DEF 14A 1 a07-11454_1def14a.htm DEF 14A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

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

 

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Definitive Proxy Statement

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Soliciting Material Pursuant to §240.14a-12

 

SM&A

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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Dear Shareholder:

The Board of Directors of SM&A joins me in extending a cordial invitation to attend our 2007 Annual Meeting of Shareholders which will be held at our corporate headquarters, 4695 MacArthur Court, 8th Floor, Newport Beach, California, 92660 on Tuesday, June 5, 2007 at 10:00 a.m. local time.

In addition to voting on the matters described in the accompanying Notice of Annual Meeting and Proxy Statement, we will review SM&A’s business and discuss our direction for the coming years. There will also be an opportunity, after conclusion of the formal business of the meeting, to discuss other matters of interest to you as a shareholder.

It is important that your shares be represented at the meeting regardless of the number of shares you hold or whether you plan to attend the meeting in person.  Please vote by (i) returning your signed proxy form in the envelope provided; (ii) voting by telephone; or (iii) by using the Internet voting option indicated on the proxy form.

We hope you will be able to attend the meeting and look forward to seeing you.

 

Sincerely,

 

 

 

/s/ Dwight L. Hanger

 

 

Chairman of the Board

 




Notice of Annual Meeting of Shareholders

NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of SM&A, a Delaware corporation (hereinafter, the “Company”), will be held on Tuesday, June 5, 2007 at 10:00 AM local time, at the Company’s corporate headquarters at 4695 MacArthur Court, 8th Floor, Newport Beach, California 92660, for the following purposes, as more fully described in the accompanying Proxy Statement:

Proposal 1

Item 1             Election of eight (8) Directors to serve until the next Annual Meeting of Shareholders

Proposal 2

Item 2             Approval of the 2007 Equity Incentive Plan

Item 3             Ratification of the Independent Registered Public Accounting Firm

Item 4             Act on other matters that may properly come before the meeting

Only shareholders of record at the close of business on April 9, 2007 are entitled to notice of and to vote at the Annual Meeting or any adjournment thereof.

Accompanying this Notice are a Proxy Statement and Proxy.

 

By Order of the Board of Directors,

 

 

 

/s/ Steve D. Handy,

 

 

Senior Vice President,

 

Chief Financial Officer and Secretary

 

YOUR VOTE IS IMPORTANT

Whether or not you plan to attend the meeting, we urge you to vote as soon as possible by mail, telephone, or Internet.

Newport Beach, California

April 23, 2007

 

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SM&A

 

 

Corporate Headquarters

 

 

4695 MacArthur Court, 8th Floor

 

 

Newport Beach, California 92660

 

 

(949) 975-1550

 

 

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TABLE OF CONTENTS

INTRODUCTION

 

 

 

 

 

Shareholders Entitled to Vote

 

 

Voting of Proxies

 

 

Revocation of Proxy

 

 

Voting at the Annual Meeting

 

 

 

 

 

 

 

MATTERS TO BE VOTED ON

 

 

 

 

 

 

 

ITEM 1:

 

ELECTION OF DIRECTORS

 

 

 

 

Director Nominees

 

 

 

 

 

 

 

ITEM 2:

 

APPROVAL OF 2007 EQUITY INCENTIVE PLAN

 

 

 

 

Equity Compensation Plan Information

 

 

 

 

 

 

 

ITEM 3:

 

RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

 

Independent Registered Public Accounting Firm Fees

 

 

 

 

Work Performed by Independent Auditors

 

 

 

 

Audit Committee Approval of Audit and Non-Audit Services

 

 

 

 

 

 

 

ITEM 4:

 

OTHER BUSINESS

 

 

 

 

 

 

 

CORPORATE GOVERNANCE

 

 

 

 

 

 

 

Board Member Attendance

 

 

Committees of the Board of Directors

 

 

Audit Committee

 

 

Compensation Committee

 

 

Governance & Nominating Committee

 

 

Board Committee Membership

 

 

Director Nominee Criteria and Process

 

 

Retention of Independent Advisors

 

 

Director Independence

 

 

Certain Relationships and Related Transactions

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

 

Compensation Committee Interlocks and Insider Participation

 

 

Business Conduct and Ethics Code

 

 

Whistleblower Procedures

 

 

Shareholder Communication with Board of Directors

 

 

Executive Loans

 

 

 

 

 

THE AUDIT COMMITTEE REPORT

 

 

 

 

 

Report of the Audit Committee

 

 

 

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SECURITY OWNERSHIP

 

 

 

 

 

Principal Holders

 

 

Named Executive Officers and Directors

 

 

Named Executive Officers – Principal Occupation During Last Five Years

 

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

 

 

 

 

Overview of Compensation Program

 

 

Compensation Philosophy and Objectives

 

 

Elements of Executive Compensation

 

 

Base Salary

 

 

Incentive Cash Bonus

 

 

Long-Term Incentives

 

 

Benefits

 

 

Perquisites

 

 

Change of Control Agreements

 

 

Employment Agreements

 

 

Equity Incentive Plan

 

 

Tax Considerations

 

 

Table 1: Summary Compensation Table

 

 

Table 2: Grants of Plan-Based Awards Table

 

 

Table 3: Outstanding Equity Awards At Fiscal Year-End Table

 

 

Option Exercises and Stock Vested Table

 

 

Pension Benefits Table

 

 

Non-Qualified Deferred Compensation Table

 

 

Potential Payments Upon Termination or Change-in-Control

 

 

Employment Agreement with Ms. Davis

 

 

Employment Agreement with Ms. McCarthy

 

 

Payments Upon Termination Due to Death or Disability

 

 

Benefits Letter

 

 

Payments Upon Termination Without Cause or Resignation For Good Reason

 

 

Payments Upon Change of Control

 

 

Potential Payments to Named Executive Officers Other Than Mr. Myers

 

 

Retirement Agreement with Mr. Myers

 

 

Director Compensation

 

 

Director Compensation Plan, Amendment 2

 

 

Director Compensation Table

 

 

Non-Employee Directors-Outstanding Equity Awards at Fiscal Year-End

 

 

Report of the Compensation Committee

 

 

 

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ADDITIONAL INFORMATION

 

 

 

 

 

 

 

Submission of Shareholder Proposals for the 2007 Proxy Statement

 

 

Cost of Proxy Solicitation

 

 

Other Matters

 

 

 

 

 

 

 

APPENDICES

 

 

Appendix A – 2007 Equity Incentive Plan

 

 

Appendix B – Amended Compensation Committee Charter

 

 

 

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INTRODUCTION

This Proxy Statement is furnished to the shareholders of SM&A, a Delaware corporation (the “Company”), in connection with the solicitation of proxies by and on behalf of the Board of Directors of the Company.  The proxies solicited hereby will be presented at the Annual Meeting of Shareholders (the “Annual Meeting”) of the Company to be held at 10:00 AM local time on Tuesday, June 5, 2007, at the Company’s Corporate Headquarters, 4695 MacArthur Court, 8th Floor, Newport Beach, California 92660.  This Proxy Statement, the accompanying form of proxy, and the Company’s Annual Report for fiscal year ending December 31, 2006, are being furnished to shareholders beginning on or about April 23, 2007.

Shareholders Entitled to Vote

Only holders of record of the Company’s Common Stock (the “Common Stock”) at the close of business on April 9, 2007 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting and at any and all adjournments and postponements thereof.  As of the Record Date, a total of 18,741,604 shares of the Company’s Common Stock were issued and outstanding.  A majority of those voted shares will constitute a quorum for the purpose of electing directors or adopting proposals at the Annual Meeting.  Abstentions and broker non-votes are counted for purposes of determining a quorum to transact business at the Annual Meeting.

Voting of Proxies

Your vote is important.  A form of proxy is enclosed for your use.  Whether or not you expect to attend in person, we urge you to vote your shares via telephone, the Internet, or by signing, dating, and returning the enclosed proxy form at your earliest convenience.  Promptly voting your shares will save the Company the expense and extra work of additional solicitation.  An addressed envelope, for which no postage is required if mailed in the United States, is enclosed if you wish to vote your shares by mail.   Please be aware that, if you vote over the Internet, you may incur costs such as Internet access charges for which you will be responsible.

Unless otherwise directed, all proxies will be voted FOR the election of each of the individuals nominated to serve as a director, FOR approval of the SM&A 2007 Equity Incentive Plan; and FOR the ratification of the appointment of BDO Seidman, LLP as the Company’s independent registered public accounting firm.  The votes of shareholders present in person or repropesented by proxy at the Annual Meeting will be tabulated by an inspector of elections appointed by the Company.  The nominees for directors of the Company who receive the greatest number of votes cast by shareholders present in person or represented by proxy at the Annual Meeting and entitled to vote thereon will be elected directors of the Company.  The other proposals will be approved if the affirmative votes exceed the votes cast against.  Abstentions and broker non-votes are each included in the determination of the number of shares present and voting, for purposes of determining the presence or absence of a quorum for the transaction of business at the Annual Meeting.  A “non-vote” occurs when a nominee (such as a broker) holding shares for a beneficial owner abstains from voting on a particular proposal because the nominee does not have discretionary voting power for that proposal and has not received instructions from the beneficial owner on how to vote those shares. Any shares not voted, whether by withheld authority, broker non-vote or otherwise, will have no effect on the outcome of the voting.




Revocation of Proxy

A proxy given may be revoked at any time before it is exercised by filing with the Corporate Secretary of the Company an instrument revoking such proxy or by the filing of a duly executed proxy bearing a later date.  Any shareholder present at the Annual Meeting who has given a proxy may withdraw it and vote his or her shares in person if such shareholder so desires.

Voting at the Annual Meeting

The method by which you vote will in no way limit your right to vote at the Annual Meeting if you later decide to attend in person.  If your shares are held in the name of a bank, broker or other holder of record, you must obtain a legal proxy or letter from the holder of record confirming your ownership of shares in order to be able to vote in person at the Annual Meeting.

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MATTERS TO BE VOTED ON

ITEM 1.                  ELECTION OF DIRECTORS

Eight directors will be elected at the Annual Meeting to hold office until the next Annual Meeting of Shareholders in 2008, or until their successors are elected and qualified.

Steven S. Myers, Founder and Chairman of the Company’s Board of Directors and Chief Executive Officer for most of the Company’s existence, retired from the Company and the Board of Directors on March 31, 2007.  The Board expresses its deepest appreciation for Mr. Myers’ vast contributions to the Company.

The Board of Directors appointed Cynthia A. Davis effective April 2, 2007, to fill the vacancy on the Board created by the retirement of Mr. Myers.  Dwight L. Hanger, a member of the Board since 2005, was elected to become Chairman of the Board effective April 1, 2007.

If for any reason a nominee should, prior to the Annual Meeting, become unavailable to serve as a director due to an event not now anticipated, the proxies will be voted for such substitute nominee, if any, as may be recommended by the Board of Directors.  In no event, however, will the proxies be voted for a greater number of persons than the number of nominees named.

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

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

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Director Nominees

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

WILLIAM C. BOWES

Age 65

Director Since April 2004

Mr. Bowes currently serves as Chairman of the Governance & Nominating Committee.  Mr. Bowes is also a member of the Compensation Committee.  Mr. Bowes is a retired Vice Admiral and an experienced industry executive.  As Vice Admiral, he served as Commander of the Naval Air Systems Command, Principal Deputy Assistant Secretary of the Navy for Research, Development and Acquisition (RDA), and Acting Assistant Secretary of the Navy for RDA.  In 1996, following his retirement from active duty, Mr. Bowes joined Hughes Electronics as corporate vice president and deputy general manager of Hughes Aircraft Company’s Sensors and Communications Systems Segment.  Shortly after Raytheon acquired Hughes, he joined Litton Industries where he held positions as vice president for Corporate Strategic Planning and vice president of Programs Management at Litton’s Integrated Systems Division.  After Northrop Grumman acquired Litton, Mr. Bowes led one of three business units in the newly created Navigation Systems Division of Northrop.  Mr. Bowes holds a Bachelors degree in Chemical Engineering from the University of Idaho and a Masters degree in Systems Acquisition Management from the Naval Postgraduate School.  He has completed financial management, corporate planning and director courses at Harvard, Wharton, the University of Chicago, and at the University of California, Los Angeles.  Mr. Bowes is a certified director from the UCLA Anderson School of Business.  Mr. Bowes currently serves on the board of Talla Tech and the Software Engineering Institute at Carnegie Mellon University. He is a Fellow for the Society of Experimental Test Pilots.

CYNTHIA A. DAVIS

Age 50

Director Nominee

Ms. Davis was appointed as Chief Executive Officer and Director of the Company’s Board of Directors on April 2, 2007, following the retirement of Steven S. Myers.  From March 2003 to March 2007, Ms. Davis served as Vice President and General Manager of a Lockheed Martin Missiles & Fire Controls business.  In this role, Ms. Davis was responsible for strategic planning, business development, R&D, manufacturing, and P&L for the 650 person business unit providing precision guided weapons systems and mission critical sensors and controls to Federal and international customers.  From October 2001 to March 2003, Ms. Davis served as Vice President, Distribution Technologies of Lockheed Martin Systems Integration where she was recruited to lead and revitalize this commercial mail automation and technology subsidiary of Lockheed Martin.  Before joining Lockheed Martin, Ms. Davis served as Vice President of the Surface Mount and Systems Division of Universal Instruments Corporation, a hi-tech electronic assembly company. Previous to this, she held various senior positions at Bausch & Lomb’s Eyewear Division and was a management consultant with Meritus Consulting Services. Ms. Davis received her Bachelor of Science in Industrial Technology and Computer Science and Master of Science in Advance Technology and Computer Science from the State University of New York at Binghamton.

