<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-22097
SPR Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3932665
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 SPRING ROAD, SUITE 750, OAK BROOK, ILLINOIS 60523-1874
(Address of principal executive offices)
(630) 575-6200
(Registrant's telephone number, including area code)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01
------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [x] No [ ]
As of March 22, 1999, there were 13,847,319 shares of registrant's common stock
outstanding and the aggregate market value of the registrant's common stock held
by non-affiliates of the registrant (based upon the per share closing price of
$4.50 on March 22, 1999, and for the purpose of this calculation only, the
assumption that all of the registrant's directors and executive officers are
affiliates) was approximately $44,435,453.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the registrant's Annual
Meeting of Stockholders to be held in 1999 are incorporated by reference into
Part III hereof. Certain exhibits listed in Part IV of this Annual Report on
Form 10-K are incorporated by reference from prior filings made by the
Registrant under the Securities Act of 1933, as amended, and the Securities Act
of 1934.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
SPR Inc., a Delaware corporation ("SPR" or the "Company") has over 25
years of experience in providing information technology ("IT") services to
clients in a variety of industries, including financial services, healthcare,
insurance, manufacturing, oil and gas, transportation and utilities. The Company
focuses its marketing efforts on Fortune 1000 companies and other large
organizations which have complex IT operations and significant IT budgets. SPR
provides its clients with three levels of consulting support which are
distinguished by the degree of responsibility the Company assumes: strategic
planning, project management and implementation. Within this framework, SPR
currently provides outsourcing services through five service offerings: software
modernization, mass change, application management, information delivery, and
software quality services, in addition to providing general consulting services.
SPR believes that this breadth of service and support fosters long-term client
relationships, promotes cross-selling opportunities and minimizes the Company's
dependence upon any particular service.
The Company's business was founded in 1973 by Eugene Figliulo as
Systems & Programming Resources, Inc. ("Systems Inc."). During 1994, Systems
Inc. transferred certain assets and liabilities to SPR Chicago, SPR Tulsa, and
SPR Wisconsin, respectively. These entities were organized as S corporations and
owned by the executives primarily responsible for the operations in each of
these locations. SPR Chicago, SPR Tulsa, SPR Wisconsin, Systems Inc. and
DataFlex (an affiliated IT services company in a complementary business) were
merged into the Company upon the Company's formation in October 1996.
The Company maintains its principal executive offices at 2015 Spring
Road, Suite 750, Oak Brook, Illinois 60523-1874. Its telephone number is (630)
575-6200. The Company's World Wide Web address is www.sprinc.com. The Company
currently has four branch offices located in Oak Brook, IL, Tulsa, Milwaukee and
Dallas. The Company has made, and intends to continue to make, significant
investments in its systems infrastructure, recruiting organization, training
programs and marketing initiatives in an effort to sustain growth. SPR intends
to leverage these investments, as well as its operating expertise, by opening
additional branch offices.
INDUSTRY OVERVIEW
Dataquest Incorporated estimated total expenditures for professional IT
services in the United States were approximately $62 billion in 1997. Dataquest
also estimates that the professional IT services market, consisting of
consulting and education, systems integration and development and systems
management services, will reach approximately $80 billion by 1999. This
represents a compound annual growth rate of approximately 14% between 1997 and
1999.
SPR's solutions focus on the modernization of legacy mainframe systems.
SPR believes that the demand for its services remains strong as large
institutions seek to protect and maximize the value of their investments in
mainframe systems by bringing them up to date and making them accessible to
today's newer Internet and distributed desktop systems.
Based on SPR's experience, many large organizations find it
increasingly difficult and costly to internally maintain their existing systems.
As providers of IT solutions focus more on the client/server and Internet
segments of the market, fewer professionals possess the skills necessary to
support and maintain existing mainframe and mid-range systems. The Company
believes these factors provide it with a substantial growth opportunity within
the IT services industry.
In addition, the Company believes that clients will continue to
maintain and improve their mainframe systems for the following reasons:
- mainframe systems represent an enormous investment that may prove too
risky and expensive to completely replace;
- mainframe computing is increasingly being used in new ways as
Internet/intranet technologies develop;
- existing mainframe systems are critical to the functioning of
clients' businesses as they contain vital business information
necessary to build replacement systems; and
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- clients need access to data resident in mainframe computers
regardless of the front-end computing platform being used.
BUSINESS AND GROWTH STRATEGIES
In the course of becoming a leading IT solutions provider, SPR has
pursued, and intends to continue to pursue, the following business and growth
strategies:
- Implement Information Technology Consultant (ITC) Training Program.
To address the industry-wide shortage of qualified technical
consultants, the Company has implemented a comprehensive training
program for college graduates with degrees other than in computer
science. In addition, SPR, in conjunction with DeVry, Inc., a leading
higher education institution specializing in technology, has
developed a continuing education program to complement and enhance
its consultants' careers and improve their technical skills. SPR
believes that the entry-level and continuing education training
programs provide SPR with a competitive advantage in attracting,
developing and retaining qualified technical consultants. As of
December 31, 1998, 284 individuals have entered and successfully
completed the entry-level portion of the ITC Training Program.
- Continue To Focus On Project Management. SPR will continue to focus
on increasing its mix of project management and strategic planning
engagements. SPR believes that by providing these value-added
services, it gains a competitive advantage in assessing its clients'
needs and anticipating opportunities to provide additional IT
solutions.
- Leverage Existing Client Base. The Company intends to continue
building long-term client relationships. Its record of customer
satisfaction and expanded solutions offerings have contributed to its
ability to increase the revenues generated from existing clients. The
Company derived more than 78% of its revenues in 1998 from 49 clients
to which it had provided IT solutions in the prior three consecutive
years. The Company intends to further penetrate its existing client
base by providing additional service offerings.
- Develop Additional Virtual Insourcing Centers. In 1996, as part of
its outsourcing solutions, SPR established its first Virtual
Insourcing Center in Chicago, enabling SPR to provide the full range
of its solutions in a company facility rather than at its clients'
facilities. Since its initial public offering in October 1997, SPR
has doubled the capacity of its Chicago Center and opened and
subsequently expanded its capacity in Centers in Tulsa, Dallas and
Milwaukee.
- Focus On Leading Technologies. The Company maintains and continues to
build expertise not only in mainframe applications but also in other
high-demand technologies, such as Internet/intranet applications,
open computing systems, data warehousing and relational database
management systems. SPR's expertise in these areas, together with its
relationships with software product developers and research
institutions, allow SPR to remain on the leading edge of
technological development.
SERVICE OFFERINGS
Since its inception, the Company has provided technical personnel to
augment its clients' internal IT departments. Over the past several years,
however, the Company has focused its efforts on providing higher-end service
offerings. The Company provides its clients with three levels of consulting
support which are distinguished by the degree of responsibility the Company
assumes: strategic planning, project management and implementation. Within this
framework, SPR currently provides outsourcing services through five service
offerings:
- Software Modernization - Enables clients to realize the value of
their existing systems, transforming legacy systems into assets. SPR
applies a proven methodology to make existing systems more flexible,
easier to maintain, and easier to integrate with new technology or
other existing systems.
- Mass Change - Consists of retrofitting existing systems to address
the date-coding problem that will be caused by the year 2000, as well
as implementing other mass changes to applications and systems and
their associated databases, such as the European Community's
conversion to the Euro currency and the extension of the number of
digits or other characters in zip codes, product codes and account
numbers.
- Application Management - Consists of providing the management,
systems maintenance and support of all or part of clients' existing
IT applications. Using proprietary service methodologies and third
party
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tools, the Company provides transition planning, engagement
management, program maintenance and testing, production support and
system improvements.
- Information Delivery Services - Consists of accessing, analyzing and
managing data which currently resides in existing systems. The
Company uses its expertise with existing systems and emerging
technologies to provide its clients with the ability to retrieve and
utilize data resident in existing systems which would otherwise be
inaccessible. Services provided include information harvesting,
information analysis and information publishing, which incorporate
technologies such as OLAP and the Internet/intranet.
- Software Quality Services - Provides a structure, risk-based testing
approach to ensure that a company's software continues to support
their business needs.
In addition, the Company offers general consulting services, which
consists of providing technical personnel with expertise in a wide variety of
skills and disciplines to augment clients' internal IT departments. Clients' IT
departments often require advice and programming skills without the full range
of project management support. General Consulting consists of staff augmentation
principally for maintenance and development of client/server and mainframe
environments.
The amount of responsibility assumed by the Company generally depends
upon a client's internal capabilities and desire to outsource IT functions.
Based upon client needs, SPR can provide strategic planning, project management
or implementation either at its clients' facilities or off-site at SPR's Virtual
Insourcing Centers. SPR employs proven proprietary service methodologies and
software analysis tools to deliver these services. SPR bills its clients on
either a time and materials or fixed-price basis.
RECRUITING AND TRAINING
The Company employs 14 full time recruiters, including 4 recruiting
managers, who are responsible for recruiting and establishing relationships with
qualified technical personnel. Technical personnel meeting the Company's
standards are added to a computerized database. Recruiting managers maintain
regular contact with technical personnel, monitor their availability and changes
in skill levels and update the database, which has been maintained for over 25
years.
In the first quarter of 1996, the Company implemented its ITC Training
Program to address the current shortage of available technical consultants. The
Company actively recruits college graduates with degrees other than in computer
science, such as music, mathematics and philosophy. Based upon its experience
with graduates of the entry-level portion of the training program, the Company
believes such individuals have the aptitude to develop the requisite systems and
programming skills. The Company enrolls these individuals in an intensive
eight-week entry-level training course. Upon completion of training, the Company
places these individuals on engagements managed by experienced technicians and
project managers. The Company enters into employment agreements with these
individuals, whereby the consultants agree to reimburse the Company for some or
all of the cost of their training if they leave the Company within four years.
As of December 31, 1998, 284 individuals have entered and successfully completed
the entry-level training since the commencement of the ITC Training Program
course on February 15, 1996. The Company intends to continue to conduct
additional training classes. The Company has developed additional training
courses in conjunction with DeVry, Inc., a leading higher education institution
specializing in technology. These courses offer SPR's consultants advanced
training in information technologies. By participating in these advanced
training courses, the Company's consultants can attain certification from DeVry
and earn credits toward both a master's degree in information technology and an
MBA.
MARKETING AND SALES
SPR marketing representatives are assigned to a limited number of
accounts in order to develop an in-depth understanding of each client's
individual needs and to build long-term client relationships. These
representatives are responsible for providing highly responsive service and
ensuring that the Company's service offerings achieve client objectives. In many
instances, a portion of SPR's marketing activity is carried out by senior
Company executives.
The Company employs a variety of business development and marketing
techniques to communicate directly with current and prospective clients,
including (i) various print and direct mail advertisements, (ii) participation
in print and live interviews, roundtable discussions and seminars, and (iii) a
World Wide Web site (www.sprinc.com). In addition, the Company believes that its
Chief Executive Officer and Chairman is recognized as an expert concerning the
year 2000 problem. He has participated, often with other service providers,
research organizations and productivity tool
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and hardware companies, in print, television and live interviews and
seminars concerning this problem. The Company believes these activities promote
greater client awareness and enhance the SPR brand name.
