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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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 January 3, 1997.
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 0-21682
SPARTA, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 63-0775889
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23041 Avenida de la Carlota, Suite 325, Laguna Hills, CA 92653-1595
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 768-8161
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Options to Purchase Common Stock
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(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 [ ]
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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. [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant (based upon the "Formula Price", as hereinafter
defined) as of February 1, 1997 was $33,858,504.
As of February 1, 1997, 5,708,854 shares of the Registrant's common stock, $.01
par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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SPARTA, Inc.
FORM 10-K
TABLE OF CONTENTS
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Page
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PART 1
ITEM 1. BUSINESS ...................................................................................................1
ITEM 2. PROPERTIES..................................................................................................7
ITEM 3. LEGAL PROCEEDINGS...........................................................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................................7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.........................................................................................8
ITEM 6. SELECTED FINANCIAL DATA....................................................................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................................................12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................................15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................................................16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................................16
ITEM 11. EXECUTIVE COMPENSATION.....................................................................................18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................................................................21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................................23
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K...................................................................................................24
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PART I
ITEM 1. BUSINESS
General
SPARTA, Inc. ("SPARTA" or the "Company") performs a wide range of
scientific, engineering and technical assistance services, both as a prime
contractor and subcontractor, primarily for the U.S. military services and other
agencies of the U.S. Department of Defense. The Company analyzes complex
technological, strategic and tactical issues necessary to define the
requirements for new tactical and strategic weapons and defense systems,
including systems for the Ballistic Missile Defense ("BMD"); develops
engineering solutions to accommodate conflicting technological, schedule and
budgetary requirements; and assists in the design, integration, evaluation and
testing of software and hardware components. These activities include the
development of sophisticated computer simulations, applications software, and
functional algorithms depicting all aspects of various weapons and defense
systems and their operation, and the design, fabrication and testing of
prototype hardware. SPARTA's technology development activities include research
and development for laser systems; distributed interactive computer simulations;
software development; advanced signal processing; battle management/command,
control, and communications; artificial intelligence; information security;
aircraft avionics; test range data acquisition; advanced materials and
production technology; composite materials; and marine instrumentation. SPARTA
also manufactures composite parts for aircraft and missile systems.
The Company is also a 50% partner in a Norwegian ANS partnership ("OCEANOR
SPARTA ANS") under which it performs offshore instrumentation work in Norway.
The primary contract ended in September 1995 with warranties effective through
September 1997. In 1994, the Company established a wholly-owned subsidiary
called ACT\SPARTA, incorporated in California, to resell commercial accounting
software packages. In May 1995, the assets of ACT/SPARTA were sold to the
managers of that company. Also in 1995, a new subsidiary, Commercial Technology,
Inc. ("CTI"), was formed and in 1996 did business as SPARTA Marine
Instrumentation ("SMI"). As used in this report on Form 10-K, all references to
the Company or SPARTA include, unless the context indicates otherwise, the
Company, SPARTA Alabama and CTI, the Company's wholly owned subsidiary.
Performance of scientific, engineering, technical and other services,
under contracts with Department of Defense ("DoD") agencies, either as a prime
contractor or subcontractor, accounted for approximately 88% of the Company's
revenues in the fiscal year ended January 3, 1997. Contracts to other non-DoD
government agencies accounted for an additional 3% of the Company's revenues and
the balance of 9% was commercial work.
In the area of strategic defense systems, the Company provides a wide
range of scientific, engineering, and analytical services and technical support
to various organizations of the Department of Defense. These services and
support are provided both directly to these agencies or indirectly via
subcontracts from major defense and aerospace contractors. The agencies have
primary responsibility for developing strategic defense systems which include
(i) sophisticated reconnaissance and surveillance equipment, (ii) long range
missile and weapons systems to protect the United States from attack and provide
the United States with retaliatory capability, (iii) threater missile defense
and (iv) command, control, communication and intelligence systems which control
and integrate the operations of strategic reconnaissance, surveillance and
weapons systems.
The Ballistic Missile Defense Organization ("BMDO") was established as a
separate agency of the Department of Defense to integrate into a single agency
all the military activities carried out for defense against ballistic missiles
by the U.S. Air Force, the U.S. Army and the U.S. Navy. The BMDO is an umbrella
organization that funds and supervises technology and system development for
defensive systems which defend against both nuclear and non-nuclear ballistic
missiles. Contracts for scientific, engineering and technical assistance
services for the BMDO have historically been a significant source of revenues
for the Company and as a result, the Company was, and remains, heavily dependent
on its BMDO programs. In recent years, the Company has attempted to diversify
its business base to reduce its dependence on BMD, primarily due to the
uncertainties created by the combined effects of political changes affecting the
former Soviet Union and Eastern Europe, continuing negotiations for new arms
reduction treaties and increasing pressures to reduce the federal budget deficit
through defense budget reductions. However, BMD continues to be a large part of
the Company's business. In 1996, 1995 and 1994, BMD revenues accounted for 41%,
45% and 31% , respectively, of sales. Government BMDO funding
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for government fiscal year ("GFY") 1996 was $3.4 billion, up from $2.7 billion
in GFY 1995. The program, as restructured starting in GFY 1994, emphasized
Theater Missile Defense ("TMD") rather than National Missile Defense ("NMD").
Most of the Company's past BMDO business has been in the NMD area. In 1996, the
Company was successful in converting essentially all of its BMD contract base to
the support of TMD. At the end of 1996, the Company was successful in winning a
large TMD systems engineering and technical assistance program at BMDO.
The BMDO budget appropriation for GFY 1997 is $3.6 billion with some
renewed emphasis on NMD as well as continuing support of TMD. BMD will be
affected by governmental budget decisions, international events, proliferation
of nuclear weapons and international arms negotiations over which the Company
has no influence. As a result, there can be no assurance that the present
commitment of the United States to BMD will materialize or that funding for BMD
programs in general will not be reduced. However, strategic defense programs,
under the direction of various military and Defense Department agencies, have
been in existence for more than 39 years. The Company believes that many
strategic defense programs will continue to be funded by these agencies.
The Company, which is primarily owned by its employees and directors, has
assembled a staff of highly-trained scientists, engineers and analysts who hold
undergraduate and advanced degrees in a wide range of disciplines. Accordingly,
the Company has been able to compete for large, multi-task projects with
multi-disciplinary requirements. Located in twenty-four offices in eight states,
including four government facilities, within close proximity to government
agencies and private contractors for which services are performed, the Company's
various business units are given substantial autonomy in identifying and
pursuing business opportunities for the Company.
The Company was originally incorporated in the State of Alabama in
August 1979 under the name SPARTA, Inc. ("SPARTA Alabama"). On December 8, 1989,
the Company reincorporated in Delaware. In connection with the reincorporation,
each outstanding share of SPARTA Alabama Common Stock, $.02 par value, and each
share of SPARTA Alabama Preferred Stock, $.02 par value, was converted into one
share of Common Stock, $.01 par value, of the Company. In addition, all options
to purchase Common Stock or Preferred Stock of SPARTA Alabama were converted
into options to purchase an equal number of shares of Common Stock of the
Company. Certain historical information contained herein and described as
relating to the Company reflects the operations of SPARTA Alabama prior to
December 8, 1989.
Industry Background
A substantial portion of the U.S. defense budget is devoted to the
development of new weapons and defense systems and system upgrades. However,
development of new weapons and defense systems and upgrades requires a
considerable scientific, engineering and analytical expertise which is often
beyond the resources of the government agencies which are responsible for
development of those systems.