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DWIGHT L. HANGER

Age 64

Director Since April 2005

Mr. Hanger was elected as Chairman of the Board effective April 1, 2007. He also serves on the Company’s Audit Committee. From 2000 to 2004 Mr. Hanger held the position of Vice President for Capgemini Ernst & Young, a provider of consulting, technology and outsourcing services. From 1969 to 2000, he worked as a management consultant with Ernst & Young LLC and Ernst & Whinney serving as a Partner 22 years. During his tenure, he managed various business areas, geographies (Los Angeles Western Region, and National), and significant global clients.  Mr. Hanger has consulted with government agencies and companies focused on manufacturing, distribution, healthcare and retail.  His areas of expertise include strategic planning, IT strategy, operations, systems integration and supply chain management, among others. Mr. Hanger currently serves Biola University in a non-profit capacity as Vice Chairman of the Board, a member of the Trustees Affairs Committee, and a member of the Finance and Audit Committee. He is a member of the AICPA (American Institute of Certified Public Accountants), the IMA (Institute of Management Accountants), and the APICS (American Production and Inventory Control Society). Mr. Hanger was licensed through the states of California and Ohio as a Certified Public Accountant. Mr. Hanger holds a Bachelors degree in Electrical Engineering and an MBA degree in General Management from the University of California, Los Angeles.

J. CHRISTOPHER LEWIS

Age 51

Director Since September 1996

Mr. Lewis currently serves on the Company’s Compensation Committee and Governance & Nominating Committee.  Mr. Lewis has been a general partner of Riordan, Lewis & Haden, equity investors in California-based enterprises since 1981.  Mr. Lewis has been involved in all aspects of private equity investing, including growth financings, acquisitions, and corporate advisory activities.  Mr. Lewis also serves as a director of Tetra Tech, Inc., a publicly held company, and several private companies.  Mr. Lewis graduated cum laude from the University of Southern California, where he earned a Bachelor of Science in Business Administration and Finance and subsequently received a Masters of Business Administration.

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JOSEPH B. REAGAN

Age 72

Director Since July 2004

Dr. Reagan currently serves as Chairman of the Company’s Compensation Committee and is a member of the Audit Committee. Dr. Reagan is a technology and senior management consultant to industry and the United States Government. He retired in 1996 after 37 years with the Lockheed Martin Corporation where he was a corporate officer and vice president and general manager in the Missiles and Space Company. Dr. Reagan was a director of Southwall Technologies Inc., an OTC public company, from October 1987 to May 1992 and from June 1993 to May 2006, where he served as Chairman of the Compensation Committee and as a member of the Audit Committee. From December 1998 to December 2004, Dr. Reagan was a director of the Naval Studies Board, an element of the National Research Council, where he served as Vice Chairman. From May 1992 until May 2004 he was a director of the Tech Museum of Innovation in San Jose. He was elected to the National Academy of Engineering in 1998 and currently is the Chairman of the Aerospace Section. Dr. Reagan is a graduate of the Pennsylvania State University Executive Management Program, the Management Institute, Advanced Institute, Executive Institute and Senior Management Institute of Lockheed.  Dr. Reagan holds a Bachelor of Science in Physics from Boston College, a Master of Science in Physics from Boston College, and a PhD in Space Science from Stanford University.

ROBERT RODIN

Age 53

Director Since January 2005

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

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JOHN P. STENBIT

Age 67

Director Since April 2004

Mr. Stenbit currently serves on the Company’s Audit Committee and Governance & Nominating Committee.  Mr. Stenbit has had distinguished careers in both the private and public sectors, including participation as a member of Secretary Rumsfeld’s staff in conjunction with the transformation of the entire Department of Defense during both of his terms of service.  In his most recent position, Mr. Stenbit served as the Assistant Secretary of Defense Networks and Information Integration (NII), previously known as Command, Control, Communications, and Intelligence (C3I), at the Pentagon.  He has served in several high profile positions for TRW, Inc., most recently in Fairfax, Virginia, where he was responsible for providing systems integration solutions to the government as an executive vice president and member of the Management Committee of TRW.  Mr. Stenbit has chaired advisory committees for the Director of the Central Intelligence Agency and the Administrator of the Federal Aviation Administration, as well as serving as a member of advisory committees on information security, strategic systems, telecommunications, submarines, and future warfare defense communications.  Mr. Stenbit also serves in the following capacities: (i) as a member of SI International’s board committees for compensation and corporate governance; (ii) as chairman of the governance & nominating committee, and member of the compensation committee and the audit committee of Cogent, Inc. (iii) on the compensation and the governance and nominating committee of Viasat; (iv) on technical/scientific boards advising the Secretary of Defense, Commander Strategic Command, the Director National Security Agency, and the Director National Reconnaissance Office.  Mr. Stenbit serves as a member of the Board and Audit Committee of Loral Space and Communications Company.  He is also a Trustee of the MITRE Corporation. Mr. Stenbit holds a Bachelors degree in Engineering and Masters degree in Electrical Engineering from the California Institute of Technology in Pasadena, California, and attended the Technische Hogeschool in The Netherlands.  Mr. Stenbit was a Fulbright Fellow, an Aerospace Corporation Fellow, and a member of the National Academy of Engineering.  He is presently a member of Tau Beta Pi, and a recipient of Secretary of Defense Medals for both Distinguished and Outstanding Public Service.

ROBERT J. UNTRACHT

Age 58

Director Since April 2002

Mr. Untracht currently serves as Chairman the Company’s Audit Committee and is a member of the Governance & Nominating Committee.  Mr. Untracht is a private investor and formerly served as Associate Professor of Accounting at the New York Institute of Technology in Old Westbury, New York.  Earlier in his career, he taught accounting classes at the University of California, Los Angeles.  Mr. Untracht held positions with Ernst & Young LLP from 1981 through 1998 ranging from Manager to Audit Partner and National Director of Retail and Consumer Product Industry Services.  From 1974 to 1981, while at Deloitte & Touche LLP, Mr. Untracht was responsible for conducting audits of aerospace, defense and manufacturing industry clients.  Mr. Untracht holds a Bachelors degree in Computer Technology from the New York Institute of Technology, an MBA degree with a concentration in Finance and Accounting from the State University of New York, and a Juris Doctorate degree from Southwestern University School of Law. Mr. Untracht has been a CPA and was admitted to the State Bar of California.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS

VOTE “FOR”

THE ELECTION OF THE NOMINEES TO SERVE AS DIRECTORS.

 

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ITEM 2.                                                     APPROVAL OF THE 2007 EQUITY INCENTIVE PLAN

Upon the recommendation of the Compensation Committee, the Board of Directors has adopted the SM&A 2007 Equity Incentive Plan (the “Plan”) and is submitting it to the shareholders for approval.  If approved by the shareholders, the Plan will become “effective” (as such term is used in the Plan) as of June 6, 2007.  No awards will be made under the Plan until the Plan is approved by shareholders.  The Plan is a new long-term stock incentive plan intended to facilitate the continued use of long-term equity-based incentives and rewards for the benefit of the Company’s employees, directors and consultants, which are currently provided under an equity incentive plan first adopted in 1997.  If the Plan is approved by shareholders, the SM&A Second Amended and Restated Equity Incentive Plan (the “Prior Plan”) which expires later this year, will be frozen and no further grants or awards will be made under such plan.  The Board believes that administering all future stock and equity-based awards under a single plan in lieu of such awards under the Prior Plan would increase the efficiency and effectiveness of the Company’s equity program, reduce administrative and regulatory costs and create greater transparency with respect to the Company’s equity compensation practices.  The Prior Plan will continue in effect after approval of the Plan for so long as and solely to the extent necessary to administer previously-granted awards that remain outstanding under such plan.

We are requesting that the shareholders vote in favor of approving the Company’s 2007 Equity Incentive Plan (the “2007 Plan”), which was adopted by the Board on April 13, 2007.  Our Prior Plan, adopted at the time of our initial public offering in 1997, is expiring and we will not be able to recruit or retain employees using equity incentives after October 2007, absent the adoption of a new plan.

Purpose. The 2007 Plan is intended to retain and reward highly qualified employees, consultants, and directors and encourage their ownership of Common Stock.

Administration. The 2007 Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”). Subject to the provisions of the 2007 Plan, the Committee has discretion to determine the employee, consultant or director to receive an award, the form of award and any acceleration or extension of an award. Further, the Committee has complete authority to interpret the 2007 Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective award agreements (which need not be identical), and to make all other determinations necessary or advisable for the administration of the 2007 Plan.

Eligibility. Awards may be granted to any employee of or consultant to one or more of the Company and its affiliates or to non-employee members of the Board or of any board of directors (or similar governing authority) of any affiliate.

Shares Subject to the 2007 Plan. The shares issued or to be issued under the 2007 Plan are authorized but unissued shares of the Company’s Common Stock (the “Common Stock”). The maximum number of shares of Common Stock which may be issued or made subject to awards under the 2007 Plan is 1,500,000, and no more than 500,000 of the available Plan shares of Common Stock may be covered by awards issued to any one person in any one calendar year.

Types of Awards. Awards under the 2007 Plan may include Incentive Stock Options, Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units and Performance Units, Qualified Performance-Based Awards, and Stock Grants. Each award will be evidenced by an instrument in such form as the Committee may prescribe, setting forth applicable terms such as the exercise price and term of any option or applicable forfeiture conditions or performance requirements for any Restricted Stock or Restricted Stock Units. Except as noted below, all relevant terms of any award will be set by the Committee in its discretion.

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·                  Nonstatutory Stock Options and Incentive Stock Options (together, “Stock Options”) are rights to purchase Common Stock of the Company. A Stock Option may be immediately exercisable or become exercisable in such installments, cumulative or non-cumulative, as the Committee may determine. A Stock Option may be exercised by the recipient giving written notice to the Company, specifying the number of shares with respect to which the Stock Option is then being exercised, and accompanied by payment of an amount equal to the exercise price of the shares to be purchased. The purchase price may be paid by cash, check, by delivery to the Company (or attestation of ownership) of shares of Common Stock held at least six months, or through and under the terms and conditions of any formal cashless exercise program authorized by the Company.

Incentive Stock Options may be granted only to eligible employees of the Company or any parent or subsidiary corporation and must have an exercise price of not less than 100% of the fair market value of the Company’s Common Stock on the date of grant (110% for Incentive Stock Options granted to any 10% shareholder of the Company). In addition, the term of an Incentive Stock Option may not exceed 10 years (five years, if granted to any 10% shareholder). Nonstatutory Stock Options must have an exercise price of not less than 100% of the fair market value of the Company’s Common Stock on the date of grant and the term of any Nonstatutory Stock Option may not exceed 10 years.  In the case of an Incentive Stock Option, the amount of the aggregate fair market value of Common Stock (determined at the time of grant) with respect to which Incentive Stock Options are exercisable for the first time by an employee during any calendar year (under all such plans of his or her employer corporation and its parent and subsidiary corporations) may not exceed $100,000.

·                  Stock Appreciation Rights (“SARs”) are rights to receive (without payment to the Company) cash, property or other forms of payment, or any combination thereof, as determined by the Committee, based on the increase in the value of the number of shares of Common Stock specified in the SAR. The base price (above which any appreciation is measured) will in no event be less than 100% of the fair market value of the Company’s stock on the date of grant of the SAR or, if the SAR is granted in tandem with a Stock Option (that is, so that the recipient has the opportunity to exercise either the Stock Option or the SAR, but not both), the exercise price under the associated Stock Option.

·                  Awards of Restricted Stock are grants or sales of Common Stock which are subject to a risk of forfeiture, such as a requirement of the continued performance of services for stated term or the achievement of individual or Company performance goals. Awards of Restricted Stock will not include the right to any dividends on the shares pending vesting (or forfeiture), unless the Committee otherwise determines.

·                  Awards of Restricted Stock Units and Performance Units are grants of rights to receive either shares of Common Stock (in the case of Restricted Stock Units) or the appreciation over a base value (as specified by the Committee) of a number of shares of Common Stock (in the case of Performance Stock Units) subject to satisfaction of service or performance requirements established by the Committee in connection with the award. Such awards may include the right to the equivalent to any dividends on the shares covered by the award, which amount may, in the discretion of the Committee, be deferred and paid if and when the award vests.

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·                  Qualified Performance-Based Awards are awards which include performance criteria intended to satisfy Section 162(m) of the Tax Code. Section 162(m) of the Code limits the Company’s federal income tax deduction for compensation to certain specified senior executives to $1 million dollars, but excludes from that limit “performance-based compensation.” Qualified Performance-Based Awards may be in the form of Stock Options, Restricted Stock, Restricted Stock Units or Performance Units, but in each case will be subject to satisfaction of one of the following criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or affiliate, either individually, alternatively, or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Compensation Committee in the award:

·      cash flow

 

·      customer service

·      stock price

 

·      return on equity

·      shareholder return or total shareholder return

 

·      return on capital (including without limitation return on total capital or return on invested capital)

·      return on investment

 

·      return on assets or net assets

·      market capitalization

 

·      economic value added

·      levels of associate deployment

 

·      revenue

·      sales or net sales

 

·      diversification

·      income, pre-tax income or net income

 

·      operating income or pre-tax profit

·      operating profit, net operating profit or economic profit

 

·      gross margin, operating margin or profit margin

·      return on operating revenue or return on operating assets

 

·      cash from operations

·      operating ratio

 

·      operating revenue

·      market share improvement

 

·      general and administrative expenses

 

 

·      earnings per share (including, without limitation, earnings before interest, taxes, depreciation and amortization)

 

Further criteria may be added by the Compensation Committee in response to changes in our business over time.  Qualified Performance-Based Awards in the form of Stock Options must have an exercise price which is not less than 100% of the fair market value of the Company’s Common Stock on the date of grant. No payment or other amount will be available to a recipient of a Qualified Performance-Based Award except upon the Committee’s determination that particular goal or goals established by the Committee for the criteria (from among those specified above) selected by the Committee have been satisfied.

·                  A Stock Grant is a grant of shares of Common Stock not subject to restrictions or other forfeiture conditions. Stock Grants may be awarded only in recognition of significant contributions to the success of the Company or its affiliates, in lieu of compensation otherwise already due, or in other limited circumstances which the Committee deems appropriate.