CLIENT BASE
The Company serves clients in a diverse range of industries thereby
mitigating cyclical effects of any one industry or market. The Company derives
an additional level of diversification from certain of its clients. Different
operating divisions of a given client may utilize any one or several services
offered by SPR, which helps mitigate the risk of customer concentration. During
1998, SPR's largest client, The SABRE Group, accounted for approximately 11% of
the Company's revenues.
EMPLOYEES
As of December 31, 1998, the Company had 680 IT consulting
professionals, of whom 651 were employees and 29 were independent contractors.
Of these IT consulting professionals were 81 project managers. As of such date,
the Company had 294 IT consulting professionals in Chicago, 153 in Tulsa, 188 in
Milwaukee and 45 in Dallas, respectively.
The Company has three categories of IT consultants: Salaried employees,
associate employees and independent contractors. Salaried employees are
full-time employees of the Company and are eligible for all benefits offered by
the Company. Associate employees are eligible for the same benefits offered to
salaried employees but are paid on an hourly basis and, as such, are not
entitled to paid time off in the form of sick days, personal days or vacation.
Approximately 96% of the Company's IT consultants are employees. Independent
contractors are not employees of the Company, but are paid on an hourly basis
and are not entitled to any benefits offered to Company employees.
Approximately 4% of the Company's IT consultants are independent contractors.
The Company is not a party to any collective bargaining agreements and
considers its relationships with its employees to be good.
COMPETITION
The market for IT professional services is intensely competitive on
local and national levels, and the Company competes frequently with a variety of
companies for both the same clients and qualified technical consultants. These
companies include: "Big Five" accounting firms, systems consulting and
implementation firms, application software firms, service groups of computer
equipment companies, general management consulting firms and programming
companies. The Company considers large organizations with complex IT needs to be
among its primary clients. Within a given market, there are a limited number of
such potential clients, some of which have designated only certain IT
professional services companies as approved providers of IT professional
services. Primary competitive factors for obtaining and retaining clients
include price, quality of services, technical expertise and responsiveness to
client needs. The primary competitive factors in attracting and retaining
qualified candidates as consultants are competitive compensation arrangements
and consistent exposure to high quality and varied engagements.
Several of the Company's competitors are substantially larger than the
Company and have greater financial and other resources. Many of such competitors
have also been in business longer than the Company and have significantly
greater name recognition throughout the United States, including the geographic
areas in which the Company operates and into which it may expand. In addition,
such competitors are able to meet a broader range of a client's IT consulting
needs and serve a broader geographic range than the Company, which permits such
competitors to better serve national accounts. Although the Company believes
that it competes, and will continue to compete, favorably with existing and
future competitors, there can be no assurance that the Company will continue to
do so.
INTELLECTUAL PROPERTY RIGHTS
Software developed by SPR in connection with a client engagement
typically becomes the exclusive property of the client. The Company relies upon
a combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws to protect its proprietary rights, the
rights of third parties from whom the Company licenses intellectual property and
the proprietary rights of its clients. The Company enters into confidentiality
agreements with its consultants in an effort to prevent the distribution of
proprietary information.
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The Company holds no patents or registered copyrights, and has no
present intention of registering any copyright or filing any patent
applications.
ITEM 2. PROPERTY
SPR leases its principal executive offices, which are located at 2015
Spring Road, Oak Brook, Illinois 60523-1874, and also leases facilities in
Tulsa, Oklahoma, Dallas, Texas, and Milwaukee, Wisconsin. These leases expire on
October 31, 2004, May 31, 2004, March 31, 2003 and June 30, 2003, respectively.
The Company also leases space in Oak Brook, Illinois, Tulsa, Oklahoma, and
Dallas, Texas to house Virtual Insourcing Centers. The leases expire in 2002,
2002, and 2003, respectively. The Company believes it has adequate space to
conduct its current business. The Company anticipates, however, that additional
space will be required as business expands but believes that it will be able to
obtain suitable space as needed. See Note 7 of Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The company is not involved in legal proceedings which the Company
believes are material to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the fourth quarter of the period covered by this report.
Part II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters.
(a) The Company's common stock began trading on October 2, 1997 at a price
of $10.67 per share. The Company's common stock is quoted on the NASDAQ
National Market, under the symbol SPRI. The quarterly range of high and low
sales prices, as reported by the NASDAQ National Market, for the fourth
quarter of 1997, through March 22, 1999, was as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997 4th Qtr 13.25 9.17
1998:
1st Qtr 23.67 10.67
2nd Qtr 23.00 17.17
3rd Qtr 25.67 14.00
4th Qtr 21.50 12.38
1999 1st Qtr. (through March 22, 1999) 22.44 3.88
</TABLE>
As of March 24, 1999, there were approximately 61 shareholders of record.
This number does not include stockholders for whom shares were held in a
nominee or street name.
Except for undistributed S Corporation income earned prior to the initial
public offering. The Company has not paid any dividends to date and plans
to reinvest its earnings in future growth opportunities. The Company does
not anticipate paying cash dividends in the foreseeable future.
(b) The Company's Registration Statement No. 333-32735 covering an initial
public offering of 3,719,250 shares of the Company's common stock, $0.01
par value per share (the "Offering"), was declared effective on October 1,
1997. Smith Barney Inc. and Robert W. Baird & Co. Incorporated were the
Managing Underwriters of the Offering. Of the shares so registered, the
Company sold 2,400,000 shares and certain selling stockholders sold an
aggregate of 1,500,000 shares on October 3, 1997. On November 4, 1997,
certain selling stockholders sold
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additional 585,000 shares to the underwriters' exercise of their
over-allotment option. All of the shares in the Offering were sold at a
price of $10.67 per share for an aggregate offering price of $47,840,000.
Net proceeds to the Company from the sale of 2,400,000 shares in the
Offering was approximately $22.5 million, after deducting underwriting
discounts and commissions of $1.8 million and offering expenses of $1.3
million paid by the Company. The Company did not receive any of the
proceeds from the sale of shares by the selling stockholders.
On May 5, 1998, the Company completed a follow-on public offering of
3,315,000 shares of the Company's Common Stock. The Company sold 1,350,000
shares in the follow-on public offering and received $23.1 million in net
proceeds from the sale of such shares.
The remaining net proceeds of approximately $10.2 million from the
Offering, together with the $23.1 million from the follow-on public
offering, and cash from operations are being temporarily invested in
investment grade securities. The Company intends to use the remaining net
proceeds for general corporate purposes, including the expansion of its ITC
Training Program, additional virtual insourcing centers, working capital,
branch expansion and possible acquisitions of related businesses.
Item 6. Selected Financial Data.
The following selected financial data is derived from the Company's
financial statements and notes thereto that have been audited by Arthur
Andersen LLP, independent public accountants. This information should be read
in conjunction with the financial statements and notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 14,797 $ 22,908 $ 32,511 $ 53,422 $ 85,344
Cost of Services 10,424 15,525 23,287 32,377 50,508
-------- -------- -------- -------- --------
Gross Profit 4,373 7,383 9,224 21,045 34,836
Costs and Expenses
Selling 1,165 2,141 3,046 4,855 5,275
Recruiting 410 777 1,323 1,608 1,827
Stock-based compensation (1) 6,510 27,987 12,231 -- --
General and administrative expenses 1,334 1,642 3,742 8,438 12,320
-------- -------- -------- -------- --------
Total costs and expenses 9,419 32,547 20,342 14,901 19,422
-------- -------- -------- -------- --------
Operating income (loss)(1) (5,046) (25,164) (11,118) 6,144 15,414
Other income (expense) (57) (109) (71) 47 2,083
-------- -------- -------- -------- --------
Income (loss) before income taxes (1) (5,103) (25,273) (11,189) 6,191 17,497
Provision for income taxes 75 21 9 1,553 6,999
-------- -------- -------- -------- --------
Net income (loss), as reported (1) $ (5,178) $(25,294) $(11,198) $ 4,638 $ 10,498
======== ======== ======== ======== ========
Historical diluted net income (loss) per share $ (2.61) $ (1.15) $ 0.43 $ 0.77
======== ======== ======== ========
Pro forma diluted net income (loss) per common share
- includes adjustment to recognize "C" corporation provision
for income taxes (2) $ (2.72) $ (1.19) $ 0.30 $ --
======== ======== ======== ========
Balance Sheet Data (at end of period):
Cash and short-term investments $ 1,083 $ 1,109 $ 356 $ 21,177 $ 51,113
Working capital 1,674 2,370 1,194 23,072 58,650
Total assets 3,573 5,584 7,131 31,943 71,438
Long-term debt, less current portion 1,841 704 206 -- --
Total stockholders' equity 326 2,275 2,507 25,530 62,808
</TABLE>
(1) In 1994, Systems Inc. transferred certain assets and liabilities to SPR
Chicago and SPR Wisconsin. Inasmuch as such 1994 transactions were among
family members within a control group, such transactions have been recorded
in the Company's financial statements as if the stockholders of SPR Chicago
and SPR Wisconsin received non-cash, stock-based compensation during 1994,
1995 and 1996 in an amount equal to the increase in the estimated value of
such companies since 1994. This expense is non-recurring subsequent to
October 31, 1996. Such compensation expense is recorded as stock-based
compensation with the corresponding credit included in
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additional paid-in capital. Upon conversion of the Company to a C
Corporation upon closing of the Offering, the retained deficit of the
Company, which includes the aggregate stock-based compensation expense, was
reclassified and netted against additional paid-in capital. See Note 13 of
Notes to Financial Statements.
(2) Prior to the Offering, the Company was an S Corporation and was not subject
to Federal and certain state corporate income taxes. The Statement of
Operations Data reflects a pro forma provision for income taxes as if the
Company had been subject to Federal and state corporate income taxes. The
pro forma provision for income taxes is computed by multiplying the
effective tax rate times the income (loss) before income taxes adjusted to
eliminate the stock-based compensation expense and subtracting income taxes
previously recorded.
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
Company Overview
The Company was founded in 1973 and derives its revenues from providing IT
consulting services. SPR principally bills its clients on a time and materials
basis and revenues are recognized as services are provided. The Company has
occasionally entered into fixed-price billing engagements and may enter into
more such engagements in the future. Typically, the Company bills for its
services on a biweekly basis to monitor client satisfaction and to manage its
outstanding accounts receivable balances. The Company's cost of services
consists primarily of consultant compensation and related expenses. Accordingly,
the Company's financial performance is substantially affected by billing margins
(billable hourly rate less consultant hourly cost) and consultant utilization
rates (the ratio of hours billed to total available hours).
SPR has maintained its billing margins by increasing its hourly rates to
offset increases in its consulting staff costs. The Company manages its billing
margins by establishing a target billing rate for each consultant; however,
actual billing rates may be higher or lower than the target billing rates
depending upon competitive pressures and market conditions. Hourly billing rate
increases are generally implemented by the Company based upon market conditions,
consultant skill levels and the terms of its engagements.