As a result, U.S. government defense and military agencies have relied, in
part, on outside service firms such as the Company to assist them in the
performance of their responsibilities. Such firms provide analytical, technical
and engineering support services throughout the life-cycle of complex weapons
and defense systems. This life-cycle typically begins with a requirements
definition phase in which particular strategic or tactical needs, opportunities
and objectives are identified and the technological requirements and
configuration or design of a system is defined in terms of those needs,
opportunities or objectives. Requirements definition involves analyses of
numerous and seemingly diverse factors, including (i) the current state of
technology; (ii) the performance of existing weapons and defense systems; (iii)
developments or changes in military and weapons capabilities of other countries
which can create potential new military threats that must be counteracted; (iv)
changes in US strategic or tactical policies and the effects of geo-political
developments, which may require changes in defensive strategies or tactics; and
(v) budgetary and economic considerations. The life-cycle continues through the
development, testing, manufacture, deployment and maintenance of systems and
technology.
Scientific, engineering and technical assistance firms, such as the
Company, play a significant role in this development process by gathering and
analyzing complex data, developing design alternatives and solutions to
accommodate conflicting requirements, establishing development priorities,
assisting in the preparation of requirements for various programs and in the
evaluation of bids received for those programs, and developing software and
other systems for testing and validating weapons system hardware and software.
Finally, such firms
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are relied on to develop software and other systems which simulate combat
situations for training of military personnel in the operation of the new or
upgraded weapons and defense systems.
Reliance by government agencies on outside firms for independent
scientific, engineering and technical services has decreased in the most recent
government fiscal years. Although the government will continue to use outside
firms for oversight and independent analysis, the trend is to place more
reliance on the system development contractors to oversee their own development
efforts through stronger internal controls. The Company does not believe that
this change in direction will have a significant adverse effect on the Company.
In recent years there have been numerous consolidations and mergers in the
defense industry. None of these has adversely impacted the Company's business
activities. However, there is no way to assess the impact to the Company of any
future mergers. In addition, there has been a strong movement in acquisition
reform resulting from the Federal Acquisition Streamlining Act ("FASA"). None of
these initiatives is expected to impact the Company's business activities.
Company Strategy
The Company's strategy has been to build a high quality professional staff
of scientists, engineers, technicians and analysts who have diverse backgrounds
and the experience necessary to enable the Company to bid effectively on and to
capture a significant number of defense service contracts. The Company has
approximately 536 employees, of which more than 90% have earned undergraduate
and/or advanced degrees in a wide variety of disciplines including aeronautical,
electrical and mechanical engineering, physics, mathematics, computer science,
business management and management information systems.
The Company relies heavily on its senior management and professional staff
to obtain contracts which involve development of new systems configurations and
technologies. Such contracts are important to the future success of the Company
because they provide the Company's professional staff with the opportunity to
broaden its expertise and provide the Company with the opportunity to hire new
personnel who have backgrounds in areas outside of the Company's existing
expertise. The addition of such individuals enables the Company to bid on and
obtain contracts in new areas and establish relationships with additional
agencies in order to broaden its sources of business and enhance its ability to
secure larger contracts. During the past five years, the Company has succeeded
in obtaining larger contracts in more diverse areas, including test and training
range support for the U.S. Air Force and evaluation of foreign military systems
for the Army.
Due to the size, complexity and multi-disciplinary requirements of many
government contracts, teaming arrangements among defense contractors are common,
with one contractor serving as the prime contractor and others acting as
subcontractors. The Company will continue to follow the practice of teaming with
other government contractors to bid on procurements which require capabilities
in areas outside of the Company's expertise to enable the Company to obtain
contracts for larger programs in which the Company might not otherwise be able
to participate. Given the recent government trend for less reliance on service
companies to oversee the work of system development contractors, the Company
will pursue subcontractor roles from the large prime contractor system
developers. The Company will continue to pursue small business set-aside
programs. The Company expects to remain qualified for small business programs
for several more years. The Company is a small business in most of its business
areas, where the threshold for contracts is 1,000 employees or less.
Over the years, the Company has worked on military programs and has
developed certain technologies for military applications. The Company is now
pursuing the development of products and services which exploit these military
technologies in the commercial marketplace. Such technologies include lasers,
composite materials and secure communications.
Organization
In 1996, the Company reorganized by restructuring its operations into the
following three sectors: (1) Information Systems, (2) Defense & Space Systems
and (3) Hardware Systems. This approach integrated the Company's capabilities
and resources for key business targets and provided dedicated and focused
business development leadership for each of those business areas. In addition,
the Company established the Marine Systems
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Division as a wholly-owned subsidiary, Commercial Technology, Inc., which does
business as SPARTA Marine Instrumentation ("SMI"). Shown below is a summary of
the business areas of each sector:
Defense and Space Systems Sector - This sector performs systems
formulation, analysis, engineering, and design for advanced military and space
systems.
Hardware Systems Sector - This sector performs engineering services and
hardware analysis, design, development and production for products for military
and commercial applications. SMI reports to the Hardware Systems Sector
President.
Information Systems Sector - This sector works on networked computer and
communication systems, software and hardware technologies, and provides services
and software products for government and commercial applications.
Marketing
The Company's marketing approach begins with the development of
information concerning the present and future needs of various military and
intelligence agencies of the U.S. government, and certain civilian agencies and
prime contractors. Such information is gathered in the course of contract
performance and from formal or informal briefings, participation in the
activities of professional organizations and from published literature. This
information is then evaluated by the Company, and teams of Company scientists,
engineers and analysts are formed along functional, geographic and other lines
in order to devise and implement the best means of taking advantage of available
business opportunities. This occasionally includes the preparation of
unsolicited proposals responsive to the perceived needs of current and
prospective customers, but more often includes responding to formal
solicitations from various U.S. government agencies as discussed below.
The Company places significant emphasis on client satisfaction, which is
essential to the development of repeat business. Past performance is now a
government mandated award criteria factor. To facilitate promptness of service
and interaction between the Company's professional staff and government,
civilian and military personnel responsible for weapons and defense systems
programs, the Company has established offices at 24 locations in proximity to
the agencies and other contractors for which the Company provides services.
Moreover, the Company's various business units are given substantial autonomy in
identifying and pursuing business opportunities for the Company. All staff
members are encouraged, however, to avail themselves of the broad diversity of
expertise at other offices within the Company to ensure that the highest quality
of service is provided to the Company's customers.
The Company frequently forms teaming arrangements with other defense
contractors to bid on large, complex and multi-disciplinary contracts. The
teaming arrangements are also designed to broaden the Company's business base or
to penetrate new market areas and technologies. The Company teams with other
corporations both as a prime and a subcontractor. Corporations which have acted
as subcontractors to the Company include Science Applications International
Corporation, Nichols Research, W. J. Schafer Associates, BDM Federal, and Camber
Corporation, among others. Companies for which the Company has acted as a
subcontractor include Lockheed Martin, TRW, Hughes, Motorola, Raytheon, and
Lockheed Martin\Texas Instruments Joint Venture, among others.
Substantially all of the Company's new business is acquired as a result
of formal competitive solicitations, in which contracts are awarded on the basis
of technical and management capabilities, cost and past performance. As a result
of big cuts in the real dollars available for procurement in the defense budget
over the last few years, there are fewer new opportunities and stronger cost
competitions. Cost has become as important and sometimes more important than
technical and management capabilities. The Company is also looking for
opportunities outside of the Defense Department. Several technologies developed
for the military are being evaluated for possible introduction into the
commerical market place.
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U.S. Government Contracts
Approximately 91% of the Company's fiscal year 1996 revenues were derived
from contracts or subcontracts for the benefit of departments or agencies of the
U.S. government, primarily the military services and other agencies of the
Department of Defense. The Company's business is performed principally under
cost reimbursement, fixed price and fixed rate time and materials contracts.