10




Effect of Termination of Employment or Association. Unless the Committee determines otherwise in connection with any particular award under the 2007 Plan, Stock Options and SARs will generally terminate three months following the recipient’s termination of employment or other association with the Company.  The effect of termination on other awards will depend on the terms of those awards.

Transferability. In general, no award under the 2007 Plan may be transferred by the recipient and during the life of the recipient all rights under an award may be exercised only by the recipient or his or her legal representative. However, the Committee may approve the transfer, without consideration, of an award of a Nonstatutory Option or Restricted Stock to a family member.

Effect of Significant Corporate Event. In the event of any change in the outstanding shares of Common Stock through merger, consolidation, sale of all or substantially all the property of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other distribution with respect to such shares of Common Stock, an appropriate and proportionate adjustment will be made in (i) the maximum numbers and kinds of shares subject to the 2007 Plan and the 2007 Plan limits, (ii) the numbers and kinds of shares or other securities subject to the then outstanding awards, (iii) the exercise or hurdle price for each share or other unit of any other securities subject to then outstanding Stock Options or SARs (without change in the aggregate purchase or hurdle price as to which Stock Options or SARs remain exercisable), and (iv) the repurchase price of each share of Restricted Stock then subject to a risk of forfeiture in the form of a Company repurchase right. In the event of an acquisition, any then outstanding award will accelerate in full to the extent not assumed or replaced by the acquirer of the Company.  In addition, except as otherwise provided with respect to any particular award or by employment contract, upon the occurrence of a change of control, awards which are not then exercisable in full will generally be accelerated by an additional 25%.  Upon dissolution or liquidation of the Company, other than as part of an acquisition or similar transaction, each outstanding Stock Option or SAR shall terminate, but the participant shall have the right, immediately prior to the dissolution or liquidation, to exercise the Stock Option or SAR to the extent exercisable on the date of dissolution or liquidation.

Amendments to the 2007 Plan. Generally the Board of Directors may amend or modify the 2007 Plan at any time subject to the rights of holders of outstanding awards on the date of amendment or modification.

Summary of Tax Consequences. The following is a brief and general discussion of the United States federal income tax consequences to recipients of awards granted under the 2007 Plan. This summary is not comprehensive and is based upon laws and regulations in effect on January 1, 2007. Such laws and regulations are subject to change. This summary is intended for the information of shareholders considering how to vote and not as tax guidance to participants in the 2007 Plan.  Participants in the 2007 Plan should consult their own tax advisors as to the tax consequences of participation.

·                  Nonstatutory Stock Options. Generally, there are no federal income tax consequences to the participants upon grant of Nonstatutory Stock Options. Upon the exercise of such an Option, the participant will recognize ordinary income in an amount equal to the amount by which the fair market value of the Common Stock acquired upon the exercise of such Option exceeds the exercise price, if any. A sale of Common Stock so acquired will give rise to a capital gain or loss equal to the difference between the fair market value of the Common Stock on the exercise and sale dates.

11




·                  Incentive Stock Options. Except as noted at the end of this paragraph, there are no federal income tax consequences to the participant upon grant or exercise of an Incentive Stock Option. If the participant holds shares of Common Stock purchased pursuant to the exercise of an Incentive Stock Option for at least two years after the date the Option was granted and at least one year after the exercise of the Option, the subsequent sale of Common Stock will give rise to a long-term capital gain or loss to the participant and no deduction will be available to the Company. If the participant sells the shares of Common Stock within two years after the date an Incentive Stock Option is granted or within one year after the exercise of an Option, the participant will recognize ordinary income in an amount equal to the difference between the fair market value at the exercise date and the Option exercise price, and any additional gain or loss will be a capital gain or loss. Some participants may have to pay alternative minimum tax in connection with exercise of an Incentive Stock Option.

·                  Restricted Stock. A participant will generally recognize ordinary income on receipt of an award of Restricted Stock when his or her rights in that award become substantially vested, in an amount equal to the amount by which the then fair market value of the Common Stock acquired exceeds the price he or she has paid for it, if any. Recipients of Restricted Stock may, however, within 30 days of receiving an award of Restricted Stock, choose to have any applicable risk of forfeiture disregarded for tax purposes by making an “83(b) election.” If the participant makes an 83(b) election, he or she will have to report compensation income equal to the difference between the value of the shares and the price paid for the shares, if any, at the time of the transfer of the Restricted Stock.

·                  Stock Appreciation Rights. A participant will generally recognize ordinary income on receipt of cash or other property pursuant to the exercise of an award of Stock Appreciation Rights.

·                  Restricted Stock Units, Performance Units and Stock Grants. A participant will generally recognize ordinary income on receipt of any shares of Common Stock, cash or other property in satisfaction of any of these awards under the 2007 Plan.

·                  Potential Deferred Compensation. For purposes of the foregoing summary of federal income tax consequences, we assumed that no award under the 2007 Plan will be considered “deferred compensation” as that term is defined for purposes of recent federal tax legislation governing nonqualified deferred compensation arrangements, Section 409A of the Code, or, if any award were considered to any extent to constitute deferred compensation, its terms would comply with the requirements of that legislation (in general, by limiting any flexibility in the time of payment). For example, the award of an SAR at less than 100% of the market value of the Company’s Common Stock, would constitute deferred compensation. If an award includes deferred compensation, and its terms do not comply with the requirements of the legislation, then any deferred compensation component of an award under the 2007 Plan will be taxable when it is earned and vested (even if not then payable) and the recipient will be subject to a 20% additional tax.

·                  Section 162(m) Limitations on the Company’s Tax Deduction. In general, whenever a recipient is required to recognize ordinary income in connection with an award, the Company will be entitled to a corresponding tax deduction.  However, the Company will not be entitled to deductions in connection with awards under the 2007 Plan to certain senior executive officers to the extent that the amount of deductible income in a year to any such officer, together with his or her other compensation from the Company exceeds the $1 million dollar limitation of Section 162(m) of the Code. Compensation which qualifies as “performance-based” is not subject to this limitation, however.

12




Awards to Particular Officers, Etc. The benefits or amounts that will be received under the 2007 Plan by or allocated to each of (i) the officers listed in the Summary Compensation Table, (ii) each of the nominees for election as a director, (iii) all directors of the Company who are not executive officers of the Company as a group, (iv) all present executive officers of the Company as a group, and (v) all employees of the Company, including all other current officers, as a group are not determinable.

Equity Compensation Plan Information

The following table provides information about the Company’s Common Stock that may be issued upon the exercise of options, warrants and rights under all of the Company’s existing equity compensation plans and arrangements as of December 31, 2006.

Plan category

 

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

 

Weighted-average
exercise price of
outstanding options,
warrants and rights

 

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a) and giving
effect to the adoption
of the 2007 and
expiration of the prior
plan)

 

 

 

(a)

 

(b)

 

(c)

 

Equity Compensation Plans Approved by Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Amended & Restated Equity Incentive Plan

 

2,488,159

 

$

7.19

 

1,500,000

 

Amended & Restated ESPP

 

 

N/A

(1)

147,156

 

 

 

 

 

 

 

 

 

Equity Compensation Plans Not Approved by Shareholders

 

N/A

 

N/A

 

N/A

 

 


(1) Under the Amended and Restated ESPP, the purchase price per share of Common Stock is 95% of the fair market value as determined in accordance with the Plan and Section 423 of the Internal Revenue code and applicable regulations thereunder.

13




Required Vote: Recommendation of the Board of Directors

The proposal to approve the 2007 Plan will require approval by a majority of the votes cast by the holders of the shares of Common Stock voting in person or by proxy at the meeting. Withholding authority to vote for approval of the 2007 Plan will be treated as shares present and entitled to vote and, for purposes of determining the outcome of the vote, will not be treated as votes cast for the approval of the 2007 Plan. Broker “non-votes” will not be treated as shares present and entitled to vote on the approval of the 2007 Plan and will have no effect on the outcome of the vote. Broker “non-votes” will be counted as present for the purpose of determining whether a quorum is present.

THE BOARD OF DIRECTORS RECOMMENDS

THAT YOU VOTE “FOR” THIS PROPOSAL.

14




 

ITEM 3.          RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 Company’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.

15




Independent Registered Public Accounting Firm Fees

As of April 23, 2007 BDO remains as the Company’s independent registered public accounting firm and is being considered for fiscal 2007 services. A representative of BDO will be present at the Annual Meeting and will be available to respond to appropriate questions.

The aggregate audit fees billed to the Company and its subsidiaries for the fiscal years ended December 31, 2006 and 2005 were:

 

2006

 

2005

 

 

 

BDO

 

E&Y

 

Audit Fees(a)

 

$

478,500

 

$

443,000

 

Audit-Related Fees(b)

 

$

 

$

 

Tax Fees(c)

 

$

17,530

 

$

75,000

 

All Other Fees(d)

 

$

 

$

 

 


(a)          The aggregate fees billed for professional services rendered by the Independent Registered Public Accounting Firm for the audit of the Company’s annual financial statements and the reviews of the financial statements included in the Company’s Form 10-Q or services that are normally provided by the Independent Auditor in connection with statutory and regulatory filings or engagements for those fiscal years.  These services may include: fees for services that normally would be provided by the Independent Registered Public Accounting Firm in connection with statutory and regulatory filings or engagements, services that generally only the independent auditor can provide such as comfort letters, statutory audits, attest services, consents and assistance with review of documents filed with the SEC, accounting consultations on matters that would be addressed during audit and review work.

(b)         The aggregate fees billed for assurance and related services by the Independent Registered Public Accounting Firm that are reasonably related to the performance of the audit or review of the Company’s financial statements and not reported as Audit Fees.

These services may include, among others: employee benefit plan audits, due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services that are not required by statue or regulation and consultation concerning financial accounting and reporting standards not classified as audit.

(c)          The aggregate fees billed for professional services rendered by the Independent Registered Public Accounting Firm for tax compliance, tax advice and tax planning. These services may include: out-of-pocket expenses for services rendered during the year under audit by the Independent Registered Public Accounting Firm, fees for tax compliance, tax planning, and tax advice.

(d)         The aggregate fees billed for products and services provided by the Independent Registered Public Accounting Firm, other than the services reported in (a) through (c) of this section.

The Audit Committee has considered whether provision of the services described above under the caption “All Other Fees” was compatible with maintaining the Independent Registered Public Accounting Firm’s independence and has determined that such services did not adversely affect EY’s or BDO’s independence.

The Company did not pay any fees to EY or BDO during the last two fiscal years for financial system design and implementation.

16




Work Performed by Independent Registered Public Accounting Firm

EY’s services rendered in performing the Company’s audit for the period January 1, 2005 to June 21, 2006 and fiscal year 2005 were performed by full-time, permanent employees and partners of EY.  BDO’s services rendered in performing the Company’s audit for the period fiscal year end 2006 was performed by full-time, permanent employees and partners of BDO.

Audit Committee Approval of Audit and Non-Audit Services

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

Proxies, if not revoked, will be voted in favor of ratifying BDO as the Company’s Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2007 unless the shareholder specifies otherwise.

THE BOARD OF DIRECTORS RECOMMENDS SHAREHOLDERS

VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF

BDO SEIDMAN, LLP

AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

17




ITEM 4.          OTHER BUSINESS

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

18




CORPORATE GOVERNANCE

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

Board Member Attendance

The Board of Directors held nine meetings during the fiscal year ended December 31, 2006, and have held two meetings since the end of such fiscal year. All of the incumbent directors attended in excess of 75 percent of the total number of meetings of the Board.

Following most of the regularly scheduled Board meetings in 2006, executive sessions were conducted in which directors in attendance participated.  The Company is complying with the National Association of Securities Dealers’ (the “NASD’s”) rules which require that only independent directors be present for at least two executive sessions.

The Company expects all incumbent directors to attend Annual Meetings.  The Company generally holds a board meeting coincident with the Annual Meeting to minimize travel obligations and facilitate director attendance at the Annual Meeting.  All of the Company’s directors then in office attended the Company’s 2006 Annual Meeting.

19




Committees of the Board of Directors

Following is a description of each Committee of the Board of Directors.

Audit Committee

Members:

 

Robert J. Untracht, Chair

 

 

Dwight L. Hanger

 

 

Joseph B. Reagan

 

 

John P. Stenbit

 

 

 

Purpose:

 

The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting and reporting practices of the Company, the qualifications and independence of the Independent Auditor engaged to prepare or issue an audit report on the financial statements of the Company and such other duties as directed by the Board.  The Committee’s role includes discussing with management the Company’s processes to manage financial risk, and for compliance with significant applicable legal, ethical, and regulatory requirements.  The Committee also approves, subject to shareholder approval, the appointment and replacement of the Independent Registered Public Accounting Firm and is directly responsible for oversight and pre-approval of all audit and non-audit services provided by the Independent Registered Public Accounting Firm.  For the fiscal year ended December 31, 2006 and the current fiscal year, the Committee consisted entirely of independent directors (as defined in Rule 4200(a)(15) of the NASD’s marketplace rules) and satisfied the audit committee independence and financial literacy requirements of NASDAQ.  The Board has determined that Mr. Untracht satisfied the requirements for an “audit committee financial expert” under the rules and regulations of the Securities and Exchange Commission.  The Committee held: (i) four meetings during the fiscal year ended December 31, 2006 attended by all of the Committee members; and (ii) has held one meeting since the end of such fiscal year, attended by a majority of the Committee members. A copy of the Amended Charter of the Audit Committee is available on the Company’s website: www.smawins.com under Investor Relations>Corporate Governance.

 

20




Compensation Committee

Members:                                           Joseph B. Reagan, Chair

William C. Bowes

J. Christopher Lewis

Purpose:                                               The Compensation Committee provides guidance and periodic monitoring for all corporate compensation, employee benefit, and employee equity programs.  The compensation of the Company’s chief executive officer and other senior executive officers is determined or recommended to the Board by the Committee.  None of the members of the Compensation Committee were, at any time during fiscal 2006 or at any other time, an officer or employee of the Company.  The Committee held: (i) five meetings during the fiscal year ended December 31, 2006 attended by a majority of the Committee members; and (ii) has held one meeting since the end of such fiscal year, also attended by a majority of Committee members.  The Committee’s formal written amended charter dated March 7, 2007 is included as Appendix B to this proxy statement. A copy of the amended charter is also available on the Company’s website: www.smawins.com under Investor Relations>Corporate Governance.

