
    200Earn-out amount earned by the principal of PPI
    
    
    0.9
    
    
    
    
    
    
    
    100Company-wide offsite training conference fees
    
    
    1.1
    
    
    
    
    
    
    
    100Management transition expenses
    
    
    
    
    
    
    0.7
    
    
    
    (100
    )Total SG&A
    
    $
    9.0
    
    
    $
    6.9
    
    
    
    30
    %
  Operating Income
 Income Tax Expense
 Capital Resources and Liquidity
  13




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Controls
  14




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Principal stockholder has significant control and has initiated a proxy contest for the election of
directors.
    
    
    further divert the attention of our Board of Directors and management from the conduct
of the Companys business and enhancing stockholder value,
    
    cause competitors to negatively use his filings against us in sales proposals,
    
    cause employees to seek other employment outside the Company,
    
    cause current customers to look for alternative vendors,
    
    disrupt any strategic initiatives or transactions in which the Company is involved,
    
    expose the Company to litigation, and
    
    cause the Company to incur additional significant legal, advisory and other expenses.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  (d) Approximate(c) Total number
    
    dollar value of(a) Total
    
    (b)
    
    of shares
    
    shares that maynumber of
    
    Average
    
    purchased as part
    
    yet be purchasedshares
    
    price paid
    
    of a publicly
    
    under the planPeriod
    
    purchased
    
    per share
    
    announced plan
    
    (in thousands)Beginning balance at January 1, 2008
    
    
    3,354,860
    
    
    $
    7.21
    
    
    
    3,354,860
    
    
    $
    5,797January 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 2008
    
    
    241,200
    
    
    
    4.29
    
    
    
    3,596,060
    
    
    
    4,763Total as of March 31, 2008
    
    
    3,596,060
    
    
    $
    7.02
    
    
    
    3,596,060
    
    
    $
    4,763
 
 Item 3. Defaults Upon Senior Securities
  15




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Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  16




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Item 6. Exhibits
 INDEX TO EXHIBITS
 Exhibits (numbered in accordance with Item 601 of Regulation S-K).
 2.1
    
    Stock Purchase Agreement, by and among Project Planning, Inc., Richard Bowe, its Shareholder, and SM&A.Filed on February 12, 2007 as Exhibit 99.2 to the registrants Current Report on Form 8-K and incorporated herein by
reference.2.2
    
    Stock Purchase Agreement, by and among Performance Management Associates, Inc., James A.
Wrisley and Paulette Wrisley, its Shareholders, and SM&A.Filed on September 19, 2007 as Exhibit 10.1 to the registrants Current Report on Form 8-K
and incorporated herein by reference.2.3
    
    Amendment to Stock Purchase Agreement, by and among Performance Management Associates,
Inc., James A. Wrisley and Paulette Wrisley, its Shareholders, and SM&A.Filed on March 7, 2008 as Exhibit 2.3 to the registrants Annual Report on Form 8-K and
incorporated herein by reference.2.4
    
    Amendment to Stock Purchase Agreement, by and among Project Planning, Inc., Richard Bowe,
its Shareholder, and SM&A.Filed herewith.3.1
    
    Certificate of Incorporation of SM&A, a Delaware corporation.Filed on December 6, 2006 as Exhibit 3.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference.3.2
    
    Bylaws of SM&A, a Delaware corporation.Filed on December 6, 2006 as Exhibit 3.3 to the registrants Current Report on Form 8-K and
incorporated herein by reference.3.3
    
    Agreement and Plan of Merger, between SM&A, a California corporation, and SM&A, a Delaware corporation.Filed on December 6, 2006 as Exhibit 2.1 to the registrants Current Report on Form 8-K and incorporated herein by
reference.10.28
    
    Amendment No. 1 to Employment Agreement of Cathy L. McCarthy.Filed on January 17, 2008 as Exhibit 99.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference.10.29
    
    Employment Agreement of Peter Pace.Filed on January 24, 2008 as Exhibit 99.1 to the registrants Current Report on Form 8-K and
incorporated herein by reference.10.40
    
    Indemnification Agreements.Filed on March 10, 2008 as Exhibit 10.1 to the registrants current
report on Form 8-K and incorporated herein by reference.10.41
    
    Renewal of Revolving Note dated April 24, 2006, executed by SM&A, in favor of City
National Bank.Filed on May 6, 2008 as Exhibit 10.1 to the registrants current report on Form 8-K and
incorporated herein by reference.31.1
    
    Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Filed herewith.31.2
    
    Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Filed herewith.
 17




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32
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Filed herewith.
 18




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##### Table of Contents



SIGNATURES
  SM&A(Registrant)Dated:  May 9, 2008
    /s/ JAMES R. ECKSTAEDTJames R. EckstaedtExecutive Vice President, Finance and Chief Financial OfficerDated:  May 9, 2008
    /s/ CATHY MCCARTHYCathy McCarthyPresident and Chief Executive Officer 19