Cost reimbursement contracts include cost-plus-fixed fee and
cost-plus-award fee contracts. These contracts provide for reimbursement of
costs, to the extent allocable and allowable under applicable regulations, and
payment of a fee, which may either be fixed by the contract (cost-plus-fixed
fee) or the customer's subjective evaluation of the Company's work
(cost-plus-award fee). Under U.S. government regulations, certain costs,
including financing costs, are not reimbursable. In a cost reimbursement
contract, the Company can incur an actual loss only if unreimbursable costs
exceed the fixed or award fee.
Under firm fixed price contracts, the Company agrees to perform certain
work for a fixed price and, accordingly, realizes the benefit or detriment
occasioned by decreased or increased actual costs of performing the contract.
Under fixed price (level-of-effort) contracts, the Company agrees to perform
certain work for a fixed price and an agreed-upon level of effort. For example,
a given contract may provide for the number of hours to be spent by the Company
on the contract. Fixed price (level-of-effort) contracts are less risky than
firm fixed price contracts. If the Company uses all the agreed-upon
level-of-effort, it may stop work and receive the entire payment, regardless of
whether all the work was completed. Under a fixed rate, time and materials
contract, the customer agrees to pay a specific negotiated rate for each hour
worked or performed against a task order under the contract and to reimburse
material "at cost".
Greater risks are involved under firm fixed price contracts than under
fixed price (level-of-effort) contracts, fixed rate, time and materials
contracts and other types of cost-reimbursable contracts. Also, less risk is
involved in firm fixed price contracts relating to the delivery of analytical
results compared to the same type of contracts relating to hardware. At this
time, the Company has less than 5% of its revenue resulting from firm fixed
price contracts relating to the delivery of hardware. Most of the Company's
contracts are low risk fixed price (level-of-effort), cost reimbursement and
fixed rate, time and materials contracts.
All cost reimbursement contracts relating to services or products supplied
to government agencies are subject to audits and adjustments. Such audits
include both an audit of the contractor's indirect contract costs on a fiscal
year basis, as well as an audit of the direct contract costs relating to each
individual contract. The government does not adhere to any firm schedule with
respect to its conduct of these audits. Rather, the scheduling of such audits is
dependent on the resources available to the Defense Contract Audit Agency from
time to time and the existence of higher priority projects. The Company's
indirect contract costs have been audited by and settled with the Defense
Contract Audit Agency through the fiscal year ended December 31, 1993. Indirect
contract costs for periods subsequent to fiscal year 1993 have been recorded at
amounts which are expected to be realized upon final settlement.
The Company's contracts may be terminated, in whole or in part, at the
convenience of the customer (as well as in the event of default). In the event
of a termination for convenience, the customer generally is obligated to pay the
costs incurred by the Company under the contract plus a fee based upon work
completed. There were no contract terminations in 1996. The Company doesn't
anticipate any terminations of programs and contracts in 1997. However, no
assurances can be given that such events will not occur. The revenues and income
of the Company also would be materially affected by changes in government
procurement policies or a significant reduction in government expenditures for
services of the type provided by the Company.
In addition to the right of the U.S. government to terminate contracts for
convenience, U.S. government contracts are conditioned upon the continuing
availability of Congressional appropriations. Congress usually appropriates
funds on a fiscal year basis, even though contract performance may take several
years. Consequently, at the outset of a major program, the contract is usually
partially funded and additional monies are normally committed to the contract by
the procuring agency only as appropriations are made by Congress for future
years. These appropriations are therefore subject to changes as a result of
increases or decreases in the overall Department of Defense budget, including
possible budgetary restraints resulting from deficit reduction programs such as
the
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Gramm-Rudman Act. The Company's business can also be affected by any significant
delay between Congress and the Administration in reaching a defense budget
accord.
Backlog
The following table shows the dollar amount of the Company's 12-month
backlog at the dates stated:
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January 3, 1997 December 29, 1995
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Funded 12-Month Backlog $34,900,000 $12,000,000
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Unfunded 12-Month Backlog 41,500,000 55,300,000
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Total Funded/Unfunded Contract Backlog $76,400,000 $67,300,000
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Funded backlog represents all current contracts expected to be performed
during the next 12 months for which the Company has received funding. Unfunded
12-month backlog includes the 12-month expected value of future incremental
funding on existing or negotiated contracts. As a result, in part, of U.S.
government funding practices, most of the Company's funded backlog at any given
date is represented by work that will be performed within twelve months.
Although the Company's backlog has, in the past, generally been indicative
of its future revenues, there can be no assurance that this will continue. The
Company's backlog is typically subject to variations from year to year as
contracts are completed, major existing contracts are renewed, or major new
contracts are awarded. Additionally, all U.S. government contracts included in
backlog, whether or not funded, may be terminated at the convenience of the U.S.
government.
Competition
The business in which the Company is involved is very competitive and
requires highly skilled and experienced technical personnel with appropriate
levels of U.S. government security clearances. There are many companies which
compete in the service and technology areas and research and development areas
in which the Company is engaged. Competition among these companies is intense
because, among other things, capital requirements and other barriers to entry
are minimal and a substantial number of contracts are competitively bid, which
enables less established firms to capture contract awards based on price. In
addition, due to defense budget reductions, there are fewer new opportunities
and more intense cost competition. Technical capability continues to be an
important criterion for awarding contracts, but cost and past performance have
increased in importance. Since an important role of firms such as the Company is
to develop requirements for various programs and even, occasionally, to evaluate
bids from weapons systems manufacturers on behalf of government defense
procurement agencies in response to those requirements, conflict-of-interest
considerations usually preclude weapons systems manufacturers from competing for
scientific, engineering and technical assistance service contracts. Principal
competitive factors are technical competence and expertise, cost and the
reputation of the firm based on prior performance. In addition, project-related
experience is an award criterion, and firms that have performed services in
earlier phases of a project generally have an advantage in obtaining follow-on
contracts for later phases. The Company believes the skills of its technical
personnel are the key to its growth and competitive position in its industry.
See "Business-Industry Background" and "Business-Marketing".
Patents and Proprietary Rights
The Company, at present, holds a small number of patents. All of these
patents are related to defense technology conversions, some of which the Company
plans to exploit in the commercial marketplace. The Company believes that its
competitive position in its core business areas are not dependent on these
patents, or on copyright or trade secret protection, and that the success of the
Company depends primarily on the technical competence and managerial and
marketing ability of the Company's personnel.
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Employees
Most of the Company's employees are highly skilled and educated.
Approximately 90% of the Company's employees have college degrees, and 50% hold
advanced degrees, in a wide variety of disciplines, including aeronautical,
electrical and mechanical engineering, physics, chemistry, mathematics, computer
sciences and business and management. The Company's professional staff also
includes specialists in systems analysis, scientific simulation, data
processing, software design and development, and hardware development, testing,
evaluation and integration. The Company believes that one of its strengths,
which derives from the diverse backgrounds and training of its employees, is its
ability to apply multi-disciplinary approaches to the projects it undertakes.
The Company's primary resource is its technical staff and support
personnel. The Company believes its future success depends upon its ability to
retain and motivate its personnel and attract qualified new employees. In the
last few years, the Company has experienced a higher turnover of employees than
in prior years. Some of this turnover can be attributed to the changes and
perturbations in the defense industry and some can be attributed to the
Company's reduced bonus and raise pools relative to prior years and the lack of
stock price growth. Prior to these recent years, the Company experienced very
little turnover and great success in recruiting. The Company believes that a
return to growth is the key to recruiting and retaining a highly-qualified
staff. Such growth will enhance its employee stock ownership program and restore
its other incentives to industry comparative levels.