Governance & Nominating Committee

Members:                                           William C. Bowes, Chair

Robert Rodin

John P. Stenbit

Robert J. Untracht

Purpose:                                               The Committee’s role is to determine the slate of director nominees for election to the Company’s Board of Directors, to identify and recommend candidates to fill vacancies occurring between annual shareholder meetings, and to review, evaluate and recommend changes to the Company’s corporate governance practices.  The director nominees are selected or recommended for Board selection by a majority of the independent directors.  During the fiscal year ended December 31, 2006, the Committee held (i) five meetings attended by a majority of Committee members; and (ii) has held two meetings since the end of such fiscal year attended by all Committee members.  All Committee members attended in excess of 75 percent of these meetings.  The Committee’s formal written amended charter may be viewed on the Company’s website: www.smawins.com under Investor Relations>Corporate Governance.

21




BOARD COMMITTEE MEMBERSHIP

as of April 2, 2007

Director

 

Board

 

Audit

 

Compensation

 

Governance
&
Nominating

 

 

 

 

 

 

 

 

 

William C. Bowes

 

X

 

 

 

X

 

Chair

Cynthia A. Davis

 

X

 

 

 

 

 

 

Dwight L. Hanger

 

Chair

 

X

 

 

 

 

J. Christopher Lewis

 

X

 

 

 

X

 

 

Joseph B. Reagan

 

X

 

X

 

Chair

 

 

Robert Rodin

 

X

 

 

 

 

 

X

John P. Stenbit

 

X

 

X

 

 

 

X

Robert J. Untracht

 

X

 

Chair

 

 

 

X

 

Director Nominee Criteria and Process

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

The Committee may receive recommendations for Board candidates from various sources, including the Company’s directors, management and shareholders.  Shareholder proposals for nominations to the Board should be submitted to the Governance & Nominating Committee in care of the Corporate Secretary of the Company at its principal executive office at 4695 MacArthur Court, 8th Floor, Newport Beach, California 92660.  To be considered by the Board for nomination at the next succeeding Annual Meeting, nominations must be delivered to the Corporate Secretary no later than November 26, 2007 (see “Submission of Shareholder Proposals for the 2008 Proxy Statement”).

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

When a vacancy occurs on the Board, the Committee recommends to the Board a nominee to fill the vacancy.  As provided in the Company’s By-Laws, the Board elects a new director when a vacancy occurs between Annual Meetings.

22




Retention of Independent Advisors

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

Director Independence

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

 The Board has determined that seven of the current directors, Messrs. William C. Bowes, Dwight L. Hanger, J. Christopher Lewis, Joseph B. Reagan,  Robert Rodin,  John P. Stenbit, and Robert J. Untracht are independent.  Ms. Davis, an employee of the Company and Chief Executive Officer is not independent.

Certain Relationships and Related Transactions

The Company reviews all related party transactions for potential conflict of interest situations on an ongoing basis.  All such transactions are reviewed and approved by the Company’s Audit Committee.

The following describes certain transactions that have occurred during the Company’s fiscal year ending December 31, 2006:

William C. Bowes.  Effective May 17, 2004, the Company entered into a consulting agreement with Bowes Enterprises, a partnership, for the purpose of providing the Company with added technical expertise associated with its contracted client base.  The agreement was renewed and continues until May 17, 2008.  During the fiscal year ending December 31, 2006 a total of $1,608 in consulting fees and $786 in expenses were paid to Bowes Enterprises.

Joseph B. Reagan.  Effective August 9, 2004, the Company entered into a consulting agreement with Dr. Reagan for the purpose of providing the Company with added technical expertise associated with its contracted client base.  The agreement was renewed and continues until January 1, 2008.  During the fiscal year ending December 31, 2006, no payments were paid to or received from Dr. Reagan.

SummitJets, Inc. The Company periodically leases aircraft from SummitJets, Inc., which is owned by the Company’s former Chairman and Chief Executive Officer.  The lease rate was determined through a review of prevailing market rates for such services.  During the year ended December 31, 2006, the Company recorded an expense of $149,000.   Of the amount expensed in 2006, no balance remained in accounts payable as of December 31, 2006.

23




Charitable Contributions.  The Company provided charitable donations to two not-for-profit agencies, Goodwill Industries of Orange County and the Blind Children’s Learning Center of Orange County.  Ms. Cathy L. McCarthy, the Company’s President and Chief Operating Officer, serves on the Board of Directors of Goodwill Industries of Orange Country and Mr. Steve D. Handy, the Company’s Senior Vice President, Chief Financial Officer and Corporate Secretary, serves on the Board of Directors of the Blind Children’s Learning Center of Orange County.  The Company contributed a total of $18,000 during fiscal year ended December 31, 2006.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, and the regulations thereunder, requires the Company’s directors, executive officers and persons who own more than ten percent (10%) of a registered class of the Company’s equity securities (“Reporting Persons”), to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission (the “SEC”). Such persons are also required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file with the SEC.

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during its fiscal year ended December 31, 2006, all Reporting Persons complied with all applicable filing requirements.

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended December 31, 2006, the members of the Compensation Committee were Joseph B. Reagan, William C. Bowes, and J. Christopher Lewis, all of whom were non-employee directors of the Company.  None of the members of the Compensation Committee was, at any time during fiscal 2006 or at any other time, an officer or employee of the Company.  There are no Compensation Committee interlocks between the Company and other entities involving the Company’s executive officers and Board members who serve as executive officers or Board members of such other entities.

Business Conduct and Ethics Code

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

24




Whistleblower Procedures

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

Shareholder Communication with Board of Directors

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

SM&A

4695 MacArthur Court, 8th Floor

Newport Beach, CA  92660

Attn:  Corporate Secretary

Executive Loans

The Company does not extend loans to executive officers or directors and has no such loans outstanding.

25




REPORT OF THE AUDIT COMMITTEE

The Audit Committee (the “Committee”) oversees the Company’s financial reporting process on behalf of the Board of Directors and is directly responsible for the compensation, appointment and oversight of the Company’s independent auditors.  Management is responsible for the preparation, presentation and integrity of the Company’s financial statements, and for the procedures designed to assure compliance with accounting standards and applicable laws and regulations.   The Company’s independent auditors, BDO Seidman, LLP are responsible for auditing the Company’s financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States.

The Committee operates pursuant to a charter that can be found on the Company’s website at www.smawins.com under Investor Relations>Corporate Governance. Under its written charter, the Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, has direct access to the independent auditors as well as anyone in the Company, and has the ability to retain, at the Company’s expense, special legal, accounting, or other consultants or experts it deems necessary in the performance of its duties.  A copy of the Committee Charter will be provided, without charge, upon request by contacting the Corporate Secretary at SM&A, 4695 MacArthur Court, 8th Floor, Newport Beach, CA 92660.

The Committee is composed of four independent directors.  The Board of Directors has made a determination that each member of the Committee is independent and financially literate as required by the Sarbanes-Oxley Act and applicable SEC rules.  The Board has also determined that one or more members of the Committee have accounting or related financial management expertise.  The Board determined that Mr. Robert J. Untracht is an “audit committee financial expert” as defined by rules of the SEC. The Committee held four meetings during the fiscal year ended December 31, 2006, attended by all of the Committee members, and has held one meeting since the end of such fiscal year, attended by a majority of the Committee members.

In performing its oversight function, the Committee reviewed and discussed with management and the independent auditors, the audited financial statements and the quarterly operating results prior to their issuance. During 2006, management advised the Committee that the financial statements reviewed had been prepared in accordance with generally accepted accounting principles, and reviewed significant accounting and disclosure issues with the Committee.  These reviews included discussion with independent auditors of matters required to be discussed pursuant to Statement on Auditing Standards No. 61, “Communication with Audit Committees,” as modified or supplemented.  The Committee has received the written disclosures from the independent auditors required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” as currently in effect and has discussed such independence with the independent auditors.  The Committee also reviewed the requirements and the Company’s progress in implementing the requirements of Section 404 of Sarbanes-Oxley Act of 2002 and related regulations.  The Committee also reviews comments on accounting matters from the Securities and Exchange Commission.

The Committee has also considered whether the provision of non-audit services by the independent auditors is compatible with maintaining their independence, and has satisfied itself with respect to the independent auditors’ independence.

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Based on its reviews and discussions, the Committee recommended to the Board of Directors that the Board approve the inclusion of the Company’s audited financial statements in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2006 for filing with the Securities and Exchange Commission.

The Audit Committee:

 

Robert J. Untracht, Chairman

 

 

Dwight L. Hanger

 

 

Joseph B. Reagan

 

 

John P. Stenbit

 

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SECURITY OWNERSHIP

Principal Holders

As of April 2, 2007, the Company had 18,725,593 shares of Common Stock issued and outstanding.  The only persons known by the Company, as of this date, to be beneficial owners of more than five percent of the Company’s Common Stock are noted below.

Name and Address of Beneficial Owner

 

Amount and
Nature of
Beneficial
Ownership

 

Percentage of
Common
Stock Owned

 

Steven S. Myers(1)

 

3,279,776

 

17.51

%

Wasatch Advisors, Inc(2)

 

2,466,598

 

13.17

%

Royce & Associates, Inc., LLC(3)

 

2,208,900

 

11.80

%

JP Morgan Chase & Co(4)

 

1,021,450

 

5.45

%

Heartland Advisors, Inc/William J. Nasgovitz(5)

 

968,900

 

5.17

%

Sarbit Asset Management, Inc(6)

 

944,553

 

5.04

%

 

Footnotes to Principal Holders:


(1)                      Includes 11,667 shares owned beneficially and of record by Melissa Myers, Mr. Myers’ daughter.  Melissa Myers is economically dependent on Mr. Myers and, as a result, Mr. Myers holds an indirect beneficial ownership interest in such shares.   Mailing address is c/o SM&A, 4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660.

(2)                      Based on information contained in Schedule 13G filed with the SEC on February 14, 2006.  Mailing address is 150 Social Hall Avenue, Salt Lake City, UT 84111.

(3)                      Based on information contained in Schedule 13G/A filed with the SEC on January 31, 2006.  Mailing address is 1414 Avenue of America, New York, NY 10019.

(4)                      Based on information contained in Schedule 13G filed with the SEC on February 10, 2006.  Mailing address is 270 Park Avenue, New York, NY 10017.

(5)                      Based on information contained in Schedule 13G filed with the SEC on February 12, 2007.  Mailing address is 789 North Water Street, Milwaukee, WI 53202.

(6)                      Based on information contained in Scheduled 13G filed with the SEC on March 29, 2007.  Mailing address is 100-1 Evergreen Place, Winnipeg, MB R3L OE9 Canada

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Named Executive Officers and Directors

As of April 2, 2007, all current Named Executive Officers and Directors as a group, consisting of thirteen (13) persons, beneficially owned 1,330,970 shares of the Company’s Common Stock, which amount represents 7.11% of the total outstanding shares of the Company’s Common Stock as of that date.

The following table sets forth the shares of the Company’s Common Stock beneficially owned by the current Named Executive Officers of the Company as of April 2, 2007:

Name and Title of Beneficial Owner

 

Amount and
Nature of
Beneficial
Ownership

 

Percentage
of Common
Stock
Owned

 

 

 

 

 

 

 

 

 

G. Timothy Bauman

 

Executive Vice President, Sales and Marketing

 

34,472

(1)

*

%

Cynthia A. Davis

 

Chief Executive Officer and Director

 

7,000

(1),(2)

*

%

Thomas A. Eide

 

Senior Vice President, Consulting Operations

 

20,680

(1)

*

%

Steve D. Handy

 

Senior Vice President, Chief Financial Officer & Corporate Secretary

 

21,250

(1)

*

%

Cathy L. McCarthy

 

President and Chief Operating Officer

 

408,907

(1)

2.18

%

Kevin L. Reiners

 

Senior Vice President, Program Services Operations

 

8,321

(1)

*

%

William C. Bowes

 

Director

 

100,000

(1)

*

%

Dwight L. Hanger

 

Chairman of the Board

 

51,000

(1),(3)

*

%

J. Christopher Lewis

 

Director

 

355,392

(1)

1.90

%

Joseph B. Reagan

 

Director

 

50,000

(1)

*

%

Robert Rodin

 

Director

 

50,000

(1)

*

%

John P. Stenbit

 

Director

 

107,417

(1)

*

%

Robert J. Untracht

 

Director

 

116,531

(1)

*

%

 

 

Total Current Named Executive Officers and Director

 

1,330,970

 

 

 

 

 

 

 

 

 

 

 

Steven S. Myers

 

Retired Chairman and Chief Executive Officer

 

3,279,776

(4)

17.51

%

 


*Less than 1%

Footnotes to Current Named Executive Officers and Directors:

(1)          Includes the following shares which could be acquired upon the exercise of stock options exercisable within 60 days of April 2, 2007:

Mr. Bauman

 

30,000

 

Mr. Bowes

 

100,000

 

Ms. Davis

 

-0-

 

Mr. Eide

 

19,775

 

Mr. Handy

 

21,250

 

Mr. Hanger

 

50,000

 

Mr. Lewis

 

29,000

 

Ms. McCarthy

 

350,550

 

Dr. Reagan

 

50,000

 

Mr. Reiners

 

7,500

 

Mr. Rodin

 

50,000

 

Mr. Stenbit

 

107,417

 

Mr. Untracht

 

116,531

 

 

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(2)   Ms. Davis was hired as Chief Executive Officer effective April 2, 2007.

(3)   Mr. Hanger was appointed as Chairman of the Board of Directors effective April 1, 2007.