Fluctuations in consultant utilization rates result from variations in the
amount of unassigned time, which historically has consisted of training,
vacation, sick and holiday time and time spent on administrative support
activities while between engagements. In order to reduce unassigned time, the
Company actively manages the terms of its engagements and matches available
consultants to client requirements. Additional factors which vary and impact
consultant utilization rate are: the number of entry-level training classes
conducted through the Company's ITC Training Program, the amount of time it
takes to assign the newly trained consultants, and general industry conditions.
The Company believes that its business and growth strategies rely in part,
upon the availability of qualified technical consultants. The Company has
developed a three-to-six year training program targeted at college graduates
with degrees other than in computer science. The individuals enrolled in the ITC
Training Program are paid a salary commensurate with the salary paid to computer
science graduates. Since the commencement of the program on February 15, 1996,
284 individuals have entered and successfully completed the entry-level portion
of the ITC Training Program. The Company incurred approximately $1.7, $1.6 and
$1.3 million in 1998, 1997 and 1996, respectively, in expenses attributable to
the training program, all of which have been expensed as incurred. Employees who
complete the entry-level course and are placed on customer engagements generate
significantly higher gross margins than the Company's more experienced
consultants. Since their cost relative to their billing rate is less than the
more experienced consultants, the Company believes that these higher margins
will enable it to sustain this training program and conduct additional classes
on a regular basis.
In 1994, Systems Inc. transferred certain assets and liabilities to SPR
Chicago and SPR Wisconsin. Inasmuch as such 1994 transactions were among family
members within a control group, such transactions have been recorded in the
Company's financial statements as if the stockholders of SPR Chicago and SPR
Wisconsin received noncash, stock-based compensation during 1994, 1995 and 1996.
This compensation expense was allocated to each such period based upon the
increase in the estimated fair market value of SPR Chicago and SPR Wisconsin
during the respective periods. Compensation expense was calculated as follows:
(i) multiply the number of shares of Common Stock owned by the former
stockholders of SPR Chicago and SPR Wisconsin by the estimated market value per
share of the Company
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(which was estimated at $10.00 per share in 1994 and 1995 and $9.33 per share in
1996); (ii) then subtract the payments made by SPR Chicago and SPR Wisconsin to
Systems Inc. on the notes issued in connection with the 1994 transactions and
(iii) then subtract the value of the shares received by the stockholders of SPR
Chicago and SPR Wisconsin attributable to such stockholders' interests in
Systems Inc. and DataFlex. This expense is non-recurring subsequent to October
31, 1996. Upon the conversion of the Company to a C corporation at the closing
of the initial public offering, the retained deficit of the Company, which
included the aggregate stock-based compensation expense, was reclassified and
netted against additional paid-in capital.
On June 2, 1997, the Company granted options to purchase 1,228,849 shares
of Common Stock at an exercise price of $5.11 per share, of which options to
purchase 415,088 shares vested immediately. As a result, non-cash compensation
expense related to these vested options of approximately $0.5 million was
recorded for the year ended December 31, 1997. The expense related to these
vested options is non-recurring subsequent to June 30, 1997. However, through
May 2002, the Company will recognize non-cash compensation expense of up to
approximately $150,000 per year as additional remaining options to purchase
758,461 shares of Common Stock vest. See Note 14 of Notes to Financial
Statements.
Results of Operations
The following table sets forth selected statements of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Percentage of Total Revenues
----------------------------
Year Ended December 31,
----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues 100% 100% 100%
Cost of Services 72 61 59
---- ---- ----
Gross Profit 28 39 41
Costs and Expenses:
Selling 9 9 6
Recruiting 4 3 2
Stock-based compensation (1) 38 -- --
General and administrative expenses 11 16 15
---- ---- ----
Total costs and expenses 62 28 23
---- ---- ----
Operating income (loss) (1) (34) 11 18
Other income (expense) -- -- 2
---- ---- ----
Income (loss) before income taxes (34) 11 20
Provision for income taxes -- 3 8
---- ---- ----
Net income (loss), as reported (1) (34)% 8% 12%
---- ---- ----
</TABLE>
(1) In 1994, Systems Inc. transferred certain assets and liabilities to SPR
Chicago and SPR Wisconsin. Inasmuch as such transactions were among family
members within a control group, such transactions have been recorded in the
Company's financial statements as if the stockholders of SPR Chicago and SPR
Wisconsin received non-cash, stock-based compensation during 1994, 1995 and
1996, in an amount equal to the increase in the estimated value of such
companies since 1994. This expense is non-recurring subsequent to October 31,
1996. See Note 13 of Notes to Financial Statements.
1998 Compared to 1997
Revenues. Revenues increased 60% to $85.3 million in 1998 from $53.4
million in 1997. This increase was primarily the result of a significant
increase in the number of consultants employed by the Company, many of whom
completed the entry-level training program in 1996, 1997, and 1998, and an
increased number of engagements for both new and existing clients. In 1998, a
higher proportion of these engagements encompassed project-focused
9
<PAGE> 10
engagements, which yield higher billing rates.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant salaries, benefits, virtual insourcing center facility
costs, training costs for experienced consultants, and travel expenses. Gross
profit increased 66% to $34.8 million in 1998 from $21.0 million in 1997. Gross
profit as a percentage of revenues increased to 41% in 1998 from 39% in 1997.
The increase in gross profit was primarily attributable to higher billing rates
and a higher billing-to-consultant cost ratio (which is revenues divided by
consultant cost), partially offset by management's estimate of the services to
be performed related to completing the Company's projects recorded in 1998 and
VIC facility costs. The higher billing rates were realized as a result of the
increase in project management engagements and the higher billing ratio was
attributable primarily to the placement of consultants who have completed the
ITC Training Program.
Selling Expenses. Selling expenses include the salaries, benefits,
commissions, bonuses, travel, entertainment and other direct costs associated
with the Company's direct sales force. Selling expenses increased 9% to $5.3
million in 1998 from $4.9 million in 1997. This increase was primarily the
result of increased commissions attributable to the 60% increase in sales over
the comparable period and to the hiring of 6 additional sales executives in
1998. The Company's selling expenses as a percentage of revenues decreased to 6%
in 1998 from 9% in 1997 as a result of a change in the sales commission plan on
January 1, 1998.
Recruiting Expenses. Recruiting expenses consist of costs related to
hiring new personnel, which include the salaries, benefits, bonuses and other
direct costs of the in-house recruiters, consultant relocation fees, recruiters'
travel expenses, and advertising costs. The Company hired 336 consultants in
1998 compared to 384 in 1997. Recruiting expenses increased to $1.8 million in
1998 from $1.6 million in 1997. Total recruiting costs per hire increased to
approximately $5,400 in 1998 from approximately $4,200 in 1997.
General and Administrative Expenses. General and administrative expenses
include salaries and benefits of management and support staff, leased facilities
cost, training costs for the entry level portion of the ITC Training Program,
travel expenses related to general and administrative matters, outside
professional fees, depreciation and other corporate costs. General and
administrative expenses increased 46% to $12.3 million in 1998 from $8.4 million
in 1997. This increase was primarily attributable to twelve additional
employees, general salary and management bonus increases, expenses related to
upgrading and utilizing the Company's network and telecommunications systems,
increased professional fees for legal, accounting and investor relations,
increased travel expenses, training costs associated with the entry level
portion of the ITC training program, employee functions, and depreciation. These
increases were partially offset by charges in 1997 for bad debt expense of
approximately $0.8 million relating primarily to a client which filed for
Chapter 11 bankruptcy protection and $0.2 million in expenses relating to the
Company's March 1997, proposed initial public offering that was postponed.
Other Income (Expense). The increase in other income in 1998, as compared
to 1997, is primarily attributable to interest earned on investments of
available net proceeds from the Company's initial and follow-on public
offerings.
Provision for Income Taxes. The Company's effective tax rate was 40% for
1998. Prior to the initial public offering, the Company elected to be taxed as
an S Corporation. As a result, income of the Company was taxable to the
shareholders. On October 1, 1997, the Company's S Corporation status was
terminated and the Company became a C Corporation.
1997 Compared to 1996
Revenues. Revenues increased 64% to $53.4 million in 1997 from $32.5
million in 1996. This increase was primarily the result of revenue generated by
the consultants who completed the entry-level training program in 1996 and 1997,
and an increased number of engagements for both new and existing clients. A
higher proportion of these engagements encompassed strategic planning and
project focused engagements, which yield higher billing rates.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant salaries, benefits and travel expenses. The Company's
gross profit of $9.2 million or 28% of revenues in 1996 increased 128% to $21.0
million or 39% of revenues in 1997. The increase in gross profit was primarily
attributable to higher billing rates and a higher billing-to-consultant cost
ratio (which is revenues divided by consultant cost), which were realized as a
result of the increase in project management engagements and the placement of
consultants who completed the entry-level course of the ITC Training Program in
1996 and 1997.
10
<PAGE> 11
Selling Expenses. Selling expenses include the salaries, benefits,
commissions, bonuses, travel, entertainment and other direct costs associated
with the Company's direct sales force. Selling expenses increased 59% to $4.9
million in 1997 from $3.0 million in 1996. This increase was primarily the
result of increased commissions attributable to the 64% increase in sales over
the comparable period. The Company's selling expenses as a percentage of
revenues were 9% in both 1997 and 1996.
Recruiting Expenses. Recruiting expenses consist of costs related to
hiring new personnel, which include the salaries, benefits, bonuses and other
direct costs of the in-house recruiters, consultant relocation fees, recruiters'
travel expenses, and advertising costs. The Company hired 384 consultants in
1997 compared to 292 in 1996. Recruiting expenses increased to $1.6 million in
1997 from $1.3 million in 1996. Total recruiting costs per hire decreased to
approximately $4,200 in 1997 from approximately $4,500 in 1996.
Stock-based Compensation Expense. Stock-based compensation expense
consists of non-cash expense resulting from the financial statement treatment of
the 1994 transfers by Systems Inc. of certain of its assets and liabilities to
SPR Chicago and SPR Wisconsin. The stock-based compensation expense was
allocated to each period based upon the increase in the estimated fair market
value of SPR Chicago and SPR Wisconsin. The increase in the estimated fair
market value of SPR Chicago and SPR Wisconsin for the periods presented was
based primarily upon SPR Chicago's and SPR Wisconsin's revenue growth over such
periods. The expense is non-recurring subsequent to October 31, 1996. There was
no stock-based compensation expense allocated to 1997 compared to $12.2 million
in 1996.