At January 3, 1997, the Company employed 536 employees, a majority of
which are based in the Company's facilities in California, Virginia and Alabama.
The number of employees at 449 at the end of 1995, was essentially the same as
the 450 at the end of 1994. The Company believes that its employee relations are
excellent, and it has not experienced any labor disputes or work stoppages.
ITEM 2. PROPERTIES
The Company's principal corporate offices, comprised of approximately
12,500 square feet of office space leased through December 1997, are located in
Laguna Hills, California. It is not certain at this time whether the Company
will renew this lease or move to another local facility. The Company's other
offices, aggregating approximately 250,000 square feet, including offices
located in the cities of Huntsville, Alabama; San Diego, California; Boston,
Massachusetts; Rosslyn, Virginia; and McLean, Virginia, are occupied under
leases which expire at various times during the next eight years. The aggregate
annual rent paid by the Company for all of its offices and facilities during the
fiscal year ended January 3, 1997 was approximately $2,970,000. In 1996, the
Company continued to reduce space in California, but added space in Virginia to
accommodate the increase in the number of employees resulting from one major
contract win. At the end of 1996, the Company reduced space in the La Jolla
office from 45,000 sq. ft. to 30,000 sq. ft. by moving to a smaller new facility
at a reduced rate. The Company also added one facility in Rosslyn, Virginia of
11,300 sq. ft. and signed another lease in Rosslyn at the end of the year for
8,900 sq. ft.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Lack of Public Market: Internal Repurchase Program
Except as noted below, the Company is primarily owned by its current
employees and directors. Accordingly, the Company's 1987 Nonqualified Stock
Option Plan (the "Option Plan") and the Company's Certificate of Incorporation
place restrictions on the transferability of the Company's Common Stock and
grant the Company the right to repurchase the shares held by any stockholder
whose association with the Company terminates. For these and other reasons, no
public market currently exists for the Company's securities, and it is not
likely that a public market will develop in the foreseeable future. However, in
order to provide some liquidity for the shares of Common Stock owned by the
Company's stockholders, the Company has established and maintains a program
which permits the Company's stockholders to offer all or any portion of their
shares (except shares of "unvested" stock) for sale to the Company on February
21, May 21, August 21 or November 21 of any year (each a "Stock Repurchase
Date") or at such other interim dates as the Board of Directors of the Company
may designate from time to time, at a per share price equal to the Formula Price
(as hereinafter defined) as of such Stock Repurchase Date.
The Company's repurchase program is, however, a voluntary program on
the part of the Company, and the Company's stockholders therefore have no right
to compel the Company to repurchase any of the stockholders' shares. Moreover,
the number of shares which the Company may repurchase is subject to legal
restrictions imposed by applicable corporate law affecting the ability of
corporations generally to repurchase shares of their capital stock. In addition,
the number of shares which the Company may repurchase is subject to a
self-imposed quarterly repurchase limitation which is designed to ensure that
the Company's repurchase of its shares from time to time does not materially
impair the Company's financial condition. The Board of Directors may approve
waivers to the self-imposed quarterly repurchase limitation. For example, in May
of 1996, the Board of Directors authorized the purchase of all stock offered on
21 May 1996 from former employees. In November of 1996, the Board again
authorized the purchase of all stock offered on 21 November 1996 from former
employees.
The Company's policy prior to 1994 was to buy back the stockholdings of
all individuals leaving the Company, so as to retain all stockholdings among
active employees. The 40% reduction in the Company's staff level during 1993 and
1994 resulted in the termination of employees who held, in the aggregate,
approximately 30% of the Company's total Common Stock then outstanding.
Consequently, in April of 1994, the Company suspended the policy of repurchasing
all of the stock held by terminating employees so as not to deplete
stockholders' equity. The Company did not reinstate the practice of repurchasing
stock from terminating employees with promissory notes in 1996. Because of the
special authorization granted to repurchase former employees' stock as stated
above, the percentage of stock held by former employees dropped in 1996. As of
the end of 1996, former employees only held 8.7% of all the outstanding stock,
or 556,000 shares. The percentage was 11.8% at the end of 1995.
In November 1994, the Company entered into a Stock Purchase Agreement (the
"Agreement") with Science Applications International Corporation ("SAIC"), under
which SAIC was obligated to buy, during the first year of the Agreement, shares
of the Company's Preferred Stock with an aggregate price of $1,200,000. Under
the Agreement, SAIC also has the option, but not the obligation, to buy
additional shares of Preferred Stock, provided that SAIC's total purchases
during any quarter may not exceed $600,000, and provided further, that the total
number of shares of Preferred Stock purchased during any quarter may not exceed
the total number of shares of Common Stock offered to the Company for repurchase
by the Company's existing stockholders. The purchase price for all shares
purchased under the Agreement by SAIC is equal to the then current Formula Price
applicable to the Company's Common Stock. The Agreement provides that SAIC's
rights to purchase Preferred Stock will be suspended if and to the extent that
any purchase would cause the aggregate number of shares of the Preferred Stock
held by SAIC to exceed 19.9% of the total capital stock of the Company then
outstanding. In any event, SAIC's rights to purchase shares of the Company's
Preferred Stock under the Agreement will terminate on the tenth anniversary of
the Agreement, or earlier upon the occurrence of certain specified events. Under
the Agreement, if SAIC's ownership of shares of the Company's Preferred Stock
causes the Company to cease to be considered a "small business" for purposes of
any governmental program or award, the Company will have the option to
repurchase the Preferred Stock then held by SAIC at a price per share equal to
the then current Formula Price. The
8
<PAGE> 11
Agreement also grants SAIC the right, exercisable after the second anniversary
of the Agreement, to require the Company to repurchase all of the Preferred
Stock then held by SAIC at the then current Formula Price. The Company has used
the proceeds of sales of Preferred Stock under the Agreement to improve the
liquidity of the holders of the Company's Common Stock. As of the end of 1996,
SAIC owned 569,000 shares of Preferred Stock, which represented 8.9% of the
total capital stock outstanding. It is unknown at this time if SAIC will resume
purchasing Preferred Stock.
Formula Price
The Formula Price is based upon a formula (the "Formula") which is
established by the Company's Board of Directors, and which is subject to
revision by the Board of Directors from time to time.
The Formula, as currently in effect, provides that the Formula Price is
equal to the sum of (i) a fraction, the numerator of which is the sum of the
stockholders' equity of the Company at the end of the fiscal quarter immediately
preceding the date on which a Formula Price revision is to occur ("SE"), the
aggregate principal amount of the long term portion of the Company's long term
subordinated promissory notes at the end of such fiscal quarter ("SN"), and the
aggregate exercise price of all stock options which were exercisable as of the
end of such fiscal quarter ("CX"), and the denominator of which is the sum of
the number of issued and outstanding shares of Common Stock and Preferred Stock
of the Company ("SI") and the number of shares of Common Stock issuable upon the
exercise of stock options which are exercisable ("SV") at the end of that fiscal
quarter, and (ii) the product of 7 multiplied by the "future growth factor"
("FG"), multiplied by the average annual "earnings per share" of the Company for
the eight fiscal quarters immediately preceding the price revision ("A"). (For
this purpose, "earnings" include both net income and the tax benefits to the
Company from option exercises and disqualifying dispositions of incentive stock
option shares, and "shares" include both outstanding shares and shares subject
to vested stock options.) The "future growth factor", or "FG", is the lesser of
1.5 or the number obtained by dividing (a) the sum of the Company's gross profit
for the four fiscal quarters immediately preceding the date on which the price
revision occurs, and the projected gross profit for the four fiscal quarters
immediately following the end of such prior period by (b) the Company's gross
profit during the eight fiscal quarters immediately preceding the price
revision, and squaring the quotient so obtained. The Formula Price, expressed as
an equation, is as follows:
Formula Price = SE + SN + CX + (7FG x A)
------------
SI + SV
Where:
SE = Stockholders' equity which includes all common and preferred stock
SN = Aggregate principal amount of subordinated notes (long term portion)
CX = Aggregate exercise price of vested stock options
SI = Number of shares issued and outstanding
SV = Number of shares subject to vested stock options
FG = The lesser of 1.5 or gross earnings over the past twelve months plus
projected gross earnings over the next twelve months divided by gross
earnings over the past twenty-four months, the quotient of which is squared
A = Average annual "earnings per share" for the preceding eight quarters
For purposes of the Formula, projected gross profit is determined by the
Company's CEO based on information provided monthly by each of the Company's
Division Managers concerning all contract proposals which have been sent to
customers for evaluation and source selection by his or her division. This
information includes expected contract value, period of performance, funding
profile, expected fee/profit, probable award date, and "probability of win"
assessment. This information is then reviewed and revised by the Company's
Operation Managers before submission to the Chief Executive Officer.