(4)   Includes 11,667 shares owned beneficially and of record by Melissa Myers, Mr. Myers’ daughter.  Melissa Myers is economically dependent on Mr. Myers and, as a result, Mr. Myers holds an indirect beneficial ownership interest in such shares.   Mr. Myers retired on March 31, 2007.

Named Executive Officers – Principal Occupation During Last Five Years

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

Cynthia A. Davis (50) was appointed as Chief Executive Officer and Director of the Company’s Board of Directors on April 2, 2007, following the retirement of Steven S. Myers.  From March 2003 to March 2007, Ms. Davis served as Vice President and General Manager of a Lockheed Martin Missiles & Fire Controls business.  In this role, Ms. Davis was responsible for strategic planning, business development, R&D, manufacturing, and P&L for the 650 person business unit providing precision guided weapons systems and mission critical sensors and controls to Federal and international customers.  From October 2001 to March 2003, Ms. Davis served as Vice President, Distribution Technologies of Lockheed Martin Systems Integration where she was recruited to lead and revitalize this commercial mail automation and technology subsidiary of Lockheed Martin.  Before joining Lockheed Martin, Ms. Davis served as Vice President of the Surface Mount and Systems Division of Universal Instruments Corporation, a hi-tech electronic assembly company. Previous to this, she held various senior positions at Bausch & Lomb’s Eyewear Division and was a management consultant with Meritus Consulting Services. Ms. Davis received her Bachelor of Science in Industrial Technology and Computer Science and Master of Science in Advance Technology and Computer Science from the State University of New York at Binghamton.

Cathy L. McCarthy (59) currently serves as President and Chief Operating Officer.  Ms. McCarthy became an officer of the Company in November 2001 and served as Executive Vice President, Chief Financial Officer and Corporate Secretary. Ms. McCarthy is also the President of Financial Management Partners, a consulting firm that specializes in financial consulting.  Prior to entering into her Employment Agreement with the Company in 2001, Ms. McCarthy served as Executive Vice President, Chief Financial Officer and Secretary for PIA Merchandising, Inc.  Ms. McCarthy has also served in various capacities at Wherehouse Entertainment, Inc., and served as a Vice President at Mellon Bank, N.A. Ms. McCarthy currently serves on the Board of Directors of Goodwill Industries and the Orange County Advisory Board of City National Bank.

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G. Timothy Bauman (55) currently serves as Executive Vice President, Sales & Marketing.  Immediately prior to joining the Company and from July 2003, Mr. Bauman was with Oracle Consulting as a Senior Manager in their State and Local government business.  From October 2001 to April 2003, Mr. Bauman was Vice President of Sales of WRQ, Incorporated, a privately held software company that provides host access and host integration software and services solutions.  From February 2001 to October 2001, Mr. Bauman was Director of Sales for Safeharbor Technology, a Seattle-based start up that builds and manages web-based graphical CRM solutions.  From January 1999 to December 2000, Mr. Bauman was Vice President, Sales and Business Development for Appliant.com Incorporated, a performance management services startup with a focus on enterprise applications and e-commerce.  Mr. Bauman received his Bachelor of Administration in Business Administration from Bloomsburg State University at Pennsylvania.

Steve D. Handy (39) currently serves as Senior Vice President, Chief Financial Officer and Corporate Secretary.  Immediately prior to this he held the position of Vice President, Corporate Controller. Mr. Handy joined the Company in December 2001 as Assistant Corporate Controller.  Prior to joining the Company, Mr. Handy was Director of Finance for Transnational Computer Technology, Inc., where, among other functions, he implemented worldwide controls, policies and procedures.  From 2000 to 2001, Mr. Handy was Corporate Controller of Futurelink Corporation where he directed all facets of the monthly internal financial reporting, including quarterly and annual SEC reporting.  Previous to this Mr. Handy served as Senior Auditor, Business Advisory and Audit Services for Deloitte & Touche LLP.  Mr. Handy planned and executed financial statement audits and reviews with emphasis on the high technology and healthcare markets. Mr. Handy is licensed through the State of California as a Certified Public Accountant. Mr. Handy currently serves on the Board of Directors of the Blind Children’s Learning Center of Orange County.  Mr. Handy holds a Bachelor of Science degree in Administration with an emphasis in accounting, from California State University, San Marcos in California.

Thomas A. Eide (40) currently serves as Senior Vice President, Consulting Operations.  Mr. Eide joined the company in September 1993 as a consulting associate.  He has served in a variety of consulting roles with all of the company’s strategic clients, ultimately becoming a Proposal Manager.  In October 2001, he was named the Proposal Development Center (PDC) Lead at Lockheed Martin Aeronautics and was promoted to Vice President and Account Executive for the Lockheed Martin Aeronautics account in January 2004.   His responsibilities included all SM&A activities relating to Joint Strike Fighter, the F/A-22 Raptor and the Advanced Development Programs organization, commonly referred to as the Skunkworks.  He moved to SM&A Headquarters in January 2005 as Vice President, Product Development responsible for the development and maintenance of the company’s consulting service offerings relating to Competition Management and Program Services.  He assumed his current duties in August 2005.  Mr. Eide graduated with honors and academic distinction from the U.S Air Force Academy with a Bachelor of Science in Astronautical Engineering.   He also received a Master of Science in Telecommunications from the Interdisciplinary Telecommunications Program at the University of Colorado, Boulder and completed the Mergers and Acquisition Program at the Stanford Graduate School of Business.

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Kevin L. Reiners (46) currently serves as Senior Vice President of Performance Assurance Practices.  Mr. Reiners joined the Company in September 2005. Prior to joining the Company Mr. Reiners served from August 2002 to August 2005 as Vice President of Programs for Lockheed Martin Space Systems Company.  In this capacity, he was responsible for the implementation of Program Management processes and disciplines for all Space Systems programs.  From July 2000 to August 2002 Mr. Reiners served as Business Director for Lockheed Martin Space Systems Company on the Terminal High Altitude Area Defense (THAAD) program.  Previous to this he served as Controller for Space and Strategic Missiles, and the Program Manager for the Lockheed/Martin Marietta merger related Consolidation Program.   This program executed the strategic plan for the 1995 merger including the closure of East Windsor and Valley Forge and the facilitization of Sunnyvale to accommodate heritage Astrospace programs.  Mr. Reiners holds a Bachelor of Science degree in Finance from San Diego State University.

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COMPENSATION DISCUSSION AND ANALYSIS

Overview of Compensation Program

The Compensation Committee (the “Compensation Committee”) of the Board of Directors currently consists of Messrs. Bowes, Lewis, and Reagan, who are independent, non-employee directors.  The Board of Directors designates the members and the Chairman of the Compensation Committee.  Currently, the Chairman of the Compensation Committee is Dr. Reagan.  The Committee primary duties are to discharge, or assist the Board of Directors in discharging, the board of director’s responsibilities with respect to all forms of compensation to the directors, Executive Officers and other employees, to assure that such compensation is fair, competitive and sufficient to attract and retain highly qualified individuals, to administer the Company’s current and future equity incentive plans and to review and approve this Compensation Discussion and Analysis report for inclusion in this Proxy Statement.

In performing their role, the Compensation Committee has relied on publicly available studies, and sought the advice of the Chief Executive Officer and the President and Chief Operating Officer when setting compensation for executives reporting to them.  Individual compensation for executives of SM&A, other than the Chief Executive Officer, have been made, to a great extent, at the time of hire or extension of an expiring employment agreement, or through bonus programs applicable to the entire management team.

The Compensation Committee held meetings on February 15, April 25, August 10, October 24 and November 30, 2006.  At such meetings, the committee discussed issues related to executive compensation, including option grants to employees exceeding the authority granted to the Chief Executive Officer, and worked extensively on succession planning for SM&A management.  The members of the Compensation Committee participated in late 2006 and early 2007 in a search for a potential successor to Steven S. Myers as Chief Executive Officer.

On February 2, 2007, the full Board of Directors met and directed the Compensation Committee to actively recruit and make a firm offer of an employment agreement to the leading candidate for the position.  On March 7, 2007, the Compensation Committee met to discuss the final, negotiated terms of a proposed employment agreement with Cynthia A. Davis to become Chief Executive Officer, and agreed to propose its adoption to the full board.  The Compensation Committee also discussed Steven Myers’ wish to retire as Chairman and Chief Executive Officer.  Further, on March 7, 2007, the Compensation Committee adopted a Long-Term Incentive Plan covering fiscal years 2007-2009 (and final financial targets, adjusted for the acquisition of Project Planning, Inc., were approved by written consent later that month).  The Compensation Committee also discussed changes to the Company’s director compensation in light of recently released survey results, which changes were approved by the Board of Directors on March 7, 2007 .  The Board of Directors also approved the amendment of the Compensation Committee Charter to reflect the changes in Securities and Exchange Commission requirements and clarify other terms.

33




Compensation Philosophy and Objectives

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

·                  Attract, retain and motivate highly qualified individuals;

·                  Link executives’ incentive goals with the interests of the Company’s shareholders;

·                  Emphasize variable compensation that is tied to the Company’s performance in an effort to generate and reward superior individual performance; and

·                  Support the Company’s business plans and long-term goals.

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

·                  the individual performance of each officer relative to pre-determined individual and Company performance goals;

·                  the experience and career potential of each officer;

·                  the competitive market for both short-term and long-term compensation;

·                  the prior compensation earned and awarded to each officer;

·                  the success of the Company in achieving its financial and performance goals; and

·                  the Company’s need to obtain, retain and motivate highly qualified individuals.

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

·                  include equity grants that typically vest over multiple years to align long-term employee interests with the interests of our shareholders while effectively managing shareholder dilution;

·                  provide a direct and meaningful link between the Company’s goals and individual achievement of pre-determined, objective and well-defined goals; and

·                  provide a competitive blend of short-term and long-term compensation to provide meaningful incentives for individual achievement.

34




Our total compensation packages may include the following components:

·                  Base salary;

·                  Incentive Cash Bonus;

·                  Long-Term Incentives;

·                  Benefits and Perquisites; and

·                  Post-Termination Benefits

The following discussion and analysis describes the Company’s compensation objectives and policies as applied to the following Named Executive Officers (the “Executive Officers”):

·      Cynthia A. Davis, Chief Executive Officer

·      Steven S. Myers, Chairman and Chief and Executive Officer (retired March 31, 2007)

·                  Cathy L. McCarthy, President and Chief Operating Officer (announced she will depart the Company by December 31, 2007)

·      G. Timothy Bauman, Executive Vice President-Sales and Marketing

·      Steve D. Handy, Senior Vice President, Chief Financial Officer

·      Thomas A. Eide, Senior Vice President-Consulting Operations

·      Kevin L. Reiners, Senior Vice President-Program Services Operations

This section is intended to provide a framework within which to understand the actual compensation awarded to, earned or held by each Executive Officer during 2006, as reported in the compensation tables and accompanying narrative sections of this Proxy Statement.

Elements of Executive Compensation

For the top two executives, the Compensation Committee has generally set targeted financial goals or awarded equity at the time of extension of existing employment agreements for the Chief Executive Officer and the President and Chief Operating Officer (with Ms. McCarthy assuming that position in 2005 after long-term service as Chief Financial Officer).  Mr. Myers, prior to his retirement in 2007, did not receive stock-based compensation given his large position in the Common Stock dating to his founding of the Company.  Ms. McCarthy’s stock-based compensation had been previously determined, as annual stock option grants (once granted, vesting over four years) were part of the agreement to retain her services after she and Mr. Myers successfully led a restructuring of SM&A’s business during 2001 and 2002.  Ms. Davis’ compensation, as embodied in her employment agreement, is based on the compensation philosophy described above, an analysis of market data obtained in cooperation with the executive search firm assisting the Compensation Committee, and specific incentives intended to replace benefits that had been earned by Ms. Davis at her previous employer but would be forfeited as a result of her departure.

For other executives, based on competitive market information and the Company’s compensation philosophy and objectives, the Chief Executive Officer and President and Chief Operating Officer submit their recommendations for executive officer compensation for the upcoming fiscal year to the Compensation Committee toward the end of the fiscal year.  The Compensation Committee reviews these recommendations and can decide to accept or modify them.  The Compensation Committee then discusses its recommended proposal with the full Board of Directors at the first meeting in the new fiscal year, and may further modify targeted compensation based on input from the full board.

35




The Company’s executive officer compensation packages combine and allocate cash and equity-based compensation taking into account the role of each executive officer of the Company, market practices, and the total value of all forms of compensation including benefits and perquisites available to the individual.  Our total compensation packages include base salary, annual bonuses, all paid in cash, as well as long-term compensation in the form of stock options or restricted stock awards, and other benefits and perquisites.  The rationale, design, reward process, and related information regarding the components of compensation are described generally below.

The Company does not currently have any equity or other security ownership policy that mandates ownership of certain amounts of Common Stock by our Executive Officers.  Steven Myers maintained a significant equity interest and did not receive any additional equity based compensation.  The Company has arrangements with two of our Executive Officers, which provide for such executives to receive certain payments and benefits if their employment with the Company is terminated. These arrangements are discussed in detail below. The Board of Directors has determined that such payments and benefits are necessary in order to attract and retain our Executive Officers.  Further, the Board of Directors reserves the right to implement broader Change of Control arrangements if they were viewed as necessary to ensure retention of its executive team.

Base Salary

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

For fiscal year 2006, the Compensation Committee reviewed salaries recommended by the Company’s Chief Executive Officer for the Executive Officers, and recommended the base salary of each executive officer on a case-by-case basis taking into account the individual officers’ responsibilities and performance, the competitive market information collected by the Compensation Committee and the compensation objectives of the Company.  For fiscal year 2006, the Company referenced the median (the 50th percentile) of the base salaries of executives in the publicly traded consulting firms, a comparative peer group having similar responsibilities to the Company’s Executive Officers, the relative seniority and level of responsibility of the Company’s executive officers as compared to the peer group, the Company’s historic compensation structure, and other relevant information.  The Compensation Committee approved and recommended to the Board of Directors the following base salaries for fiscal year 2006 for our named Executive Officers effective January 1, 2006:

·                  Ms. McCarthy’s base salary remained at $400,000;

·                  Mr. Bauman’s base salary remained at $275,000;

·                  Mr. Handy’s base salary was increased by 19% from 2005 to $195,846, reflecting a promotion;

·                  Mr. Eide’s base salary was increased by 3% from 2005 to $200,000; and

·                  Mr. Reiners’ base salary was set by employment agreement at $203,311 for 2006.