General and Administrative Expenses. General and administrative expenses
include salaries and benefits of management and support staff, leased facilities
cost, training, travel expenses related to general and administrative matters,
outside professional fees, depreciation and all other corporate costs. General
and administrative expenses increased 126% to $8.4 million in 1997 from $3.7
million in 1996. This increase was primarily attributable to thirteen additional
employees, general salary and management bonus increases, non-cash compensation
expense of approximately $0.5 million related to the grant of options on June 2,
1997, bad debt expense of approximately $0.8 million relating primarily to a
client which filed for Chapter 11 bankruptcy in 1997 and $0.2 million in
expenses relating to the Company's March 1997 proposed initial public offering
that was postponed until October 1997. Total costs of the March 1997, postponed
offering were approximately $0.8 million, of which $0.2 million was expensed in
the second quarter of 1997 and $0.6 million was charged against the proceeds of
the Offering. Additional factors contributing to this increase include increased
rent relating to new office space in Wisconsin, increased depreciation,
increased professional fees and training costs associated primarily with outside
instructors for the ITC Training Program.
1996 Compared to 1995
Revenues. Revenues increased 42% to $32.5 million in 1996 from $22.9
million in 1995. This increase was primarily the result of an increased number
of engagements for both new and existing clients. A higher proportion of these
engagements encompassed strategic planning, project-focused engagements, which
yield higher billing rates.
Gross Profit. Gross profit increased 25% to $9.2 million in 1996 from $7.4
million in 1995. Gross profit as a percentage of revenues decreased to 28% in
1996 from 32% in 1995. The decrease in gross profit was primarily attributable
to salaries and benefits of trainees enrolled in the ITC Training Program, and
the subsequent delay in the assignment of these individuals to billable
engagements. This resulted in an increase in expenses of approximately $0.8
million without any increase in revenues. In addition, the Company hired 20
project managers (an increase of 200% from 1995) to satisfy anticipated demand
for the Company's services. The Company's operating income for the year ended
December 31, 1996 was adversely affected by the large number of project managers
hired during such period and the amount of time these project managers devoted
to enhancing the Company's proprietary methodologies and performing marketing
and administrative activities.
Selling Expenses. Selling expenses increased 42% to $3.0 million in 1996
from $2.1 million in 1995. This increase was primarily the result of increased
commissions attributable to the 42% increase in sales over 1995. The Company's
selling expenses, as a percentage of revenues, were 9% in 1996 and 1995.
Recruiting Expenses. The Company hired 292 consultants during 1996
compared to 254 in 1995. Recruiting expenses increased 70% to $1.3 million in
1996 from $0.8 million in 1995. The Company employed on average 4 more
recruiters in 1996 than in 1995 to handle the increased hiring activity. As a
result of such additions, total recruiting costs per hire increased to
approximately $4,500 in 1996 from approximately $3,100 in 1995.
11
<PAGE> 12
Stock-based Compensation Expense. Stock-based compensation expense
allocated to 1996 was $12.2 million compared to $28.0 million allocated to 1995.
General and Administrative Expenses. General and administrative expenses
increased 128% to $3.7 million in 1996 from $1.6 million in 1995. This increase
was primarily attributable to hiring eight additional employees, increased rent
relating to new office space in Chicago and Wisconsin, increased depreciation,
training costs associated primarily with outside instructors and initial
staffing of the IDS business unit, including the reclassification of certain
employee salaries from cost of services and selling expenses to reflect the
change in responsibilities of these employees.
Liquidity and Capital Resources
On October 2, 1997, the Company completed its initial public offering
of 3,719,250 shares of the Company's common stock. The Company sold 2,400,000 of
such shares.
Net proceeds to the Company from the sale of 2,400,000 shares in the
Offering was approximately $22.5 million, after deducting underwriting discounts
and commissions of $1.8 million and offering expenses of $1.3 million paid by
the Company. The Company did not receive any of the proceeds from the sale of
shares by the selling stockholders.
On May 5, 1998, the Company completed a follow-on public offering of
3,315,000 shares of the Company's Common Stock. The Company sold 1,350,000
shares in the follow-on public offering and received $23.1 million in net
proceeds from the sale of such shares.
The remaining net proceeds of approximately $10.2 million from the
Offering, together with the $23.1 million from the follow-on public offering,
and cash from operations are being temporarily invested in investment grade
securities. The Company intends to use the remaining net proceeds for general
corporate purposes, including the expansion of its ITC Training Program,
additional virtual insourcing centers, working capital, branch expansion and
possible acquisitions of related businesses.
At December 31, 1998 the Company had approximately $51.1 million of cash
and short-term investments. Prior to its initial public offering in October
1997, the Company financed its growth through cash flows from operations,
periodically supplemented by borrowings under its line of credit or revolving
credit and term loan facilities. Receivables have increased to 52 days of
revenues at December 31, 1998 from 42 days of revenues at December 31, 1997.
Net cash flows provided from operating activities totaled $0.6 million,
$5.8 million, and $6.6 million in 1996, 1997, and 1998, respectively. The
increase from 1996 to 1997 was primarily a result of an increase in net income,
accrued compensation and accounts payable, partially offset by an increase in
accounts receivable. The increase from 1997 to 1998 was primarily a result of
increases in net income which was reduced by management's estimate of the
services to be performed related to completing the Company's projects partially
offset by an increase in accounts receivable and deferred taxes. Net cash used
in the Company's investing activities, primarily to fund capital expenditures
and to purchase investment grade securities in 1997 and 1998, totaled $0.9
million, $20.1 million, and $28.2 million for the years ended 1996, 1997, and
1998, respectively. Net cash provided by (used in) financing activities totaled
($0.5 million), $16.0 million, and $26.6 million in 1996, 1997, and 1998,
respectively. Net cash used in financing activities consisted primarily of
payments on a note payable to Eugene Figliulo and dividend distributions to
stockholders in 1996 and 1997, offset by the net proceeds from the issuance of
common stock in 1997 and 1998.
The Company, subsequent to the initial public offering, has no outstanding
debt. The Company believes the net proceeds from such offerings, together with
existing sources of liquidity and funds generated from operations, will provide
adequate cash to fund its anticipated cash needs, including funding the
Company's growth strategy.
12
<PAGE> 13
Year 2000
The Company has established a Year 2000 project team to review the
Company's computer hardware, operating system software, computer programs and
communications systems for any Year 2000 issues. The Year 2000 plan includes
testing the readiness of the Company's Virtual Insourcing Centers.
The test plan was designed using the same methodology used by the Company
in completing its Century Date Compliance engagements. The methodology
incorporates four phases including preparation, survey, plan, and implement.
The process of completing the preparation phase has produced the following
items for Year 2000 compliance consideration: 1) the Company's internal
financial system suite, 2) software that is ancillary to the financial suite, 3)
the Company's local and wide area network hardware and software, 4)
telecommunications equipment and software, 5) equipment and software used in
connecting from the Company's Virtual Insourcing Centers to its clients, and 6)
third-party vendors, including building managers and communication line
providers.
The following table reflects the methodology phases, and the completion
status of each phase as it applies to the items identified by the preparation
phase:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Preparation Survey Plan Implement
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Systems Complete Complete Complete Est. Q2 - 1999
- -------------------------------------------------------------------------------------
Ancillary Software Complete Complete Complete Est. Q2 - 1999
- -------------------------------------------------------------------------------------
LAN/WAN Complete Complete Complete Est. Q2 - 1999
- -------------------------------------------------------------------------------------
Telecommunications Complete Complete Complete Complete
- -------------------------------------------------------------------------------------
VIC Connectivity Complete Complete Complete Est. Q2 - 1999
- -------------------------------------------------------------------------------------
Third-party Vendors Complete Complete Complete Est. Q3 - 1999
- ------------------------------------------------------------------------------------
</TABLE>
As to the Company's financial system suite, the Company has purchased Year
2000 compliant software which will replace its current financial suite. The
financial suite is the only information technology system that is anticipated to
have a material impact on the Company. Expected future costs of implementing
this system, along with the ancillary systems are expected to be less than
$150,000.
During the first and second quarter of 1999, the project team will continue
to employ the Company's methodology to address the Year 2000 issue. Since most
of the Company's infrastructure was deployed within the last two years, costs of
any remediation for the Year 2000 issues, with the exception of the financial
suite and ancillary software, are expected to be immaterial.
In the event that any of SPR's significant suppliers or clients do not
successfully and timely achieve Year 2000 compliance, SPR's business or
operations may be adversely affected.
Recent Events
The Company is currently experiencing a decrease in consultant
utilization, which resulted in a decline in gross profit margins from those
experienced in 1998. This decreased consultant utilization is a result of
general industry conditions and delays of major client projects. As a result,
the Company expects to report an operating loss for the quarter. In addition,
there has been no growth in consultant headcount in the first quarter of 1999 as
a result of the decreased consultant utilization. The Company's billing rate
remains stable through the first quarter of 1999 relative to the fourth quarter
of 1998.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
The statements contained in the section captioned Management's Discussion
and Analysis of Financial Condition and Results of Operations which are not
historical are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from those in the forward looking
statements including statements pertaining to: (i) the expected continued
success of the Company's ITC Training Program, (ii) the Company's future ability
to effectively manage its consultant utilization rates and its hourly consultant
billing rates, (iii) the Company's ability to leverage its Century Date
13
<PAGE> 14
Compliance expertise into providing other mass change and project management
services to its clients, (iv) successful management of engagement and contract
risks, and (v) the Company's ability to expand and develop additional branch
offices and Virtual Insourcing Centers. Results actually achieved thus may
differ materially from expected results included in these statements.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly operating
information for each of the periods shown. This data has been prepared on the
same basis as the audited financial statements, and in management's opinion,
including all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the information for the periods
presented. Results for any previous fiscal quarter are not necessarily
indicative of results for the full year or for any future quarter.
<TABLE>
<CAPTION>
1997 1998
---------------------------------------- -------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 10.5 $ 12.2 $ 14.2 $ 16.5 $ 19.0 $ 21.4 $ 22.4 $ 22.5
Gross profit 3.8 4.9 5.9 6.4 7.7 8.8 9.3 9.0
Operating income 1.0 0.9 2.1 2.1 3.1 3.7 4.2 4.4
Net income 0.9 0.8 2.0 0.9 2.0 2.5 3.0 3.0
Net income per share --
assuming dilution $ 0.08 $ 0.08 $ 0.20 $ 0.07 $ 0.16 $ 0.19 $ 0.21 $ 0.21
Pro forma diluted net income per
share --includes an adjustment
to recognize "C" corporation
provision for income taxes $ 0.06 $ 0.05 $ 0.12 $ - $ - $ - $ - $ -
</TABLE>
Operating results fluctuate based upon the timing of service offering
expansion activities, the hiring and training of consultants, the initiation and
completion of engagements, the timing of corporate expenditures, and the number
of billing days in the respective quarter.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk.
The Company maintains investments in marketable securities. As of December 31,
1998, the aggregate fair value of the Company's marketable securities was $43.9
million.
The Company currently does not invest excess funds in derivative financial
instruments.
Item 8. Financial Statement And Subsequent Data.
The information in response to this item is included in the financial
statements and notes thereto, and the related Report of Independent Public
Accountants, appearing on pages F-1 to F-16 of this Form 10-K, and in Item 7 of
this Form 10-K under the caption "Quarterly Results of Operations."
Item 9. Change In Accountants
No change in independent public accountants during the two years ended December
31, 1998.
Part III.