The Formula Price does not include liquidity as a factor in determining
the stock price. However, it should be noted that any extended period of
non-liquidity may require the Board of Directors to make a change in the Formula
Price to factor in the lack of liquidity. The Formula Price is reviewed in April
of each year by an independent outside appraisal firm to see that the Formula is
producing a price within a range of fair market value.
9
<PAGE> 12
The Formula has been revised three times since its inception in 1979. The
Formula as initially adopted, was as follows:
Formula Price = K (SE/SI + 5 x 24 month average of P/SI)
where P = Profit
As initially adopted, the Formula did not take into account the potential
dilutive effect of the exercise of the Company's outstanding vested stock
options. Accordingly, in February 1985, the Formula was revised to take all
outstanding vested options into account in computing the earnings per share term
of the Formula, and to take all such options (as well as their aggregate
exercise price) into account in computing the equity per share term of the
Formula.
In April 1986, following an extensive analysis of the Formula and a
comparative assessment of the Formula Price relative to the stock prices of
comparable public and private companies by the Company's management, additional
revisions were made to the Formula for the purpose of (i) bringing the Formula
Price more in line with the stock prices of other comparable companies, (ii)
causing the Formula Price to behave more like the market price of a publicly
held company (with the price/earnings ratio increasing in periods of growth and
declining in periods of slow growth), and (iii) causing the Formula Price to
decline more rapidly in the event of major earnings declines or losses. These
revisions of the Formula involved (i) the elimination of the "K" factor, which
was a coefficient scheduled to be increased linearly from a value of 0.25 at the
end of fiscal l980 to a value of 1.0 at the end of fiscal 1986, (ii) the change
of the earnings per share multiplier from 5 to 7, and (iii) the addition of a
"future growth factor." Following the approval of these revisions by the
Company's Board of Directors and stockholders, the Formula, as revised, was
phased in over the following seven fiscal quarters by computing the Formula
Price as a phased composite of the Formula as it existed immediately preceding
these revisions and as it existed following these revisions.
In January 1988, a minor revision was made to the Formula due to the
impact on the Company of the Tax Reform Act of 1986, which resulted in a
significant decrease in the Company's marginal tax rate. The FG, or future
growth, term was initially included in the Formula with the intent that it
reflect changes in the Company's growth prospects, not changes in earnings due
solely to changes in the Company's tax rate. As a result, the Formula was
revised by substituting gross profit for net profit in the computation of the FG
term.
In addition to the three revisions to the Formula described above, in 1990
a change in the expression of the Formula, but not its substance, was made.
Since 1988, when the Company first issued subordinated promissory notes, the
value of the subordinated notes has been included in the equity per share term
of the Formula, consistent with the treatment of such notes by the Company's
principal bank. In 1990, the "SN" term was added to the Formula to more clearly
reflect this fact.
The Formula Price is calculated not less than once each fiscal quarter, in
January, April, July and October of each year. Such calculations are based on
unaudited financial information as of the end of the last full fiscal quarter
immediately preceding the date on which the Formula Price is recalculated. Such
information is prepared by the Company without independent review. Consequently,
from time to time certain of the information used to calculate the Formula Price
as of a given date may subsequently be adjusted. However, to date all such
adjustments have been immaterial in amount and, accordingly, no retroactive
adjustment of the Formula Price has ever been made.
Within a day or two following each recalculation of the Formula Price,
each of the Company's stockholders is given written notification of the new
Formula Price, which notification sets forth in detail the calculations by which
the new Formula Price has been determined.
Price Range of Common Stock
Shares which are repurchased by the Company, either under the repurchase
program referred to above or in connection with the termination of a
stockholder's association with the Company, are generally repurchased at a price
which is equal to the Formula Price then in effect. The following table sets
forth information regarding the Formula Price of the Common Stock, rounded to
the nearest cent, for the periods beginning on the dates indicated:
10
<PAGE> 13
<TABLE>
<CAPTION>
Formula Price per
Share of Common Stock
----------------------
1996 1995
----- -----
<S> <C> <C>
January 21 $4.66 $4.05
April 21 4.48 3.84
July 21 4.90 3.95
October 21 5.35 4.19
</TABLE>
Dividend Policy
The Company's present policy is to retain earnings for the operation and
expansion of its business. The Company has not paid cash dividends on its Common
Stock and does not anticipate that it will do so in the foreseeable future. The
Company's bank loan agreement prohibits the payment of dividends by the Company
without the bank's prior consent.
Record Holders
As of February 1, 1997 there were approximately 362 holders of record of
the Company's Common Stock.
Repurchase Rights of the Company, Restrictions on Transferability
All shares of the Company's Common Stock are subject to the Company's
right (but not obligation) to repurchase such shares in the event of a
termination of the holder's association with the Company. All shares of the
Company's Common Stock are also subject to the Company's right of first refusal
to purchase such shares in the event a holder desires to transfer them, and
other significant restrictions on transferability set forth in the Company's
Certificate of Incorporation. Substantially identical repurchase rights and
transfer restrictions are contained in the Option Plan and are applicable to all
shares issued under that Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of the
Company for each of the five fiscal years in the period ended January 3, 1997.
This table should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto appearing elsewhere in
this report on Form 10-K.
Operating Data:
<TABLE>
<CAPTION>
Years Ended December 31(1)
------------------------------------------------------------------------
(Amounts in thousands except share data)
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $67,784 $62,074 $65,258 $78,405 $79,578
Costs and expenses 62,501 59,687 62,246 72,971 73,890
Provision for income taxes 2,200 1,002 1,264 2,319 2,331
Net income 3,083 1,385 1,748 3,115 3,357
Earnings per share (2) $0.42 $0.22 $0.28 $0.39 $0.41
Weighted average Common
Stock outstanding (3) 5,898,069 6,401,069 6,351,021 8,295,045 8,331,800
</TABLE>
11
<PAGE> 14
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31(1)
-------------------------------------------------------------------
(Amounts in thousands)
1996 1995 1994 1993 1992
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Total assets $29,054 $28,662 $31,273 $37,430 $32,787
Working capital 10,010 9,476 10,286 12,411 8,365
Long term liabilities, including 6,962 8,348 10,521 10,985 6,531
redeemable Preferred Stock
Stockholders' equity 10,485 9,410 9,202 11,668 10,928
</TABLE>
(1) The Company's fiscal year is the 52 or 53 week period ending on the
Friday closest to December 31. The last five fiscal years have
ended on January 3, 1997, December 29, 1995, December 30, 1994,
December 31, 1993, and January 1, 1993. For ease of presentation of
summary financial data, the year ends have been presented as December
31.