·                  Mr. Myers accepted a reduction in base salary from $600,000 to $500,000 effective in April 2006.

36




Additionally, after reviewing competitive market compensation information and the performance of the Company and each individual executive officer in fiscal year 2006, and based on the recommendation of the Company’s Chief Executive Officer, the Compensation Committee did not approve or recommend base salary increases for our named Executive Officers for fiscal year 2007.

Incentive Cash Bonus

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

Based on the Chief Executive Officer’s recommendation, the Compensation Committee and Board of Directors set the following bonus targets for each Executive Officer as a percentage of their respective fiscal year 2006 base salaries: 80% for Mr. Myers; 63% for Ms. McCarthy; 50% for Mr. Handy; 82% for Mr. Bauman; 50% for Mr. Eide; and 50% for Mr. Reiners.  Each executive officer’s performance goals for 2006 were established by the Compensation Committee to be achievable by each officer when performing at or above a performance level that the Company believes would be expected of a similarly situated officer of a competitive peer company.

Using the same approach for determining incentive cash bonus arrangements in fiscal year 2007 as in fiscal year 2006, the Compensation Committee and the Board of Directors on March 7, 2007 set the following bonus targets for each Executive Officer as a percentage of their respective fiscal year 2007 base salaries: 63% for Ms. Davis; 63% for Ms. McCarthy; 50% for Mr. Handy; 82% for Mr. Bauman; 50% for Mr. Eide; and 50% for Mr. Reiners.  The amount of the actual bonus for performance in fiscal year 2007 is based on a combination of an annual revenue and net income target, measured on a sliding scale and paid on a quarterly basis.  As an example of the sliding scale calculation, if either the revenue or net income target is missed by more than 20%, no incentive payment will be awarded.

37




Financial performance is determined after the end of the fiscal year based on actual business results versus pre-established business objectives.  Generally, the Compensation Committee sets the annual financial performance goals, which determine payouts, at the beginning of the performance period within a range of possible financial performance levels.  The goals are generally projected after a review of management’s operating budget and forecast for the coming fiscal year.  Payouts occur on a quarterly basis in 2007.  The final financial performance is reflected as a percentage amount.  For example, achieving target financial performance would yield an award of 100% of the target amount set at the beginning of the year, and poor performance, below 80% of the target range, would result in no bonus.  Financial performance thus determines the total amount of dollars paid to the individual management team members.  The Company’s incentive plans include a variety of measures of business performance from which the Compensation Committee may choose in establishing performance targets. These include revenue, cash flow (generally referred to as earnings before interest, taxes, depreciation and amortization), and occasionally net income or earnings per share.

The Compensation Committee typically selects one or two measures at the beginning of the performance period that will focus the participants, including the Executive Officers, on those behaviors and short-term decisions that will drive sustainable growth.  When deciding what financial measures to use at the start of a plan year, and the target level of achievement of those measures, the Compensation Committee carefully considers the state of the Company’s business and what measures are most likely to focus the Executive Officers, on making decisions that deliver short-term results aligned with the Company’s long-term goals.  In 2006, performance for the Company as a whole was measured based on revenue and net income.  In early 2006, the Compensation Committee set the minimum, target and maximum levels for each measure on an individual basis, and modified the targets for Mr. Myers and Ms. McCarthy in response to developments in the business during the year.

Long-Term Incentives

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

The Board has adopted a 2007 Equity Incentive Plan to replace the plan expiring in October 2007.  The Plan provides the Board, through the Compensation Committee, the ability to issue stock options, restricted stock, and other forms of stock based compensation.  The plan is being referred to the shareholders for approval under this Proxy Statement.  1,500,000 shares will be available for grant under the Plan, representing approximately 8% of the Company’s Common Stock outstanding.

38




The Board of Directors has delegated to the Compensation Committee the authority to grant stock and other equity awards including awards to our Executive Officers.  The Compensation Committee believes that having pre-determined grant dates throughout the year reduces the degree of subjectivity of option grant date selection, provides greater transparency to its option granting practices, and informs potential grantees of dates certain when grants may occur.  Accordingly, in 2006, the Compensation Committee maintained the following general procedures relating to the grant of stock options and other awards.

·                  All new employee equity grants and existing employee annual performance-based equity grants will be presented by management for consideration by the Compensation Committee at each of the quarterly regularly scheduled Committee meetings;

·                  The Compensation Committee will consider management’s recommendations and determine, in its judgment, the appropriate equity grants to be awarded to each employee of the Company with reference to guidelines previously approved by the Compensation Committee for the fiscal year;

·                  The Compensation Committee will convene (including telephonically or by written consent), to address urgent needs of the Company in relation to stock-based compensation; and

·                  The Compensation Committee has delegated to the Chief Executive Officer the power to grant stock options at fair market value of up to 15,000 shares per person, and no more than a total of 100,000 shares per annum.  This provides the Company with the flexibility to make grants to new hires and promoted employees without convening the Compensation Committee.

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

In determining the size of option awards for fiscal year 2006, the Compensation Committee and the Board of Directors took into account a number of standard compensation factors, as well as the following special considerations:

·                  the Company’s commitments under employment contracts with Executive Officers;

·                  the Company’s size, industry and growth rate; and

·                  the competitive market for highly skilled talent.

39




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

During fiscal year 2006, the stock option grants were generally determined in each executive officer’s employment agreement.  The Compensation Committee granted stock options to the executive officers as follows.

 

 

 

Awards:

 

Exercise

 

 

 

 

 

Number of

 

of Base

 

 

 

 

 

Securities

 

Price of

 

 

 

 

 

Underlying

 

Option

 

Name

 

Grant Date

 

Options

 

Awards

 

 

 

 

 

(#)

 

($/Share)

 

Thomas A. Eide

 

02/15/2006

 

23,100

 

7.11

 

Steve D. Handy

 

02/15/2006

 

10,000

 

7.11

 

Cathy L. McCarthy

 

01/03/2006

 

100,000

 

8.49

 

 

For 2007 and Beyond, Performance Share Units.  Based on the Company’s compensation philosophy and objectives, beginning in 2007 and continuing thereafter the Company intends to pay a portion of the total compensation for Executive Officers in the form of performance share units under the Company’s 2007 Long-Term Incentive Plan (“LTIP”).  The LTIP, which was adopted by the Compensation Committee on March 7, 2007 (with modified targets including the Project Planning, Inc. acquisition adopted later in March 2007), will reward Executive Officers for achieving certain earnings per share value of the Company’s Common Stock over the three-year period starting with fiscal year 2007.  Earnings per share less that $0.65 for the period ending December 31, 2009 will result in the Executive Officers earning no award under the LTIP.  The Compensation Committee chose this measure as it believed it is a key metric for the Company’s growth model because it was determined to align closely the interests of the Executive Officers with those of the Company’s shareholders.  The Compensation Committee believes growth in earnings per share has historically correlated with the Company’s share price.  Under the LTIP, in the event that the Company achieves earnings per share of the Company’s Common Stock as described in the table below on or before December 31, 2009, the Executive Officers will be granted on January 2, 2010 the number of shares as mentioned in the table that follows.  Each Executive Officer participating in the LTIP will be issued a restricted stock unit certificate reserving the underlying shares to the Executive Officer, and reflecting the criteria for receiving the performance share units as described in the following table.

40




 

Earnings Per Share
of Company’s
Common Stock

 

$0.95 or
Greater

 

Between $0.94
and $0.85

 

Between $0.84
and $0.75

 

Between $0.74
and $0.65

 

Name

 

Performance
Share Units

 

Performance
Share Units

 

Performance
Share Units

 

Performance
Share Units

 

 

 

(shares)

 

(shares)

 

(shares)

 

(shares)

 

Ms. Davis

 

100,000

 

85,000

 

75,000

 

65,000

 

 

 

 

 

 

 

 

 

 

 

Ms. McCarthy (1)

 

50,000

 

42,500

 

37,500

 

32,500

 

 

 

 

 

 

 

 

 

 

 

Mr. Bauman

 

30,000

 

25,500

 

22,500

 

19,500

 

 

 

 

 

 

 

 

 

 

 

Mr. Handy

 

25,000

 

21,250

 

18,750

 

16,250

 

 

 

 

 

 

 

 

 

 

 

Mr. Eide

 

25,000

 

21,250

 

18,750

 

16,250

 

 

 

 

 

 

 

 

 

 

 

Mr. Reiners

 

25,000

 

21,250

 

18,750

 

16,250

 

 


(1)  Ms. McCarthy has announced she intends to leave the Company prior to December 31, 2007.

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

Employee Stock Purchase Plan.  In order to provide employees at all levels with greater incentive to contribute to the Company’s success, the Company provides employees, including the Executive Officers (excluding Steven Myers), with the opportunity to purchase discounted shares of Common Stock under the Company’s Amended and Restated Employee Stock Purchase Plan, which is intended to be a qualified plan under Section 423 of the Internal Revenue Code. Under this plan, eligible employees may authorize payroll deductions of up to 15% of their biweekly base pay.  The amounts are accumulated and, at the end of each quarter are used to purchase shares of the Company’s Common Stock at 95% of the fair market value of the Company’s Common Stock on the Purchase Date (as defined in the plan).

41




Benefits

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

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

The Company also sponsors a 401(k) Retirement Savings Plan (“401(k) Plan”) that allows employees to make plan contributions on a pre-tax basis.  Employees may enroll to a maximum deferral limit of 20% of covered compensation into the 401(k) Plan.  During 2006, the Company matched employee contributions at 100% of the first 2% of salary deferrals for a total of 2% of eligible compensation.

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

Perquisites

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

Exec-U-Care Coverage.  The Executive Officers are eligible for a maximum medical benefit of $100,000 a year through the Exec-U-Care program.  During 2006, five of the Executive Officers participated in this program.  Exec-U-Care supplements an Executive Officer’s basic health plan by reimbursing annual expenses not covered under the basic medical and dental benefit plan that are available on a Company-wide basis.  Examples of such expenses include deductibles, co-insurance amounts, special health equipment and chiropractic care.  The Executive Officer is entitled to receive reimbursement for documented medical expenses of the Executive Officer and dependents.

Club Fees & Entertaining.  The Company reimburses or pays for Executive Officers for entrance or initiation fees and monthly club dues.  Club memberships are primarily used for business meetings or entertainment purposes.  Only two of the Executive Officers participated with the club membership perquisite in 2006.

Private Aircraft.  The Company periodically leases aircraft from SummitJets, Inc., which is owned by the Company’s retired Chairman and Chief Executive Officer.  The lease rate was determined through a review of prevailing market rates for such services.  During 2006, the Company recorded an expense of $149,000.  The expense is included in selling, general and administrative expenses in the Company’s Form 10-K for the period ending December 31, 2006.  Of the amount expensed in 2006, no balance remained in accounts payable as of December 31, 2006.

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

Automobile Expense.  In lieu of an automobile allowance, the Company leases an automobile for the Executive Officer’s use.  In addition, the reasonable cost of annual insurance, fuel, maintenance, cleaning and repair is borne by the Company.

42




Founders Club Incentive Travel Plan.  As a reward for achieving target performance goals, the Executive Officer and a guest receive a seven-day complimentary travel package, including expenses.

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

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

Change of Control Agreements

The Company has entered into Change of Control agreements with the executive officers which become effective only upon certain Change of Control events, which are defined in the agreements.  These Change of Control agreements are meant to induce the continued employment of the Executive Officers and other key employees and to enhance their loyalty and performance by providing them with certain compensation and benefits in the event a Change of Control of the Company occurs.  The term of these agreements and the amounts payable upon the occurrence of the Change of Control events is described in more detail under the section entitled “Potential Payments Upon Termination or Change of Control”.  The Board of Directors reserves the right to extend Change of Control benefits to other Executive Officers to the extent deemed necessary for the Company’s business.

Employment Agreements

The Company typically does not enter into employment agreements with its executives.  However, it is party to agreements with its Chief Executive Officer, Cynthia A. Davis and its President and Chief Operating Officer, Cathy L. McCarthy.  The Company entered into these agreements because it believes that it is important to secure the leadership of these key management individuals.  These agreements, which are described in more detail under the sections entitled “Employment Agreement with Ms. Davis” and “Employment Agreement with Ms. McCarthy” of this Proxy Statement, set forth the base salaries, incentive opportunities, stock based compensation and benefits and perquisites payable to Ms. Davis and Ms. McCarthy.  The Company has provided its other executive officers with letters outlining benefits and prerequisites to which they are entitled, and those benefits (including Change of Control and severance benefits) are described below, including under “Potential Payments Upon Termination or Change of Control.”

Equity Incentive Plan

One of the proposals that shareholders are being asked to consider at the Annual Meeting is the approval of the 2007 Equity Incentive Plan.  As described in the section entitled “Item 2 – Approval of 2007 Equity Incentive Plan,” if approved, the 2007 Equity Incentive Plan will be used to grant equity and performance-based awards similar to those previously granted under the Second Amended and Restated 1997 Equity Incentive Plan (the “Prior Plan”).  All outstanding awards under the Prior Plan will remain outstanding; however, no further awards will be granted pursuant to such plan if the 2007 Equity Incentive Plan is approved by shareholders at the Annual Meeting.

43




The proposed 2007 Equity Incentive Plan, if approved, would not have a substantive effect on the elements of compensation that comprise each Executive Officer’s total compensation package.  Under the 2007 Equity Incentive Plan, the Company will continue to provide each Executive Officer with annual and long-term incentives in the form of cash and share based awards with terms similar to those discussed in this Compensation Discussion and Analysis for 2006.