Item 10. Directors And Executive Officers Of The Registrant
The information in response to this item is incorporated herein by
reference from the sections captioned "Election of Directors" and "Executive
Officers" of the Company's definitive Proxy Statement to be filed in connection
with the Company's 1999 Annual Meeting of Stockholders (the Proxy Statement").
14
<PAGE> 15
Item 11. Executive Compensation
The information in response to this item is incorporated herein by
reference from the section of the Proxy Statement captioned "Executive
Compensation."
Item 12. Security Ownership Of Certain Beneficial Owners And Management
This information in response to this item is incorporated herein by
reference from the section of the Proxy Statement captioned "Principal
Stockholders."
Item 13. Certain Relationships And Related Transactions
This information in response to this item is incorporated herein by
reference from the section of the Proxy Statement captioned "Certain
Transactions."
Part IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K
(a) (1) Financial Statements.
The following financial statements and notes thereto, and the related
Independent Auditors' Report, are filed as part of this form 10-K on pages F-1
to F-16:
Report of Independent Public Accountants
Balance Sheets at December 31, 1997 and 1998
Statements of Operations for the years ended December 31, 1996, 1997,
and 1998
Statements of Stockholders' Equity for the years ended December 31,
1996, 1997, and 1998
Statements of Cash Flows for the years ended December 31, 1996, 1997,
and 1998
Notes to Financial Statements
(2) Financial Statement Schedules.
All financial statement schedules have been omitted because such
schedules are not required or the information required has been presented
in the aforementioned financial statements.
(3) Exhibits
The following exhibits are filed with this report or incorporated by
reference as set forth below.
15
<PAGE> 16
2.1 Agreement of Merger dated October 30, 1996 between the Registrant
and SPR Chicago Inc.*
2.2 Agreement of Merger dated October 31, 1996 among the Registrant,
Consulting Acquisition, Inc. and Systems and Programming
Resources, Inc.*
2.3 Agreement of Merger dated October 31, 1996 between the Registrant
and Systems and Programming Resources of Tulsa, Inc.*
2.4 Agreement of Merger dated October 31, 1996 between the Registrant
and SPR Wisconsin, Inc.*
3.1 Certificate of Incorporation of the Registrant.*
3.1.1 Certificate of Amendment of Certificate of Incorporation.*
3.2 By-laws of the Registrant.*
4.1 Description of specimen stock certificate representing Common
Stock.*
10.1.1 Management Employment Agreement dated as of June 2, 1997 between
the Registrant and Robert M. Figliulo.*
10.1.2 Management Employment Agreement dated as of June 2, 1997 between
the Registrant and David A. Figliulo.*
10.1.3 Management Employment Agreement dated as of June 2, 1997 between
the Registrant and Stephen J. Tober.*
10.1.4 Management Employment Agreement dated as of June 2, 1997 between
the Registrant and Stephen T. Gambill.*
10.1.5 Management Employment Agreement dated as of June 2, 1997 between
the Registrant and Michael J. Fletcher.*
10.4 Amended and Restated Combined Incentive and Non-statutory Stock
Option Plan.*
10.5 Revised form of employee Stock Purchase Plan.*
10.6 Lease for 2015 Spring Road, Oak Brook, Illinois.*
10.7 Lease for 400 Mid-Continent Tower, Tulsa, Oklahoma.*
10.7.1 Third Amendment to Lease for 400 Mid-Continent Tower, Tulsa,
Oklahoma.*
10.8 Lease for 100 East Wisconsin Avenue, Milwaukee, Wisconsin.*
10.9 Sublease for 815 Commerce Drive, Oak Brook, Illinois.*
10.11 Form of Tax Indemnity Agreement.*
10.12 Fourth Amendment to Lease for 400 Mid-Continental Tower, Tulsa,
Oklahoma. #
27.1 Financial Data Schedule.
* Incorporated by reference to SPR Inc.'s Registration Statement on Form S-1
(No. 333-32735), which was declared effective by the Securities Exchange
Commission on October 1, 1997.
# Incorporated by reference to SPR Inc.'s Form 10-K for the year ending December
31, 1997.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Company during the period
covered by this report.
16
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of SPR Inc.:
We have audited the accompanying balance sheets of SPR Inc. (a Delaware
corporation) as of December 31, 1997 and 1998 and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SPR Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 8, 1999 (except for Note 19, as to which the date is
March 17, 1999)
<PAGE> 18
SPR Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,133,357 $ 7,207,273
Accounts receivable, net:
Trade 7,832,821 12,779,270
Other 239,502 893,752
Short-term investments 19,043,189 43,905,707
Prepaid expenses and other 236,721 523,041
Deferred taxes -- 1,971,394
------------ ------------
Total current assets 29,485,590 67,280,437
------------ ------------
Property and equipment, at cost:
Leasehold improvements 201,741 403,025
Computer equipment and software 1,772,554 3,086,179
Office furniture and equipment 995,732 2,502,443
------------ ------------
2,970,027 5,991,647
Less - accumulated depreciation and amortization (696,192) (2,005,065)
------------ ------------
Property and equipment, net 2,273,835 3,986,582
Deferred taxes 183,554 171,225
------------ ------------
Total assets $ 31,942,979 $ 71,438,244
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,291,951 $ 1,466,669
Dividends payable to stockholders 250,510 --
Income taxes payable 1,323,026 --
Accrued expenses:
Payroll and payroll related 2,776,526 3,700,970
Other 398,894 488,033
Deferred income -- 2,975,000
Deferred income taxes 372,400 --
------------ ------------
Total current liabilities 6,413,307 8,630,672
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock $0.01 par, 25,000,000 shares authorized, 12,137,057
and 13,843,442 shares issued and outstanding at December 31, 1997 121,371 138,434
and 1998, respectively
Preferred stock, $0.01 par, 3,000,000 shares authorized, no shares
issued and outstanding -- --
Additional paid in capital 24,503,801 51,269,440
Retained earnings 904,500 11,399,698
------------ ------------
Total stockholders' equity 25,529,672 62,807,572
------------ ------------
Total liabilities and stockholders' equity $ 31,942,979 $ 71,438,244
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-2
<PAGE> 19
SPR Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues $ 32,510,743 $ 53,421,924 $ 85,343,514
Cost of services 23,287,234 32,376,687 50,507,854
------------ ------------ ------------
Gross profit 9,223,509 21,045,237 34,835,660
Costs and expenses:
Selling 3,046,045 4,855,567 5,275,048
Recruiting 1,323,105 1,608,059 1,827,376
Stock-based compensation 12,231,085 -- --
General and administrative expenses 3,741,574 8,437,804 12,319,835
------------ ------------ ------------
Total costs and expenses 20,341,809 14,901,430 19,422,259
------------ ------------ ------------
Operating income (loss) (11,118,300) 6,143,807 15,413,401
Other income (expense):
Interest expense (122,862) (178,783) (4,203)
Interest income 39,329 266,851 2,080,420
Other, net 13,176 (41,257) 6,938
------------ ------------ ------------
Total other income (expense) (70,357) 46,811 2,083,155
------------ ------------ ------------
Income (loss) before income taxes (11,188,657) 6,190,618 17,496,556
Provision for income taxes 9,000 1,552,422 6,998,623
------------ ------------ ------------
Net income (loss) $(11,197,657) $ 4,638,196 $ 10,497,933
============ ============ ============
Historical basic net income (loss) per share $ (1.15) $ 0.45 $ 0.80
============ ============ ============
Historical diluted net income (loss) per share $ (1.15) $ 0.43 $ 0.77
============ ============ ============
Pro forma income data:
Net income (loss) as reported $(11,197,657) $ 4,638,196 $ --
Pro forma adjustment to recognize
C Corporation provision for income taxes 407,971 1,469,071 --
------------ ------------ ------------
Pro forma net income (loss) $(11,605,628) $ 3,169,125 $ --
============ ============ ============
Pro forma basic net income (loss) per share $ (1.19) $ 0.31 $ --
============ ============ ============
Pro forma diluted net income (loss) per share $ (1.19) $ 0.30 $ --
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE> 20
SPR Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
---------------------------- Paid-in Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 9,701,100 $ 97,011 $ 34,471,440 $(32,293,868) $ 2,274,583
Net loss -- -- -- (11,197,657) (11,197,657)
Distributions -- -- -- (800,663) (800,663)
Stock-based compensation -- -- 12,231,085 -- 12,231,085
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 9,701,100 97,011 46,702,525 (44,292,188) 2,507,348
Net income -- -- -- 4,638,196 4,638,196
Employee stock purchase plan 35,957 360 324,222 -- 324,582
Capitalization of undistributed S
Corporation earnings in conjunction
with termination of S Corporation
election on October 1, 1997 -- -- (45,444,263) 45,444,263 --
S Corporation distributions -- -- -- (4,885,771) (4,885,771)
Employee stock option plan and
related tax benefits -- -- 458,886 -- 458,886
Sale of stock in initial public
offering, net of issuance costs 2,400,000 24,000 22,462,431 -- 22,486,431
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 12,137,057 121,371 24,503,801 904,500 25,529,672
Net income 10,497,933 10,497,933
Employee stock purchase plan 94,646 946 1,141,285 1,142,231
Treasury stock retired (2,250) (23) (21,243) (2,735) (24,001)
Employee stock option plan and
related tax benefits 232,499 2,325 2,557,795 -- 2,560,120
Sale of stock in secondary public
offering, net of issuance costs 1,350,000 13,500 23,087,750 -- 23,101,250
Other 31,490 315 52 -- 367
============ ============ ============ ============ ============
Balance at December 31, 1998 13,843,442 $ 138,434 $ 51,269,440 $ 11,399,698 $ 62,807,572
============ ============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE> 21
SPR Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) for the period $ (11,197,657) $ 4,638,196 $ 10,497,933
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 252,215 435,151 1,364,784
Deferred taxes -- 188,846 (2,331,465)
Expense related to employee stock option plan -- 458,886 150,984
Stock-based compensation 12,231,085 -- --
Loss on sale of property and equipment -- 41,257 239,977
Increase in accounts receivable, net (1,274,591) (3,712,391) (5,600,699)
(Increase) decrease in prepaid expenses and other (334,481) 466,784 (286,320)
Increase in accounts payable 556,866 332,459 174,718
Increase (decrease) in accrued expenses and income taxes 401,807 2,991,658 (559,953)
Deferred income -- -- 2,975,000
------------- ------------- -------------
Net cash provided by operating activities 635,244 5,840,846 6,624,959
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment net of sales (1,238,595) (1,231,084) (3,317,508)
Purchases of short-term investments -- (182,122,189) (72,880,518)
Sales/maturity of short-term investments -- 163,079,000 48,018,000
Decrease in notes receivable - other 75,000 10,879 --
Decrease in notes receivable - related parties 260,682 181,245 --
------------- ------------- -------------
Net cash used in investing activities (902,913) (20,082,149) (28,180,026)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from the sale of common stock, net of issuance costs of
approximately $3,114,000 in 1997 and $1,705,000 in 1998, respectively -- 22,486,431 23,101,250
Payments on note payable - related party (1,200,000) (641,266) --
Proceeds from employee stock purchase plan -- 324,582 1,142,231
Proceeds from employee stock option plan -- -- 1,187,292
Distributions (800,663) (4,635,261) --
Tax benefit from employee stock option plan -- -- 1,221,844
Borrowings on term note payable 250,000 -- --
Payments on term note payable (33,995) (216,005) --
Net borrowings on line of credit and term note 1,300,000 (1,300,000) --
Other cash flows from financing activities -- -- (23,634)
------------- ------------- -------------
Net cash provided by (used in) financing activities (484,658) 16,018,481 26,628,983
------------- ------------- -------------
Net increase (decrease) in cash (752,327) 1,777,178 5,073,916
Cash and cash equivalents, beginning of period 1,108,506 356,179 2,133,357
------------- ------------- -------------
Cash and cash equivalents, end of period $ 356,179 $ 2,133,357 $ 7,207,273
============= ============= =============
Supplemental disclosure of cash payments made for:
Interest $ 135,792 $ 178,783 $ 4,203
Income taxes 9,000 40,550 9,526,096
============= ============= =============
Supplemental disclosure of noncash investing an financing activities:
Investment in equipment through issuance of capitalized lease obligations $ 39,926 $ -- $ --
============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
F-5
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Business -- Founded in 1973 and headquartered in the Chicago area, SPR
Inc. (the Company) provides information technology services to Fortune 1000
companies in a variety of industry groups including transportation,
manufacturing, insurance, retail, financial services, healthcare, and energy.