(2) Earnings per share are expressed as the more dilutive of 1) net income
divided by weighted Common Stock and common stock equivalents
outstanding or 2) net income less accretion in redeemable Preferred
Stock divided by the weighted Common Stock outstanding not including
the weighted average of redeemable Preferred Stock. In 1996, the latter
case resulted in the more dilutive statement of earnings per share.
(3) The weighted average number of redeemable Preferred Stock outstanding
is included in Common Stock outstanding for the year ended December 29,
1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations, and certain other portions of this report on Form 10-K, contain
trend analysis and other forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The Company's
actual results may differ significantly from those projected in the
forward-looking statements.
Results of Operations
<TABLE>
<CAPTION>
Information Summarizing Operating Results
for the Years Ended December 31,
-----------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------
<S> <C> <C> <C>
Sales $67,784,000 $62,074,000 $65,258,000
BMD 41% 45% 31%(1)
Other DoD 47% 40% 49%
Non-DoD 12% 15% 20%
Gross Profits(2) $5,936,000 $4,088,000 $4,308,000
Profits as a percentage of costs 9.6% 7.1% 7.1%
Net income $3,083,000 $1,385,000 $1,748,000
</TABLE>
(1) BMD Sales % for 1994 has been restated to include the TMD Program which
was formerly allocated to other DoD in that year.
(2) The Company defines gross profits as sales less costs and expenses
excluding interest cost and certain expenses which cannot be charged to
its government customers.
12
<PAGE> 15
<TABLE>
<CAPTION>
Information Summarizing Financial Position
at December 31,
----------------------------------------------------------------
1996 1995 1994
------------------- ----------------- ------------------
<S> <C> <C> <C>
Stockholders' equity $10,485,000 $9,410,000 $9,202,000
Equity per share(1) 1.64 1.56 1.45
Stock repurchase notes 1,730,000 2,944,000 4,224,000
Notes payable $461,000 $972,000 $2,522,000
</TABLE>
<TABLE>
<CAPTION>
Backlog
-----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Funded 12-month backlog $34,900,000 $12,000,000 $17,300,000
Unfunded 12-month backlog 41,500,000 55,300,000 39,600,000
---------------- ---------------- ----------------
Total contract backlog $76,400,000 $67,300,000 $56,900,000
</TABLE>
<TABLE>
<CAPTION>
Financial Ratios
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Days sales in receivables 109 110 113
Current ratio 1.9 1.9 1.9
Debt to equity ratio as defined
by the lender 0.8 1.0 1.3
</TABLE>
- --------------------
(1) Equity per share based on weighted shares of Common Stock outstanding
at year end, including weighted shares of Preferred Stock outstanding.
Effective 1996, Preferred Stock was included in the Formula Price.
The Company experienced a three-year decline in sales for the period 1993
through 1995. Sales decreased by 22% from a historical high of $79,578,000 in
1992 to $62,074,000 in 1995. In 1996, this three year business decline was
reversed with sales of $67,784,000, an increase of 9.2% over 1995. The decline
from 1993 through 1995 was primarily attributable to a 60% reduction in the
government fiscal year 1994 budget for the Ballistic Missile Defense
Organization's ("BMDO") National Missile Defense ("NMD") program. The reduction
in NMD funding was accompanied by an increase in funding for the Theater Missile
Defense ("TMD") program. Historically, the BMDO NMD program has been the
Company's major source of revenue. In 1993, BMDO business volume accounted for
47% of Company sales. The Company's BMDO business volume as a percent of sales
decreased in 1994 to 31%. In 1995 and 1996, BMDO programs accounted for 45% and
41% of Company sales, respectively. The return to pre-1994 levels is indicative
of the Company's efforts over the last two years to apply its NMD ballistic
missile defense expertise to TMD problems and winning TMD contracts. However,
sales growth in 1996 did not come from the Company's traditional dominant
business area, BMD, but rather from growth in the form of diversification in all
other DoD programs. In 1996, the Company derived 91% of its business from DoD
programs.
Gross profitability increased from 7.1% of costs for both 1994 and 1995 to
9.6% of costs in 1996. However, this increase primarily represents a return to
historical profit levels. Profit levels in 1994 and 1995 were negatively
impacted by 1) reversal of prior year accrued profits on two commercial oil
platform instrumentation projects, and 2) operating losses by the Company's
ACT/SPARTA subsidiary in 1994 and 1995 and a loss on disposition of ACT/SPARTA
in 1995. A restatement of gross profits in 1994 and 1995, excluding the effects
of the above events, would result in gross profits of 8.7% and 9.0%,
respectively. The end of the year annualized contract backlog, representing
expected sales on existing contracts for 1997, increased 13.5% during 1996 to
$76,400,000. Proposal and opportunity backlog, representing submitted proposals
and anticipated proposal business opportunities, respectively, was $116,000,000
at the end of 1996.
13
<PAGE> 16
The Company's task over the last three years was to not only recreate its
business base but to establish a new foundation for future growth in recognition
of the continued decline of the DoD market for its traditional engineering
business. Consistent with this strategy, the Company restructured in 1996 into
three sectors, operating substantially as subsidiaries to focus on three core
business areas: system engineering for defense and space systems; information
systems engineering, services, and products; and engineering services,
development, and products for hardware technologies. In 1996, the Company's plan
was to learn how to operate in this new structure, build a contract base for
sales growth in 1997, and initiate a multi-year process of establishing the
Company's selected product lines. Specific objectives in 1996 included improving
profitability, restoring the effectiveness of the Company's stock as an
incentive by achieving at least a 20% price growth and substantially improving
stock liquidity, and expanding the Company's future business potential by
increasing proposal and opportunity backlog by 50%. The Company exceeded its
plan and objectives in almost all respects, only falling short in increasing
proposal and opportunity backlog, as noted above. Each of the sectors achieved
sales increases over 9%, substantial contract backlog increases averaging 22%,
and improved profitability. Five product lines were identified and business
plans and strategies were developed in 1996 to move toward bringing products to
market in 1997 and subsequent years. The five product lines are Zeus, a mobile
mounted laser system to neutralize mines and unexploded ordnance; ATCI, an
electro optic system to compensate for air turbulence error sources in the
manufacture of integrated circuits and flat panel displays; composites, an
application of proprietary technology in composite material bulk molding and
thermal management; RIMS, an integrated hardware and software solution for
communication and control of a multi-functional, dispersed organization; and
SecurECTM, an application of end-to-end security software to commercial
Electronic Data Interchange (EDI) on the Internet. In 1996, two orders for ATCI
demo units were received and development of the SecurECTM product was completed
for a planned product launch in early 1997.
Stockholders' equity (after adjustment to include stock held by SAIC)
increased approximately 11% during 1996. Additionally, $507,000 of equity funds
were used during the year to reduce the fraction of stock held by former
employees, based on a decision by the Board of Directors that such purchase was
in the best long term interests of the Company. The Company continued to reduce
its major components of debt (deferred income taxes, balance of stock promissory
notes, and working capital financing) by approximately $2,000,000, or 21%, in
1996, bringing its debt-to-equity ratio to 0.8, a historical low.
Liquidity and Capital Resource
The Company's primary source of liquidity in 1996 was self-funding from
on-going business activities. Funds over those necessary for day to day
operations where invested in short term securities, resulting in interest income
of $102,000. The bank line of credit provides for borrowings up to $10,000,000
with all borrowings due December 1, 1997. Interest payments on borrowings under
the line of credit were $3,000 in 1996 compared to $247,000 in 1995. At the end
of 1996, borrowings for working capital were approximately $461,000, down from
$866,000 at the end of 1995. The change from a net borrower in 1995 to a net
investor in 1996 came primarily from 1) completion of government overhead audits
for 1991 through 1993 and the subsequent release of contract retentions for
those years, and 2) a successful effort to reduce the days sales in receivables.