Tax Considerations

Our Compensation Committee has reviewed the impact of tax and accounting treatment on the various components of our executive compensation program. We believe that achieving the compensation objectives discussed above is more important than the benefit of tax deductibility and our executive officer compensation programs may, from time to time, limit the tax deductibility of compensation.  Nevertheless, when not inconsistent with these objectives, we endeavor to award compensation that will be deductible for income tax purposes.  Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to publicly-held companies for compensation paid to “covered” executive officers, to the extent that compensation paid to such an officer exceeds $1 million during the taxable year.  No material portion of the compensation paid to our covered executive officers for the year ended December 31, 2006 that would be taken into account in determining a Section 162(m) limitation exceeded the $1 million limit.  The Company’s employee stock option plans and option grants to executives, as well as the LTIP plan adopted in 2007, have been structured so that any compensation deemed paid to an executive officer in connection with the exercise of options with an exercise price equal to the fair market value of the shares on the grant date will qualify as performance-based compensation that will not be subject to the $1 million limitation. The Compensation Committee does not expect to take any action at this time to modify cash compensation payable to the executive officers that would result in the application of Section 162(m).

44




Table 1.  Summary Compensation Table

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

Name

 

Principal Position

 

Year

 

Salary

 

Bonus
Earned

 

Option
 Awards

 

All Other
Compensation

 

Total

 

 

 

 

 

 

 

($)

 

($)

 

($)
(1)

 

($)
(2)

 

($)

 

Steven S. Myers

 

Chief Executive Officer

 

2006

 

500,000

 

261,441

 

 

218,386

 

979,827

 

Cathy L. McCarthy

 

President and Chief Operating Officer

 

2006

 

400,000

 

144,629

 

482,550

 

28,286

 

1,055,465

 

Steve D. Handy

 

Senior Vice President-Chief Financial Officer

 

2006

 

195,846

 

83,127

 

40,412

 

14,543

 

333,928

 

G. Timothy Bauman

 

Executive Vice President-Sales and Marketing

 

2006

 

275,000

 

205,364

 

 

37,499

 

517,863

 

Thomas A. Eide

 

Senior Vice President-Consulting Operations

 

2006

 

200,000

 

83,127

 

93,351

 

26,707

 

403,185

 

Kevin L. Reiners

 

Seior Vice President-Product Development & Acquisition

 

2006

 

203,311

 

112,374

 

 

3,784

 

319,469

 

 

These categories did not apply to Executive Officers during 2006: (a) Stock Awards, (b) Non-Equity Incentive Plan Compensation, and (c) Change in Pension Value and Non-Qualified Deferred Compensation Earnings.


(1)          The aggregate grant date fair value for options awards issued during 2006.

(2)          Perquisites within the Company are described in further detail under the section entitled “Compensation Discussion and Analysis – Elements of Executive Compensation – Perquisites”.  Additional detail regarding the components of this aggregate amount is provided in the following table for each Executive Officer.

 

Amount of All Other Compensation for:

 

 

 

S. Myers

 

S. Handy

 

C. McCarthy

 

G.T. Bauman

 

T. Eide

 

K. Reiners

 

 

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

Exec-U-Care

 

35,395

 

8,934

 

6,693

 

5,007

 

125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Club Fees & Entertaining

 

4,974

 

 

5,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Aircraft

 

149,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Housing Allowance

 

 

 

 

19,800

 

22,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automobile Expense

 

24,428

 

 

11,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Founders Club Incentive Travel Program

 

 

 

 

9,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life Insurance Premium Reimbursement

 

 

2,000

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401(k) Matching Contributions

 

4,400

 

3,609

 

4,400

 

1,692

 

3,846

 

3,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

218,386

 

14,543

 

28,286

 

37,499

 

26,707

 

3,784

 

 

45




Table 2.  Grants of Plan-Based Awards Table

The following table shows all grants of option awards under the Company’s equity incentive plan during fiscal year 2006 to each of the Executive Officers named in the Summary Compensation Table and the estimated future payouts with respect to such awards. To the extent that an option award only provides for a payout upon exercise of a vested option, that amount is reported as the “maximum” in column (1) below.  As of December 31, 2006, there have been no stock awards issued to any Executive Officer and therefore this table does not reflect a column for “Estimated Future Payouts Under Non-Equity Incentive Plan Awards” and “All Other Stock Awards: Number of Shares of Stock or Units”.

 

 

 

 

 

Estimated
Future
Payouts
Under
Equity
Incentive
Plan
Awards

 

 

 

All Other
Stock
Awards:
Number of
Securities
Underlying

 

Exercise
or Base
Price of
Option

 

Name

 

Grant Date

 

Threshold

 

Target

 

Max

 

Options

 

Awards

 

 

 

 

 

(#)

 

(#)

 

(#)
(1)

 

(#)
(2)

 

($/Sh)

 

Steven S. Myers

 

 

 

 

 

 

 

Steve D. Handy

 

02/15/2006

 

 

 

 

10,000

 

7.11

 

Cathy L. McCarthy

 

01/03/2006

 

 

 

18,750

 

81,250

 

8.49

 

G. Timothy Bauman

 

 

 

 

 

 

 

Thomas A. Eide

 

02/15/2006

 

 

 

 

23,100

 

7.11

 

Kevin L. Reiners

 

 

 

 

 

 

 

 


(1)          The maximum number represents options that vested during 2006.

(2)          This represents options granted during the year that were not performance based and did not vest during 2006.

46




Table 3.  Outstanding Equity Awards at Fiscal Year-End Table

The following table sets forth information concerning unexercised stock options for each of the Executive Officers named in the Summary Compensation Table as of December 31, 2006.

Name

 

Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable

 

Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable

 

Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)

 

Option
Exercise
Price ($)

 

Option
Expiration
Date

 

 

 

 

 

 

 

 

 

 

 

 

 

Steven S. Myers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steve D. Handy

 

6,250

 

 

 

$

2.55

 

03/11/2012

 

 

6,250

 

6,250

 

 

$

3.73

 

01/21/2013

 

 

 

10,000

 

 

$

7.11

 

02/15/2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Cathy L. McCarthy

 

56,800

 

 

 

$

1.531

 

09/30/2010

 

 

50,000

 

 

 

$

3.04

 

09/30/2012

 

 

50,000

 

 

 

$

11.53

 

09/30/2013

 

 

100,000

 

 

 

$

11.82

 

01/02/2014

 

 

43,750

 

56,250

 

 

$

8.45

 

01/03/2015

 

 

18,750

 

81,250

 

 

$

8.49

 

01/03/2016

 

 

 

 

 

 

 

 

 

 

 

 

 

G. Timothy Bauman

 

30,000

 

30,000

 

 

$

7.04

 

09/29/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas A. Eide

 

250

 

 

 

$

2.50

 

01/02/2012

 

 

10,000

 

 

 

$

11.76

 

01/05/2014

 

 

3,750

 

11,250

 

 

$

8.75

 

08/01/2015

 

 

 

23,100

 

 

$

7.11

 

02/15/2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Kevin L. Reiners

 

7,500

 

22,500

 

 

$

8.390000

 

12/27/2015

 

 

As of December 31, 2006, there were no stock awards issued to any Executive Officer.

47




Option Exercises and Stock Vested Table

There were no stock options exercised by Executive Officers or stock awards issued to Executive Officers during 2006.

Pension Benefits Table

The Company provides no payments or other benefits at, following, or in connection with retirement.

Non-Qualified Deferred Compensation Table

The Company provides a qualified defined contribution plan.

Potential Payments Upon Termination or Change of Control

The Company has entered into agreements with each Executive Officer that provides certain payments and benefits upon termination of such officers’ employment.  Due to Mr. Myers’ retirement effective March 31, 2007, no such payments and benefits are payable to him under such letter.  Mr. Myers however entered into a Retirement Agreement which provided certain payments and benefits as described under “Retirement Agreement with Mr. Myers”.

Employment Agreement with Ms. Davis

The Company and Ms. Davis are party to an employment agreement providing for an annual base salary of $400,000 per annum and participation in the Company’s incentive compensation program with an opportunity to earn $250,000 in bonus compensation.  In addition, on her first day of employment, as compensation for relinquishing benefits at her previous employer, Ms. Davis received 200,000 SM&A stock options, with an exercise price of $7.14 per share, a grant of 7,000 shares of SM&A Common Stock and a $50,000 payment.  Additionally, the Board of Directors may award other equity incentives each January 2nd Ms. Davis is employed.  If Ms. Davis is terminated by the Company without cause, or terminates her employment for good reason (as defined in the agreement), or if she is terminated within 12 months following a Change of Control of the Company, she will receive salary through the balance of the agreement term or for 12 months, whichever is longer, and continuation of health insurance and similar benefits for the time specified in the agreement.  Other benefits and perquisites provided to the Company’s executives are available to Ms. Davis as more fully set forth in this discussion. Ms. Davis agreed to certain restrictive covenants and other provisions for the benefit of the Company as more fully set forth in the agreement.  The agreement term continues through April 1, 2010.

48




Employment Agreement with Ms. McCarthy

The Company and Ms. McCarthy are party to an employment agreement, as amended, providing for an annual base salary of $400,000 and an annual incentive bonus pursuant to a plan adopted by the Board of Directors. Ms. McCarthy also receives an annual stock option grant for the purchase of 100,000 shares of the Company’s Common Stock at an exercise price equal to the fair market value of the Company’s Common Stock on the date of grant. These options vest and become exercisable in 16 quarterly installments. Ms. McCarthy and her dependents are entitled to reimbursement for documented medical expenses not otherwise covered by the Company’s medical plan and long-term care and disability insurance coverage and she receives other benefits as more fully set forth in this discussion. Ms. McCarthy may not compete with the Company during the term of the agreement, and may not solicit any employees to leave their employment with the Company for a period of two years following the expiration of the term of the agreement. Ms. McCarthy has an obligation to keep confidential and protect the trade secrets and other confidential information of the Company and its customers.

The Company may terminate the agreement at any time for “Cause” (as defined therein), or without “Cause” on 30 days’ prior notice. Ms McCarthy may resign at any time on 30 days’ prior notice. If Ms. McCarthy is terminated without “Cause,” or if she resigns for “Good Reason” (as defined in the agreement), she will receive her base salary, and health and welfare benefits, for the shorter of twelve months or until the expiration of the term of the agreement, and she will receive the pro rata portion of any incentive bonus which has been earned through the date of her termination. If Ms. McCarthy is terminated without “Cause” or resigns for “Good Reason” within twelve months following a of the Company, Ms. McCarthy will receive (i) a lump sum payment equal to her annual base salary for the shorter of the remainder of the term of the agreement or twelve months, and (ii) health and welfare benefits for the shorter of the remainder of the term of the agreement, the date which is 18 months from the date of the , or the date which is 12 months from the date of termination. Upon the occurrence of a , Ms. McCarthy will be entitled to a lump sum payment in an amount equal to her annual base salary, and all of her outstanding stock options will, to the extent unvested, vest in full and be immediately exercisable.

Ms. McCarthy’s employment agreement has a term expiring December 31, 2007, and she has disclosed her intention to leave the company prior to that date.  If it is determined that Ms. McCarthy is resigning for “Good Reason”, she will receive her base salary, and health and welfare benefits, for the shorter of twelve months or until the expiration of the term of the agreement, and she will receive the pro rata portion of any incentive bonus which has been earned through the date of her termination.

Payments Upon Termination Due to Death or Disability

The Company provides Ms. Davis and Ms. McCarthy with continuation of salary following death or disability for up to 12 months, or the expiration of the applicable agreement term, whichever occurs first.  In the case of disability, health and life insurance will be provided (or premiums reimbursed) for the period.

49




Benefits Letters

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

Payments Upon Termination Without Cause or Resignation For Good Reason

In the event that, absent a , the Company terminates any other Executive Officer’s employment without cause or any Executive Officer resigns for good reason and the officer signs a waiver and release in a form that meets the Company’s approval, the officer will be entitled to (i) a lump sum payment equal to 6 times the officer’s then current monthly base salary in accordance with the Company’s customary payroll practices and (ii) the same health and life insurance benefits he or she was then currently receiving until six (6) calendar months after the effective date of the termination or, if the policies for such benefits do not permit continued participation in such plan, the monthly premium or premiums for such discontinued health and/or life insurance.

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

50




Payments Upon Change of Control

In the event of a change-in-control of the Company, each Executive Officer (except Ms. Davis and Ms. McCarthy with respect to the vesting of unvested stock options as described below), if the officer is within 24 months of the change-in-control terminated for any reason (including non-continuation of his or her position with the acquirer), the officer will be entitled to (i) a payment equal to 12 times the officer’s then current monthly base salary in accordance with the Company’s customary payroll practices and (ii) the same health and life insurance benefits he or she was then currently receiving until twelve (12) calendar months after the effective date of the termination or, if the policies for such benefits do not permit continued participation in such plan, the monthly premium or premiums for such discontinued health and/or life insurance.   under these arrangements is defined as the earliest date on which any of the following occurs:  (x) a merger or consolidation in which the shares of the Company outstanding immediately prior to such merger or consolidation (or the securities into which they are converted by virtue of such merger or consolidation) do not represent at least fifty percent (50%) of the voting power of the surviving corporation or its parent or (ii) a sale, lease or other transfer of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole.

The table that follows reflects the estimated amount of compensation that would be payable to (i) Ms. Davis and Ms. McCarthy under the terms of their respective employment agreements in effect on December 31, 2006 and (ii) each of the other Executive Officers (other than Mr. Myers) under the terms of the Company’s severance pay policy, in each case, in the event of termination of such Executive Officer’s employment under any one of the follow scenarios effective as of December 31, 2006:

·                  For cause by the Company or without good reason by the Executive Officer;

·                  Without cause by the Company or with good reason by the Executive Officer;

·                  Without cause by the Company or with good reason by the Executive Officer in connection with a change of control of the Company; and

·                  Upon the death or disability of the Executive Officer.