These services include General Consulting as well as five outsourcing services:
Software Modernization, Mass Change, Application Management, Information
Delivery, and Software Quality Services. The outsourcing services help clients
with comprehensive solutions for maintaining, improving and transitioning legacy
systems. SPR has offices in Oak Brook, IL, Dallas, Milwaukee, and Tulsa.
(b) Basis of Presentation -- SPR Inc. was formed on October 29, 1996.
During October 1996, Systems and Programming Resources, Inc., Systems &
Programming Resources of Tulsa, Inc., SPR-Wisconsin, Inc., SPR Chicago Inc., and
Consulting Acquisition, Inc. (d.b.a. DataFlex) merged into SPR Inc. at which
time the stockholders of such companies received an aggregate of 9,700,786
shares of common stock of SPR Inc. Systems and Programming Resources, Inc.,
SPR-Wisconsin, Inc., SPR Chicago Inc., Consulting Acquisition, Inc. and SPR Inc.
are under common ownership and control and were accounted for at historical cost
as a reorganization of entities under common control (similar to the pooling of
interests method of accounting). The merger of Systems & Programming Resources
of Tulsa, Inc. into SPR Inc. was accounted for using the pooling of interests
method of accounting. The accompanying financial statements of the Company have
been prepared to give retroactive effect to the merger.
(c) Cash and Cash Equivalents -- Cash equivalents are comprised of certain
highly liquid investments with maturities of three months or less.
(d) Accounts Receivable -- Accounts receivable include fees and expenses
for services rendered prior to year end which were billed subsequent to year
end. Amounts relating to such fees and expenses included in accounts receivable
are $1,733,359 and $2,320,189 at December 31, 1997 and 1998, respectively. A
summary of the activity in allowance for doubtful accounts for the years ended
December 31, 1996, 1997, and 1998 is as follows:
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Of Year Expenses Write-Offs Year
------- -------- ---------- ----
<S> <C> <C> <C> <C>
1996 Allowance for Doubtful Accounts $31,900 $45,000 $ 2,501 $ 74,399
1997 Allowance for Doubtful Accounts $74,399 $852,747 $83,451 $843,695
1998 Allowance for Doubtful Accounts $843,695 $ - $ - $843,695
</TABLE>
(e) Short-term Investments -- The Company invests in investment-grade
marketable securities with varying maturities. These securities include
municipal bonds and corporate bonds. The Company accounts for its investments
using Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Management
determines the classification of investments under SFAS No. 115 at the time of
purchase and reevaluates such classifications as of each balance sheet date.
F-6
<PAGE> 23
The carrying amounts and fair values of the Company's short-term investments are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1998
-------------------------- --------------------------
Amortized Aggregate Amortized Aggregate
Cost Basis Fair Value Cost Basis Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Federal bank and mortgage debt $ 5,928,189 $ 5,927,355 $ -- $ --
Euro currency 1,100,000 1,100,000 -- --
U.S. corporate notes maturing within 1 year -- -- 17,655,707 17,640,942
----------- ----------- ----------- -----------
Total held-to-maturity 7,028,189 7,027,355 17,655,707 17,640,942
----------- ----------- ----------- -----------
Available-for-sale:
U.S. corporate notes maturing after 10 years 6,015,000 6,015,000 12,700,000 12,700,000
Municipal obligations maturing after 10 years 6,000,000 6,000,000 13,550,000 13,550,000
----------- ----------- ----------- -----------
Total available-for-sale 12,015,000 12,015,000 26,250,000 26,250,000
----------- ----------- ----------- -----------
Total short-term investments $19,043,189 $19,042,355 $43,905,707 $43,890,942
=========== =========== =========== ===========
</TABLE>
The following schedule shows the components of total investment income at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- ----------
<S> <C> <C>
Interest Income $ 244,506 $1,918,893
Dividend Income 8,997 13,696
---------- ----------
Total Investment Income $ 253,503 $1,932,589
========== ==========
</TABLE>
(f) Revenue Recognition -- Revenues are recognized as the related services
are performed. Clients are generally billed on a time and materials basis. In
June 1997, the Company entered into a fixed-price billing engagement. Services
on this engagement commenced in July 1997. The Company accounts for this
engagement under the percentage-of-completion method, using costs incurred to
date in relation to estimated total costs of the contract to measure the stage
of completion. The cumulative effects of revisions of estimated total contract
costs and revenues are recorded in the period in which the facts requiring the
revision become known. Approximately 4% of total revenues were generated from
the fixed-price engagement during 1998. At December 31, 1998, the engagement has
been substantially completed.
(g) Property and Equipment -- Property and equipment are stated at cost.
Expenditures for repair and maintenance are charged to expense as incurred.
Depreciation and amortization are computed using the straight-line method. The
estimated useful lives used in computing depreciation and amortization are as
follows:
<TABLE>
<CAPTION>
ASSET DESCRIPTION ASSET LIFE
----------------- ----------
<S> <C>
Leasehold improvements . . . . . . . . . . . . . . . . . . . . Shorter of lease term or estimated
useful life of the asset
Computer equipment and software . . . . . . . . . . . . . . . 3 years
Office furniture and equipment . . . . . . . . . . . . . . . . 5 years
</TABLE>
(h) Deferred Income -- The determination of deferred income is based on
management's estimate of the services to be performed related to completing
century date compliance projects and is adjusted as additional or new
information becomes available.
(i) Distributions -- Distributions are recorded when declared by the Board
of Directors.
F-7
<PAGE> 24
(j) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(k) Income Taxes -- Prior to the consummation of the initial public
offering on October 1, 1997, the Company elected to be taxed as an S
Corporation. As a result, income of the Company was taxable to the shareholders.
On October 1, 1997, the Company's S Corporation status was terminated and the
Company became a C Corporation. At this time, the retained deficit of the
Company was reclassified and netted against additional paid-in capital.
(l) Pro forma net income and net income (loss) per share -- The pro forma
net income (loss) and net income (loss) per share include a provision for
federal and state income taxes as if the Company had been a C Corporation for
all periods presented.
(m) Reclassifications -- Certain prior year amounts have been reclassified
to conform to the current year's presentation.
NOTE 2 -- BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The Company has no
separately reportable segments in accordance with this standard. Under the
enterprise-wide disclosure requirements of SFAS No. 131, the Company reports net
revenues by service offering. Amounts for the years ended December 31, 1996,
1997, and 1998 are shown in the table below.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1996 1997 1998
-------------------------- ------------------------- ---------------------------
Revenues % Revenues % Revenues %
---------------- -------- ----------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C>
Century date compliance $ 9,220,569 28.4% $ 17,215,227 32.2% $ 33,824,961 39.6%
General consulting 23,229,184 71.4% 27,630,770 51.7% 30,443,400 35.7%
All other service offerings 60,990 0.2% 8,575,927 16.1% 21,075,153 24.7%
------------ ------------ ------------
Total revenues $ 32,510,743 $ 53,421,924 $ 85,343,514
============ ============ ============
</TABLE>
NOTE 3 -- NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). The statement, effective
for fiscal years beginning after December 15, 1998, provides guidance with
respect to accounting for the various types of costs incurred for computer
software developed or obtained for a company's internal use. The Company is
evaluating the impact of SOP 98-1, and does not expect the statement to have a
material impact on the Company's financial reporting.
NOTE 4 -- CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist of accounts receivable and investments. The Company places its
investments with high quality financial institutions. The Company reviews a
customer's credit history before extending credit. In addition, the Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its accounts receivable credit risk is limited.
During 1997, the Company began performing services for a client which filed for
Chapter 11 bankruptcy protection during the third quarter of 1997. This customer
accounted for approximately 1%, 8%, and 7% of revenues for the years ended
December 31, 1996, 1997, and 1998, respectively. The Company is continuing to
perform services for this customer.
F-8
<PAGE> 25
The Company's customers are predominantly in the Midwest, with the majority of
customers located in Chicago, Tulsa, Milwaukee and Dallas. One customer in the
insurance industry accounted for approximately 11%, 12%, and 7% of revenues for
the years ended December 31, 1996, 1997, and 1998, respectively. One customer in
the transportation industry accounted for approximately 5% and 11% of revenues
for the years ended December 31, 1997 and 1998, respectively. The Company has no
off balance sheet credit risk.
NOTE 5 -- INCOME TAXES
Prior to the initial public offering of the Company's Common Stock completed on
October 1, 1997, "the Offering", the Company included its income and expenses
with those of its stockholders for Federal and certain state income tax purposes
(an S Corporation election). By this election, income of the Company is taxable
to the stockholders. In connection with the Offering, the Company terminated its
S Corporation election and converted to a C Corporation. The Company recorded a
deferred income tax liability and corresponding income tax expense of $712,000,
arising from the change in the Company's tax status and a change from the cash
basis to the accrual basis of accounting for tax purposes. Beginning October 1,
1997, the Company provides for deferred income taxes under the asset and
liability method of accounting for income taxes. This method requires the
recognition of deferred income taxes based upon the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities.
Prior to consummation of the Offering, the Company made a distribution to its
existing stockholders of part of the Company's undistributed S Corporation
earnings.