Days sales in receivables in 1996 averaged 95 days, down from an average of 127
days in 1995. The Company anticipates that delays in completion of government
audits for years 1994 and 1995 plus the increasing costs to fund development of
hardware projects will create a demand again for working capital borrowings in
1997. The Company anticipates that its existing capital resources and access to
the line of credit will be adequate for planned operations for the foreseeable
future.
The Company continues to conduct its stock repurchase program on a
quarterly basis under which the Company repurchases shares of its stock desired
to be sold by existing stockholders (i.e., continuing employees, terminating
employees, and former employees). The amount of funds available for the
repurchase of stock is limited to one-half the net profits (based on a four
quarter moving average) plus all funds realized by the Company through operation
of its stock program. The two primary sources of stock funds are from the
exercise of options granted to employees and from the funding of its stock
related benefits programs. In periods of declining profits and decreasing stock
prices, the funds available for the repurchase of stock can be adversely
impacted. The repurchase of stock within the available quarterly funds is
prioritized first to the repayment of stock notes, second to all stockholders
desiring to sell a minimum amount (currently $3,000), and finally to all
stockholders desiring to sell stock on a pro rata basis with total stock
ownership.
14
<PAGE> 17
It was the Company's policy to limit its Common Stock ownership to current
employees by repurchasing all stock of terminating employees with cash or
promissory notes. A 40% reduction in the Company's staff level starting mid-1993
and through 1994 resulted in the termination of employees who held, in the
aggregate, approximately 30% of the Company's total Common Stock then
outstanding. Continued issuance of promissory notes to repurchase the stock of
terminating employees jeopardized the bank covenant on equity for the bank line
of credit. Consequently, the Company suspended the policy of repurchasing stock
with promissory notes from terminating employees in April of 1994 and terminated
the repurchase of any stock of terminating employees with quarterly repurchase
funds in April of 1995. The outstanding promissory note balance for prior year's
stock repurchases declined from $4,224,000 at the end of 1994 to $1,730,000 at
the end of 1996, reflecting the continued policy of not issuing new notes and
the payment of stock notes as the first priority out of quarterly stock
repurchase funds. Liquidity for stock sales for continuing employees during
1994, 1995 and into early 1996 was adversely affected by 1) decreasing profits
and 2) the amount of funds required for stock note payments prior to purchase of
stock of continuing employees. As the Company's profits continue to improve and
as the debt service on current notes continues to decline, and as employee
confidence in future stock growth returns as demonstrated by the exercise of
options, the liquidity of the stock returned to pre-1993 levels in 1996. In
1996, the Company resumed partial cash repurchases of stock from terminating
employees, but did not resume the issuance of promissory notes. As the stock
liquidity continues to improve, stock repurchase through promissory notes will
be evaluated by the Board of Directors.
Under the Stock Purchase Agreement which the Company entered into with SAIC
in November, 1994, SAIC purchased $300,000 in 1994 and an additional $1,200,000
in 1995 and $900,000 in 1996. SAIC elected to suspend purchase of the Company's
Preferred Stock in November, 1996.
Commitments for capital expenditures were not material at January 3, 1997.
Effects of Inflation
The majority of the Company's contracts are cost reimbursement type
contracts or are completed within one year. As a result, the Company has been
able to anticipate increases in costs when pricing its contracts. Bids for
longer term fixed-price and time-and-materials type contracts typically include
labor and other cost escalation in amounts expected to be sufficient to cover
cost increases over the period of performance. Consequently, while costs and
revenues include an inflationary increase commensurate with the general economy,
net income, as a percentage of revenues, has not been significantly impacted by
the effects of inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are filed as a part of this report on
Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS...............................................................................F-2
FINANCIAL STATEMENTS
Consolidated Statement of Income for the three years ended
January 3, 1997...............................................................................................F-3
Consolidated Balance Sheet at January 3, 1997 and December 29, 1995.............................................F-4
Consolidated Statement of Stockholders' Equity for the three
years ended January 3, 1997...................................................................................F-5
Consolidated Statement of Cash Flows for the three years ended
January 3, 1997...............................................................................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
</TABLE>
15
<PAGE> 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors, nominee director and executive officers of the Company are
as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Wayne R. Winton 61 Chief Executive Officer and Chairman of the
Board of Directors
Robert C. Sepucha, Ph.D. 53 Sector President and Director
R. Stephen McCarter 65 Sector President and Director
Carl R. Case, Ph.D. 57 Sector President and Director
B. Warren Knudson 59 Corporate Vice President, Treasurer and Chief
Financial Officer
Jerry R. Fabian 49 Corporate Vice President, Secretary and
Chief Administrative Officer
Robert J. Vickery, Jr. 57 Director
John L. Allen, Ph.D. 65 Director
Rock N. Hankin 50 Director
Robert L. Johnson 77 Director
Gen. John L. Piotrowski
(USAF Retired) 64 Director
Clarke E. Reynolds 77 Director
James B. Idell 48 Nominee Director
</TABLE>
Wayne R. Winton is a co-founder of the Company and has served as
President and Chairman of the Board of Directors of the Company since its
founding in 1979. Mr. Winton served as the Company's President from its founding
until 1995, when he became Chief Executive Officer. Mr. Winton holds a Bachelors
degree in mechanical engineering from the University of Idaho.
Robert C. Sepucha, Ph.D., joined the Company as a Senior Vice President
and Group Manager in July 1991. Dr. Sepucha was elected to the Board of
Directors in 1993. He is currently the Sector President of the Defense and Space
Systems Sector. From 1984 until joining the Company, Dr. Sepucha was a Senior
Vice President of W. J. Schafer Associates, Inc. Dr. Sepucha holds a Masters of
Science degree in physics from the Massachusetts Institute of Technology and a
Ph.D. in physics from the University of California, San Diego.
R. Steven McCarter served the Company as a Vice President and Operations
Manager from 1984 to 1990 and served as President of MI SPARTA, Inc., the
Company's wholly owned subsidiary, from January 1991 to January 1994. Mr.
McCarter was appointed Senior Vice President and Group Manager in January 1 1994
and elected to the Board of Directors in 1994. Mr. McCarter is currently the
Sector President of the Hardware Sector. Mr. McCarter holds a Masters of Science
degree in electrical engineering from New York University.
16
<PAGE> 19
Carl T. Case, Ph.D., served as the Company's Division Manager of the
Systems Analysis Division from 1984 to 1988. He became a Vice President and
Operations Manager of the Company's Systems Integration Operation in 1988 and
then Operations Manager for Information Systems in 1994. Dr. Case is currently
the Sector President of the Information Systems Sector. Prior to joining SPARTA
in 1984, Dr. Case served as an Air Force officer for twenty-one years retiring
as a Colonel in 1984. Dr. Case holds a Masters of Science degree in physics from
the University of Louisville and a Ph.D. in aerospace engineering from the Air
Force Institute of Technology.
B. Warren Knudson has been with the Company since its inception in 1979.
Mr. Knudson was appointed an Operations Manager in 1984 of the Company's second
largest operation. He was subsequently made a Vice President of the Company in
1984 and assumed the duties of Group Chief Engineer in 1989. Mr. Knudson was
appointed to the position of Chief Financial Officer in September of 1993 and is
currently in that position. He reports directly to the Chief Executive Officer.
Mr. Knudson holds a Bachelor of Science degree in aeronautical engineering from
the University of Minnesota.