Potential Payments to Named Executive Officers Other Than Mr. Myers

The following table describes the potential payments upon termination or a Change of Control of the Company for each of the Named Executive Officers, other than Mr. Myers.  For the purposes of calculating the potential payments set forth in the table below, we have assumed that (i) the date of termination was December 31, 2006 and (ii) the stock price was $5.80, the closing market price of the Company’s Common Stock on December 29, 2006, the last business day of the 2006 fiscal year.

The estimates that follow do not include vested payments that are disclosed in the preceding table: Outstanding Equity Awards at Fiscal Year End—Fiscal 2006.  Also, any benefits that are generally available to all salaried employees and are nondiscriminatory are excluded from these estimates.  Cash incentives reflect bonuses accrued as of December 31 that had not been paid as of that date, plus a payment to Ms. McCarthy.

51




 

 

 

 

 

 

 

 

 

 

Termination

 

 

 

 

 

Termination

 

Termination

 

Change of

 

Following

 

 

 

 

 

Without Cause

 

Due to

 

Control; No

 

Change of

 

 

 

 

 

or

 

Death or

 

Termination

 

Control

 

 

 

 

 

For Good Reason

 

Disability

 

(1)

 

(2)

 

 

 

 

 

($)

 

($)

 

($)

 

($)

 

Cynthia A. Davis

 (3)

 

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

Cathy L. McCarthy

 (4)

Base Salary

 

400,000

 

400,000

 

 

400,000

 

 

Cash Incentive

 

48,886

 

48,886

 

400,000

 

448,886

 

 

Stock Options

 

 

 

 

 

 

Health Benefit Continuation

 

9,310

 

9,310

 

9,310

 

9,310

 

 

 

 

 

 

 

 

 

 

 

 

 

Steve D. Handy

 

Base Salary

 

100,000

 

 

 

200,000

 

 

Cash Incentive

 

20,009

 

 

 

20,009

 

 

Stock Options

 

12,938

 

12,938

 

 

12,938

 

 

Health Benefit Continuation

 

5,094

 

 

 

9,957

 

 

 

 

 

 

 

 

 

 

 

 

 

G. Timothy Bauman

 

Base Salary

 

137,500

 

 

 

275,000

 

 

Cash Incentive

 

53,311

 

 

 

53,311

 

 

Stock Options

 

 

 

 

 

 

Health Benefit Continuation

 

7,112

 

 

 

13,898

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas A. Eide

 

Base Salary

 

100,000

 

 

 

200,000

 

 

Cash Incentive

 

20,009

 

 

 

20,009

 

 

Stock Options

 

 

 

 

 

 

Health Benefit Continuation

 

7,686

 

 

 

15,008

 

 

 

 

 

 

 

 

 

 

 

 

 

Kevin L. Reiners

 (5)

 

 

N/A

 

N/A

 

N/A

 

N/A

 

 


(1)          Assumes all stock options are assumed by the acquirer as permitted under the Second and Amended Restated Equity Incentive Plan.

(2)          Assumes employment is terminated without cause by the acquirer within the period specified in the applicable agreement or benefit letter.

(3)          Ms. Davis was not an employee of the Company as of December 31, 2006; therefore, the potential payments would not apply.

(4)          Calculations assume an event occurs December 31, 2006 and Ms. McCarthy remains employed for the duration of 2007.

(5)          The Company’s Board of Directors approved additional benefit terms to Mr. Reiners effective January 1, 2007; therefore, Mr. Reiners would not have participated in potential payments as of the last fiscal year.

52




Retirement Agreement with Mr. Myers

On March 9, 2007, the Company entered into a retirement agreement with Steven S. Myers, who retired as Chairman, Chief Executive Officer and a member of the Board of Directors on March 31, 2007.  The Company made a retirement payment to Mr. Myers of $500,000 in the second quarter of 2007, and the Company and Mr. Myers agreed to a mutual release of claims, provided that the Company’s indemnification obligations and certain restrictive covenants of Mr. Myers’ employment agreement remain in force following his retirement.

53




Director Compensation

The Chief Executive Officer, as a Board member, receives no additional compensation other than her normal salary for serving on the Board. The Company has no other employee directors.

Non-employee directors receive the following annual cash and/or stock compensation as approved by the Board and as provided in Amendment 2 dated March 7, 2007 of the 2005 Director Compensation Plan.

DIRECTOR COMPENSATION PLAN

Effective April 1, 2007

Type of Compensation

 

Cash

 

Stock Options

 

 

 

 

 

 

 

Annual Retainer

 

$

20,000

(1)

 

 

Independent Chairman of the Board Retainer

 

$

40,000

(2)

 

 

Additional Retainer for Audit Committee Chair

 

$

10,000

(3)

 

 

Additional Retainer for Compensation Committee Chair

 

$

5,000

(4)

 

 

Additional Retainer for Governance & Nominating Committee Chair

 

$

5,000

(4)

 

 

Board Meeting Attendance Fee

 

$

1,500

(5)

 

 

Committee Meeting Attendance Fee

 

$

750

(6)

 

 

Telephonic Meeting Attendance Fee

 

$

500

(7)

 

 

Stock Options

 

 

 

 

 

Stock Options-In Lieu of Retainer Fee(s)

 

$

 

Vested 100% on Date of Grant

(8)

Stock Options-All Existing Non-Employee Directors

 

$

 

Options Must Vest 100%

(9)

Stock Options-All New Non-Employee Directors

 

$

 

Option for 50,000 Shares

(10)

Stock Options-Annual Membership Anniversary Grant

 

$

 

Option for 12,000 Shares

(11)

 


Footnotes to Director Compensation Table:

(1)                                  Paid to all non-employee directors (except the Independent Chairman) in quarterly increments as follows:  (a) $5,000 paid in shares of Company Common Stock on January 1; (b) $5,000 paid in cash on April 1; (c) $5,000 paid in cash on July 1; (d) $5,000 paid in cash on October 1.  If the payment date is a holiday or weekend, the next open business or market trading day will apply.

(2)                                  Paid in quarterly increments as follows: (a) $10,000 paid in shares of Company Common Stock on January 1; (b) $10,000 paid in cash on April 1; (c) $10,000 paid in cash on July 1; (d) $10,000 paid in cash on October 1.  If the payment date is a holiday or weekend, the next open business or market trading day will apply.

(3)                                  Paid in quarterly increments of $2,500 on January 1, April 1, July 1, and October 1.

54




(4)                                  Paid in quarterly increments of $1,250 on January 1, April 1, July 1, and October 1.

(5)                                  Paid to each non-employee director (except the Independent Chairman) for each scheduled Board meeting day, including days the director spends working on SM&A business.  The director is also eligible for reimbursement of expenses incurred while attending Board meetings, in accordance with Company policy. The Independent Chairman is paid $2,000 for each scheduled Board meeting day, including days the Independent Chairman spends working on SM&A business. The Independent Chairman is also eligible for reimbursement of expenses incurred while attending Board meetings, in accordance with Company policy.

(6)                                  Paid to each non-employee director for each scheduled Committee meeting day.  The director is also eligible for reimbursement of reasonable expenses incurred while attending Committee meetings, in accordance with Company policy.

(7)                                  Paid to each non-employee director for each scheduled Telephonic meeting.  The director is also eligible for reimbursement of telephonic expenses incurred for participation in Telephonic meetings, in accordance with Company policy.

(8)                                  At the request of a non-employee director, the cash fees (retainer and/or meeting attendance fees) will be converted into equivalent number of options, according to the fair market value closing price of the Company’s Common Stock on the grant date and multiplied by a factor of two (2) to determine the equivalent number of options to be granted.  Stock options granted in lieu of a retainer fee(s) will vest 100% on the date of grant.  The grant date shall be equal to the quarterly incremental payment date(s) as shown in Footnotes 1 through 4.  If the grant date falls on a weekend, legal holiday, or closed market trading date, the next open market trading date and fair market value closing price shall be designated as the option exercise price.

(9)                                  A non-employee director will be eligible for an additional stock option grant under the Director Compensation Plan when the following criteria have been met: (i) The non-employee directors serving on the Company’s Board as of April 11, 2005 namely Messrs. Bowes, Lewis, Reagan, Rodin, Stenbit, and Untracht (the “Existing Directors”) will retain all options granted through and including April 11, 2005 and each said option grant(s) must vest 100%; (ii) A non-employee director whose option grant vesting schedule was accelerated on June 8, 2005, namely Messrs. Hanger, Bowes, and Stenbit, must conclude the original vesting period schedule.  For example, an option granted on February 1, 2005 with a four-year vesting schedule is accelerated to 100% vested on June 8, 2005.  The non-employee director would not be eligible for an additional stock option grant until February 1, 2009.

(10)                            Upon initial appointment or election to the Board, (or the next open market trading date), the new non-employee director (“New Director”) is automatically granted an option to purchase fifty thousand (50,000) shares of the Company’s Common Stock under the Second Amended and Restated Equity Incentive Plan or such equity incentive plan in effect as approved by the shareholders.  The option will vest at a rate of twenty-five percent (25%) per year over a period of four (4) years with the term of the option being ten (10) years.  The standard ninety (90) day waiting period will be waived for all initial appointments or elections to the Board.

55




(11)                            On each anniversary date of appointment to the Board (or the next open market trading date), the non-employee directors who maintain options that have vested 100% are automatically granted an additional option to purchase twelve thousand (12,000) shares of the Company’s Common Stock under the Second Amended and Restated Equity Incentive Plan or such equity incentive plan in effect as approved by the shareholders. The exercise price of the option grant will be equal to the fair market value closing price of the Company’s Common Stock on the date of the option grant.  The option will vest at a rate of twenty-five percent (25%) per year over a period of four (4) years with the term of the option being ten (10) years.

As of April 2, 2007, options to purchase an aggregate of 894,948 shares of the Company’s Common Stock (of which 21,000 expired in January 2003) had been issued under the Plan to the Company’s current non-employee directors, at exercise prices ranging from $1.53 to $12.00 per share.

56




Director Compensation Table

The following table shows, for the fiscal year completed December 31, 2006, the annual fees paid to or earned by the Board of Directors.

 

 

Fees 
Earned

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

or Paid

 

Stock

 

Option

 

All Other

 

 

 

Incurred

 

Name

 

in Cash

 

Awards

 

Awards

 

Compensation

 

Total

 

Total

 

 

 

($)(1)

 

($)

 

($)(2)

 

($)

 

($)

 

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

William C. Bowes(3)

 

43,067

 

 

 

1,608

 

44,675

 

$

9,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cynthia A. Davis(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dwight L. Hanger(5)

 

36,000

 

 

 

 

36,000

 

$

3,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

J. Christopher Lewis

 

24,333

 

 

43,190

 

 

67,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steven S. Myers(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph B. Reagan

 

30,700

 

 

 

 

30,700

 

$

4,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert Rodin

 

24,333

 

 

 

 

24,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John P. Stenbit(7)

 

10,083

 

 

12,350

 

 

22,433

 

$

12,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert J. Untracht(8)

 

 

 

79,095

 

 

79,095

 

$

11,144

 

 


(1)          Directors may convert into stock options, all or a portion of the fees otherwise payable to them in accordance with Amendment 1 of the 2005 Director Compensation Plan (the “Director Compensation Plan”).

(2)          The aggregate grant date fair value computed in accordance with FAS 123R.

(3)          Includes $1,608 in consulting fees and $786 in expenses incurred pursuant to the terms of a consulting agreement between the Company and Bowes Enterprises.

(4)          Ms. Davis was appointed to the Board effective April 2, 2007.

(5)          Mr. Hanger was appointed as Chairman of the Board effective April 1, 2007.

57




(6)          Mr. Myers retired from the Board of Directors on March 31, 2007.

(7)          Effective June 6, 2006, Mr. Stenbit elected to receive stock option grants in lieu of Board fees.

(8)          Effective March 29, 2006, Mr. Untracht elected to receive stock option grants in lieu of Board fees.

58




Non-Employee Directors – Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information concerning unexercised stock options for each of the non-employee directors named in the Director Compensation Table as of December 31, 2006.

 

Number of

 

Number of

 

Equity Incentive

 

 

 

 

 

 

 

Securities

 

Securities

 

Plan Awards:

 

 

 

 

 

 

 

Underlying

 

Underlying

 

Number of Securities

 

 

 

 

 

 

 

Unexercised

 

Unexercised

 

Underlying

 

 

 

 

 

 

 

Options

 

Options

 

Unexercised

 

Option Awards

 

Option

 

 

 

(#)

 

(#)

 

Unearned

 

Exercise

 

Expiration

 

Name

 

Exercisable

 

Unexercisable

 

Options (#)

 

Price ($)

 

Date

 

William C. Bowes

 

100,000

 

 

 

$

9.88

 

04/15/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Dwight L. Hanger

 

50,000

 

 

 

$

8.91

 

04/12/2015

 

 

 

 

 

 

 

 

 

 

 

 

 

J. Christopher Lewis

 

29,000

 

 

 

$

3.48

 

06/05/2012

 

 

 

12,000

 

 

$

6.42

 

09/25/2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph B. Reagan

 

50,000

 

50,000

 

 

$

8.01

 

07/30/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert Rodin

 

25,000

 

75,000

 

 

$

8.00

 

02/17/2015

 

 

 

 

 

 

 

 

 

 

 

 

 

John P. Stenbit

 

100,000

 

 

 

$

9.88

 

04/15/2014

 

 

1,198

 

 

 

$

6.26

 

07/03/2016

 

 

498

 

 

 

$

6.03

 

08/10/2016

 

 

1,240

 

 

 

$

6.05

 

10/02/2016

 

 

496

 

 

 

$

6.05

 

10/24/2016

 

 

531

 

 

 

$

5.65

 

11/30/2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert J. Untracht

 

100,000

 

 

 

$

3.15

 

04/12/2012

 

 

1,277

 

 

 

$

6.37

 

03/29/2016

 

 

1,615