The unaudited pro forma provision for income taxes presented on the statements
of operations for 1996 and 1997 represents the estimated taxes that would have
been recorded had the Company been a C Corporation for income tax purposes for
the entirety of those periods. The pro forma provision for income taxes is as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
<S> <C> <C>
Federal $ 369,019 $2,736,725
State 47,952 284,768
---------- ----------
Total income tax expense $ 416,971 $3,021,493
========== ==========
</TABLE>
During the fourth quarter of 1997 and all of 1998, the Company was a C
Corporation for income tax purposes. The provision for income taxes for the
portion of 1997 that the Company was a C Corporation and 1998, includes federal
and state income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities. The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
------------ -----------
<S> <C> <C>
Current:
Federal $ 1,202,361 $ 7,627,347
State 161,215 1,702,741
----------- -----------
Total current provision 1,363,576 9,330,088
Deferred:
Federal (445,264) (1,905,973)
State (77,890) (425,492)
----------- -----------
Total deferred provision (523,154) (2,331,465)
Initial recognition of deferred income taxes
resulting from change in tax status 712,000 --
----------- -----------
Total income tax provision $ 1,552,422 $ 6,998,623
=========== ===========
</TABLE>
F-9
<PAGE> 26
Reconciliations of the statutory federal tax rates to the pro forma and actual
effective income tax rates are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1997 1998
--------------------
Pro forma Pro forma Actual Actual
----------- ----------- --------- -------
<S> <C> <C> <C> <C>
Statutory rate 34% 34% 34% 34%
State taxes, net of federal benefit 5% 5% 1% 5%
S Corporation income taxed to its shareholders -% -% (24%) -%
Income taxes recognized as a result of a change in tax status -% -% 11% -%
Increase in valuation allowance -% 6% 2% -%
Other 1% 4% 1% 1%
--- --- --- ---
Effective rate 40% 49% 25% 40%
=== === === ===
</TABLE>
The significant components of the Company's deferred income tax assets and
liabilities as of December 31, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Deferred income tax assets:
Payroll and related $ 311,196 $ 443,916
Allowance for doubtful accounts 75,501 337,478
Deferred income -- 1,190,000
Stock options 153,360 161,458
Intangibles 965,064 852,998
Depreciation -- 9,767
----------- -----------
Total deferred income tax assets 1,505,121 2,995,617
----------- -----------
Valuation allowance (1,321,567) (852,998)
----------- -----------
Net deferred tax income assets $ 183,554 $ 2,142,619
=========== ===========
Deferred income tax liabilities:
Change in tax accounting method (cash to accrual) $ 356,400 $ --
Depreciation 16,000 --
=========== ===========
Total deferred income tax liabilities $ 372,400 $ --
=========== ===========
</TABLE>
The Company establishes valuation allowances in accordance with the provisions
of Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS No. 109"). The Company continually reviews the adequacy of the
valuation allowance and is recognizing these benefits only as reassessment
indicates that it is more likely than not that the benefits will be realized.
In connection with the Offering, the Company entered into a tax indemnity
agreement with each of its current stockholders which provides, among other
things, that the Company will indemnify such stockholders against additional
income taxes resulting from adjustments made (as a result of a final
determination made by a competent tax authority) to the taxable income reported
by the Company as an S Corporation for periods prior to the Offering, but only
to the extent those adjustments result in a decrease in income taxes otherwise
payable by the Company as a C Corporation for periods after the Offering.
NOTE 6 -- LINES OF CREDIT AND LONG-TERM DEBT
In June 1997, the Company entered into a loan agreement which provided for a
revolving loan facility and a term loan
F-10
<PAGE> 27
facility. The revolving loan facility allowed for maximum borrowings of the
lesser of (a) $2,000,000 less the undrawn face amount of letters of credit or
(b) the borrowing base, as defined, less the undrawn face amount of letters of
credit. Interest on revolving loans was at the bank's prime rate (8.5% at
December 31, 1997). The revolving loan facility matured in March 1998. The term
loan facility provided for maximum borrowings of $2,000,000 for use for certain
purposes and was cancelled upon consummation of the initial public offering in
October 1997. Interest was payable quarterly at the prime rate plus 1% (9.5% at
December 31, 1997). The Company paid off borrowings under these facilities using
proceeds from the offering. As of December 31, 1997 and 1998, there were no
loans outstanding.
Substantially all assets of the Company were collateral for borrowings under the
loan agreement. The agreement contained certain restrictions, prohibiting, among
other things, additional indebtedness without the lender's consent. The term
loan agreement contained certain covenants including, among others, a
requirement of a cash flow coverage ratio of not less than 1.1 to 1.0. As of
December 31, 1997, the Company was in compliance with all loan covenants.
NOTE 7 -- LEASE AGREEMENTS
The Company leases its office facilities under operating lease agreements which
expire at various times through 2004. In addition, the Company leases certain
equipment under operating lease agreements.
In addition to the minimum future rental payments, the Company is obligated to
pay certain operating expenses relating to its leased properties and equipment.
Total expense under operating leases was approximately $420,000, $684,000, and
$990,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The
following is a schedule of minimum future rental payments required under the
operating leases:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------
<S> <C>
1999 $ 1,195,863
2000 1,255,972
2001 1,186,005
2002 1,075,797
2003 817,453
Thereafter 492,884
===========
Total minimum payments required $ 6,023,974
===========
</TABLE>
NOTE 8 -- 401(K) PROFIT-SHARING PLAN
The Company has a contributory 401(k) profit-sharing plan (the Plan) covering
substantially all full-time employees. The Plan allows participants to
contribute up to 15% of their total compensation on a pretax basis, up to a
specified amount. Through 1998, the Company was required to contribute annually
one-fourth of the first $2,000 of the participants' contributions, up to a
maximum of $500 per participant. The total Company contribution was
approximately $67,000, $126,000, and $224,000 for the years ended December 31,
1996, 1997 and 1998, respectively. Beginning in 1999, the Company is required to
contribute annually one-half of the first 6% of the participants' contributions,
up to a maximum of $2,000 per participant.
NOTE 9 -- CHANGE IN ESTIMATE
Effective January 1, 1998, the Company changed its estimate of depreciable lives
for computer equipment and software from five years to three years as a result
of continued improvements in technology. This change in estimate reduced 1998
net income by approximately $276,295, or approximately $0.02 per diluted common
share.
NOTE 10 -- LICENSE AGREEMENT
In October 1995, the Company entered into a nonexclusive agreement with an
unaffiliated technical services company operating in New York and other markets
where the Company is not currently doing business, whereby the Company licenses
its Century Date Compliance methodology. In contracts involving Century Date
Compliance in which the unaffiliated company is the prime contractor and the
engagement is not handled as a joint venture, the unaffiliated company is
obligated to pay SPR Inc. a license fee ranging from 4% to 9% of revenues. For
the year ended December
F-11
<PAGE> 28
31, 1997 and 1998, the Company was paid approximately $51,000 and $65,000,
respectively in license fees.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Letter of Credit -- The Company had letters of credit of $100,000 and
$78,700 at December 31, 1997 and 1998 as security for a lease agreement. The
letter of credit is renewable each year.
Litigation--In the ordinary course of conducting its business the Company
becomes involved in various lawsuits related to its business. The Company does
not believe that the ultimate resolution of these matters will be material to
its business, financial position or results of operations.
Employment Contracts--During 1998, the Company entered into employment
contracts with certain employees. The employment contracts provide that in the
event of a change in control the employee is entitled to a sum equal to (i) one
year of the employee's effective annual base compensation immediately prior to
the termination date, plus (ii) an amount equal to the prior year's cash bonus,
plus (iii) cash value in the health plan. If a change in control occurred, as
defined, at December 31, 1998, the Company's total commitment under the
employment contracts would be approximately $2,300,000.
NOTE 12 -- BUSINESS COMBINATION
During October 1996, SPR Inc. acquired by merger all the common stock of Systems
& Programming Resources of Tulsa, Inc. in exchange for 1,809,388 shares of SPR
Inc.'s common stock. This company provides information technology services to
clients in a variety of industry groups. The transaction was accounted for as a
pooling of interests, and accordingly, the financial statements for all periods
presented have been restated to include the accounts of this company.
Revenues and net income, net of intercompany eliminations of the separate
companies for the periods preceding the acquisition were:
<TABLE>
<CAPTION>
SPR INC. INCLUDING
SYSTEMS AND PROGRAMMING SYSTEMS &
RESOURCES, INC., SPR-WISCONSIN, INC., PROGRAMMING
SPR CHICAGO INC. AND DATAFLEX RESOURCES OF TULSA, INC.
----------------------------- ------------------------
<S> <C> <C>
Ten months ended October 31, 1996
Revenues . . . . . . . . . . . . . . . . . . . . $ 18,447,117 $8,128,336
Net income (loss), net of intercompany
eliminations . . . . . . . . . . . . . . . . . (11,265,184) 541,651
</TABLE>
NOTE 13 -- STOCK-BASED COMPENSATION
Systems and Programming Resources, Inc. entered into a series of transactions
with stockholders/employees from January 1994, through October 1996. Certain
assets and certain liabilities were transferred to SPR Chicago Inc. and
SPR-Wisconsin, Inc. during 1994 that were subsequently transferred to SPR Inc.
in 1996. Because the transactions were among family members within a control
group, the stockholders of SPR Chicago Inc. and SPR-Wisconsin, Inc. were
effectively granted a variable compensation arrangement that is measured by the
increase in the estimated value of these companies (as determined by management)
since 1994. Compensation expense was calculated as follows: (1) multiply the
number of shares of Common Stock owned by the former stockholders of SPR Chicago
Inc. and SPR-Wisconsin, Inc. by the estimated market value per share of the
Company's stock (which was estimated at $9.33 per share in 1996); (2) then
subtract the payments made by SPR Chicago Inc. and SPR-Wisconsin, Inc. to the
Company on the original acquisition notes; (3) then subtract the value of the
shares received by the stockholders of SPR Chicago Inc. and SPR-Wisconsin, Inc.
attributable to such stockholders' interests in Consulting Acquisition, Inc. and
Systems and Programming Resources, Inc. Compensation expense was allocated to
each period presented based on the increase in the estimated market values of
SPR Chicago Inc. and SPR-Wisconsin. Inc. which was determined primarily based on
revenue growth of each of the respective companies. The final measurement
occurred when the relative ownership interests in SPR Inc. were determined in
October 1996. The ownership interests of the former stockholders of SPR Chicago
Inc. and SPR-Wisconsin, Inc. were collectively 63.99% of the Company as of
October 1996. Compensation
F-12
<PAGE> 29
expense relating to this arrangement is recorded in the accompanying statements
of operations as stock-based compensation with the corresponding credit included
in additional paid-in-capital.
NOTE 14 -- STOCK PLANS
DESCRIPTION
In November 1996, the Company adopted an Employee Stock Purchase Plan and a
Combined Incentive and Non-statutory Stock Option Plan. 750,000 shares of common
stock are reserved for issuance under the Employee Stock Purchase Plan and
1,566,378 shares of common stock are reserved for issuance under the Combined
Incentive and Non-statutory Stock Option Plan.
The Employee Stock Purchase Plan permits eligible employees, who customarily
work more than 20 hours per week and more than five months in any calendar year,
to purchase common stock through payroll deductions of up to 20% of their total
cash compensation, provided that no employee may purchase more than $25,000
worth of stock in any calendar year. The purchase price is the lesser of 85% of
the market value of the common stock on the first or last day of the offering
period, as defined.
The Combined Incentive and Non-statutory Stock Option Plan provides that awards
may be granted to employees, officers and directors of the Company. Awards may
consist of non-statutory stock options and incentive stock options to purchase
shares of common stock and stock appreciation rights (SARs). Incentive stock
options (ISOs) generally vest over a five-year period at the rate of 20% per
year. The exercise price per share of common stock may not be less than 85%
(100% in the case of an ISO) of the fair market value of the common stock on the
date the option is granted. Options and SARs granted under the option plan must
generally be exercised within ten years from the date of grant. In the case of
any eligible employee who owns stock possessing more than 10% of the voting
power of stock, the exercise price of any ISOs granted may not be less than 110%
of the fair market value of the common stock on the date of grant and the
exercise period may not exceed five years from the date of grant.
ACTIVITY
Stock option activity for the Company's Combined Incentive and Non-statutory
Stock Option Plan for the years ended December 31, 1996, 1997, and 1998 is as
follows:
<TABLE>
<CAPTION>
Incentive Non-statutory
Stock Options Stock Options
-------------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding @12/31/95 -- -- -- --
Granted 645,348 $ 8.94 46,991 $ 8.94
---------- ------- -------- --------
Outstanding @12/31/96 645,348 $ 8.94 46,991 $ 8.94
Granted 1,431,709 $ 6.26 489,479 $ 5.35
Cancelled/Forfeited (1,297,745) $ 8.28 (93,982) $ 8.28
---------- ------- -------- --------
Outstanding @12/31/97 779,312 $ 5.11 442,488 $ 5.11
Granted 221,175 $ 18.55 -- --
Exercised (111,663) $ 5.11 (120,836) $ 5.11
Cancelled/Forfeited (68,501) $ 9.36 -- --
---------- ------- -------- --------
Outstanding @12/31/98 820,323 $ 8.38 321,652 $ 5.11
========== ======= ======== ========
</TABLE>
F-13
<PAGE> 30
The number of options exercisable and the number of options available for
grant at December 31, 1996, 1997 and 1998, are shown below:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Options exercisable at year-end -- 415,088 342,655
Options available for grant at year-end 874,039 344,578 191,904
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Weighted Average Weighted Average Weighted Average
Exercise Number Remaining Exercise Number Exercise
Price of Options Contractual Life Price of Options Price
----- ---------- ---------------- ----- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$ 5.11 941,050 8.4 Years $5.11 342,655 $5.11
$ 10.75 49,800 9.0 Years $10.75 0 --
$ 21.00 151,125 9.5 Years $21.00 0 --
--------- -------
$5.11 - $21.00 1,141,975 8.6 Years $7.46 342,655 $5.11
========= =======
</TABLE>
ACCOUNTING
The Company currently utilizes Accounting Principles Board Opinion No. 25 in its
accounting for stock plans. In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-based Compensation" ("SFAS No. 123"). The accounting method as
provided in the pronouncement is not required to be adopted; however, it is
encouraged. The Company is not adopting the accounting provisions of SFAS No.
123. Had the Company accounted for its stock plans in accordance with SFAS No.
123, the Company's net income (loss) and earnings (loss) per share for the years
ended December 31, 1996, 1997, and 1998, would have been shown as the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss) (a) $(11,605,628) $ 3,169,125 $ 10,497,933
SFAS No. 123 adjustment (net of tax) (117,720) (721,168) (593,100)
------------ ------------ --------------
Proforma net income (loss) $(11,723,348) $ 2,447,957 $ 9,904,833
============ ============ ==============
Pro forma basic EPS $ (1.21) $ 0.24 $ 0.75
Pro forma diluted EPS $ (1.21) $ 0.23 $ 0.73
</TABLE>
(a) The amounts shown in 1996 and 1997 are pro forma net income amounts
adjusted to recognize the tax impacts of the Company's conversion to a C
Corporation.
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest over
several years. Compensation expense is recognized as the options vest and
additional awards may also be granted.
F-14
<PAGE> 31
For purposes of determining the pro forma effect of stock options, the fair
value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model, assuming:
<TABLE>
<CAPTION>
Options Granted During:
-----------------------------------------------------
1996 1997 1998
-------------- ---------------- ----------------
<S> <C> <C> <C>
Volatility 40.0% 41.0% 55.0%
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 6.1% 6.5% 5.4%
Expected life in years 5 5 5
</TABLE>
The weighted average fair values of options granted under the Company's Combined
Incentive and Non-Statutory Stock Option Plan for the years ended December 31,
1996, 1997, and 1998, were $4.36, $3.06, and $9.87, respectively.
For purposes of determining the pro forma effect of the Employee Stock Purchase
Plan purchase rights, the fair value of each purchase right is estimated on the
date of grant based on the Black-Scholes option pricing model, assuming:
<TABLE>
<CAPTION>
Employee Stock Purchase Plan
Purchase Rights Issued During:
-----------------------------------
1997 1998
-------------- ---------------
<S> <C> <C>
Volatility 41.0% 55.0%
Dividend yield 0.0% 0.0%
Risk-free interest rate 5.3% 5.2%-5.4%
Expected life in months 3 6
</TABLE>
The weighted average fair value of purchase rights issued under the Company's
Employee Stock Purchase Plan for the years ended December 31, 1997 and 1998 was
$2.50 and $4.71, respectively.
NOTE 15 --- EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 changed the methodology of calculating earnings per share and
renamed the two calculations to basic earnings per share and diluted earnings
per share. The Company adopted SFAS No. 128 in December 1997, and has
retroactively restated all periods presented. Basic earnings per common share
are based on the average quarterly weighted average number of shares of common
stock outstanding. Diluted earnings per common share are adjusted for the
assumed exercise of dilutive stock options.
Under the requirements of SFAS No. 128, the Company's basic and diluted per
share amounts for the years ending December 31, 1996, 1997, and 1998 would be as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------- ----------------------------- ----------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(000's) (000's) Amount (000's) (000's) Amount (000's) (000's) Amount
------- ------- ------ ------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS (a): $(11,606) 9,701 $ (1.19) $ 3,169 10,306 $ 0.31 $ 10,498 13,144 $ 0.80
Income available to
Common Stockholders
Effect of Dilutive Securities:
Employee Compensation Plans -- -- -- -- 363 (0.01) -- 497 (0.03)
-------------------------------- ------------------------------ -----------------------------
Dilutive EPS:
Income available to
Common Stockholders
plus assumed exercises $(11,606) 9,701 $ (1.19) $ 3,169 10,669 $ 0.30 $ 10,498 13,641 $ 0.77
================================= ============================== ==============================
</TABLE>
(a) The amounts shown in 1996 and 1997 are pro forma net income
amounts adjusted to recognize the tax impacts of the Company's
conversion to a "C" Corporation.
F-15
<PAGE> 32
NOTE 16 --- RELATED PARTY TRANSACTIONS
The Company paid approximately $80,000, $480,000 and $340,000 during 1996, 1997,
and 1998, respectively, in fees to a law firm having a partner who is a
stockholder of the Company and who is a brother of certain executive officers of
the Company. A portion of the fees paid in 1997 and 1998 related to services
performed by such firm in connection with the 1996 mergers and the 1997 and
1998 offerings.
During 1998, the Company paid approximately $314,000 to a higher education
company having a president and chief operating officer who is a director of the
Company.
NOTE 17 -- FOLLOW-ON PUBLIC OFFERING
On May 5, 1998, the Company completed a follow-on public offering of 3,315,000
shares of the Company's Common Stock. The company sold 1,350,000 shares in the
follow-on public offering and received $23.1 million in net proceeds from the
sales of such shares.
NOTE 18 -- STOCK SPLITS
On September 26, 1997, the Company's Board of Directors approved a 1.044-to-1
split of the Company's common stock in the form of a stock dividend. All common
stock and per share amounts have been adjusted retroactively to give effect to
this stock split.
On August 3, 1998, the Company's Board of Directors approved a three-for-two
share common stock split. Shareholders received one additional share for every
two shares held on the record date of August 14, 1998. Distribution of the
additional shares began on August 28, 1998. Cash was paid in lieu of fractional
shares. All shares and per share amounts reported in this filing have been
restated to reflect the three-for-two share common stock split.
NOTE 19 -- SUBSEQUENT EVENTS
On January 11, 1999, the Company and Metamor Worldwide, Inc. ("Metamor")
announced a merger of the two entities. The transaction was to be structured as
a pooling-of-interest, tax-free merger. Each of the Company's common shares were
to be exchanged for 0.8 shares of Metamor's common stock, which would have
resulted in 77 percent of the combined company being owned by Metamor
shareholders and 23 percent being owned by SPR shareholders. On March 15, 1999,
the Company and Metamor announced that the companies entered into a consensual
termination agreement whereby the proposed merger was terminated.
On March 17, 1999, the Company announced a plan to purchase up to 1.5 million of
its shares of common stock under a stock repurchase program. The quantity to be
purchased and targeted price will be determined daily, based on management's
discretion.
F-16
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on March 30, 1999 on its behalf by the
undersigned, thereunto duly authorized.
SPR Inc.
By: /s/ ROBERT M. FIGLIULO
----------------------
Robert M. Figliulo
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ ROBERT M. FIGLIULO Chief Executive Officer and Chairman of
- --------------------------- the Board of Directors (Principal
Robert M. Figliulo Executive Officer)
/s/ STEPHEN J. TOBER Chief Operating Officer and Director
- --------------------------- (Principal Financial Officer)
Stephen J. Tober
/s/ STEPHEN T. GAMBILL Vice President and Chief Financial Officer
- --------------------------- (Principal Accounting Officer)
Stephen T. Gambill
/s/ DAVID A. FIGLIULO Executive Vice President and Director
- ---------------------------
David A. Figliulo
/s/ RONALD L. TAYLOR Director
- ---------------------------
Ronald L. Taylor
Director
- ---------------------------
Sydnor W. Thrift, Jr.
Director
- ---------------------------
David P. Yeager
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,207,273
<SECURITIES> 43,905,707
<RECEIVABLES> 12,779,270
<ALLOWANCES> 843,695
<INVENTORY> 0
<CURRENT-ASSETS> 67,280,437
<PP&E> 5,991,647
<DEPRECIATION> 2,005,065
<TOTAL-ASSETS> 71,438,244
<CURRENT-LIABILITIES> 8,630,672
<BONDS> 0
0
0
<COMMON> 138,434
<OTHER-SE> 62,669,138
<TOTAL-LIABILITY-AND-EQUITY> 71,438,244
<SALES> 0
<TOTAL-REVENUES> 85,343,514
<CGS> 0
<TOTAL-COSTS> 50,507,854
<OTHER-EXPENSES> 19,422,259
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,083,155)
<INCOME-PRETAX> 17,496,556
<INCOME-TAX> 6,998,623
<INCOME-CONTINUING> 10,497,933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,497,933
<EPS-PRIMARY> .80
<EPS-DILUTED> .77
</TABLE>