Jerry R. Fabian has served the Company as a Vice President and Chief
Administrative Officer since January 1989. From January 1989 to February 1992,
Mr. Fabian was also the Chief Financial Officer. Since 1986 he has served as
Director of Business Administration, reporting to the Company's CEO. Mr. Fabian
holds a Bachelor of Science degree in business administration from California
State University, Northridge.
Robert J. Vickery, Jr. is a co-founder of the Company and served as the
Executive Vice President, Secretary and Treasurer from 1979 to 1993. Mr. Vickery
retired as an active employee in December 1993, but remains as a Board member
and a member of the Board Audit Committee and Compensation Committee.
John L. Allen, Ph.D., has served as a Board member since 1982. He is
currently a private consultant operating as John L. Allen Associates, Ltd. and
has participated in many DoD advisory groups. Previously, Dr. Allen was
President of General Research Corporation and Deputy Director, Defense Research
& Engineering. He is a member of the Board Audit Committee and Compensation
Committee.
Rock N. Hankin has served as a Board member since 1989. He is the
founder and senior partner of Hankin & Co. which provides commercial and
forensic consulting services and Hankin Investment Banking, its NASD licensed
broker\dealer. Hankin & Co's services address areas critical to business success
and survival including corporate governance, business strategy and planning,
profitability improvement and recovery, crisis and bridge (interim) management,
market analysis and sales management, operations and financial modeling,
representation in mergers and acquisitions and expert analysis consulting and
testimony in complex business litigation. Mr. Hankin was previously a partner at
Price Waterhouse. He is a certified public accountant and a lawyer. Mr. Hankin
is chairman of the Board Audit Committee and a member of the Compensation
Committee. Mr. Hankin also serves as Chairman of the Board of Directors of House
of Fabrics and is a member of the boards of Alpha Microsystems, Inc. and Semtech
Corporation. Previous board service includes Nichols Institute and DDL
Electronics, Inc.
Robert L. Johnson has served as a Board member since 1987. Previously,
Mr. Johnson was Corporate Vice President - Aerospace Group, McDonnell Douglas
Corporation and President of McDonnell Douglas Astronautics Company. Prior to
that, he was the Assistant Secretary of the Army (Research and Development). Mr.
Johnson is a member of the Board Compensation Committee and Audit Committee.
John L. Piotrowski has served as a Board member since 1991. He is
currently a Corporate Vice President at Science Applications International
Corporation. Just prior to that, he was a private consultant and key participant
on many DoD advisory groups. Mr. Piotrowski was the Commander of the U.S. Air
Force Space Command and Vice Chief of Staff of the Air Force. He is the chairman
of the Board Compensation Committee and a member of the Board Audit Committee.
Mr. Piotrowski also serves as a director of National Systems and Research,
Contraves USA and Military Professional Resources.
Clarke E. Reynolds has served as a Board member since 1992. He is
retired from NCR Corporation where his last position with that company was Vice
President of NCR's European Operations from 1976 to 1981. At NCR, he was
involved in sales and marketing nationally and internationally. After retirement
from NCR, Mr. Reynolds served as President and CEO of Alpha Microsystems. Mr.
Reynolds is a member of the Board Audit Committee and Compensation Committee.
Mr. Reynolds also serves as Chairman of the Board of Directors of Alpha
Microsystems.
James B. Idell has been nominated as a Board member for shareholder vote
at the next stockholders' meeting on May 9, 1997. Mr. Idell has been nominated
to serve on the Company's Board of Directors pursuant to the SPARTA\SAIC Stock
Purchase Agreement dated November 1994. Mr. Idell is currently Senior Vice
President for Corporate Development at Science Applications International
Corporation ("SAIC") reporting directly to the Chief Executive Officer. He has
been in this position since 1984. Mr. Idell joined SAIC in January of 1977 and
has served as a systems analyst, system engineer and program manager supporting
various Air Force space programs. He has also served as Manager of Advanced
Programs for the Aerospace
17
<PAGE> 20
Systems Group in Los Angeles. Prior to joining SAIC, Mr. Idell spent three and
one-half years as an Air Force officer at the Space and Missile Systems
organization in Santa Monica.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company (hereinafter referred to as
the named executive officers) for fiscal 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
-------------------------------- ------------------------------------------------
Name Other
and Annual All Other
Principal Salary(1) Bonus(2) Compensation Options Compensation(3)
Position Year ($) ($) ($) (#) ($)
-------- ---- --------- -------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Wayne R. Winton 1996 176,600 80,000 15,400 3,564 15,800
Chief Executive 1995 182,700 31,500 15,900
Officer, Chairman 1994 197,300 13,100 1,851 16,400
Robert C. Sepucha 1996 155,900 70,000 8,300 5,899 22,500
Sector President 1995 141,300 57,400 8,457 22,500
1994 149,800 21,200 3,240 21,800
R. Stephen McCarter 1996 156,100 54,100 1,800 5,465 22,500
Sector President 1995 147,400 14,000 20,500
1994 144,900 4,624 100 4,088 22,500
Carl T. Case 1996 150,500 55,200 4,600 3,076 22,500
Sector President 1995 134,500 34,100 614 20,000
B. Warren Knudson 1996 109,200 25,100 820 19,600
Chief Financial Officer, 1995 104,000 21,900 0 15,700
Vice President 1994 104,200 5,900 624 17,000
</TABLE>
(1) Amounts shown include only cash compensation earned by executive
officers.
(2) Amounts shown include cash and non-cash compensation earned by executive
officers. The non-cash compensation, shown at fair market value, is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Winton $ 24,000 $ 6,000
Sepucha 21,000 16,900 $6,400
McCarter 16,230 4,200
Case 16,600 10,200
Knudson 7,500 6,600
</TABLE>
(3) The amounts shown in this column for the last fiscal year are Company
contributions to the Profit Sharing Plan.
18
<PAGE> 21
Stock Options. The Company's 1987 Nonqualified Stock Option Plan (the
"Option Plan") provides for the grant of stock options, stock bonuses or rights
to purchase up to an aggregate of 14,000,000 shares of the Company's authorized
but unissued Common Stock (subject to adjustment in the event of stock
dividends, stock splits, recapitalizations, mergers or other similar changes in
the Company's capital structure).
The Option Plan is currently administered by Wayne Winton, the Company's
Chief Executive Officer. However, the Board of Directors may at any time
designate another officer or other employee of the Company, the Board itself, or
a committee thereof, to act as administrator of the Option Plan. Subject to the
express provisions of the Option Plan, the Administrator has full authority to
interpret the Option Plan and to make all other determinations necessary or
advisable for the administration of the Option Plan.
Subject to the provisions of the Option Plan, the Administrator also has
full authority to determine the individuals to whom, and the time or times at
which, options, stock bonuses or rights to purchase are granted under the Option
Plan, and the number of shares to be subject to such options, stock bonuses, or
rights to purchase. However, pursuant to resolutions adopted by the Board of
Directors, approximately 90% of all stock options granted under the Option Plan
are currently granted based on a formula which is tied to financially recorded
gross profit. These options are allocated among individual employees based upon
their relative contributions to the award of the contract from which such gross
profit is derived. The remaining options granted under the Option Plan are
granted to new hires and to others based upon performance as determined by the
Company's management.
All employees of the Company are eligible to receive stock bonuses, stock
options and rights of purchase under the Option Plan; provided, however, that no
stock bonuses may be granted under the Option Plan to any person who, at the
time of the grant of the stock bonus, owns stock possessing 10% or more of the
total combined voting power of all classes of stock of the Company. Subject to
the foregoing, there is no limitation on the amount of stock bonuses, options or
rights to purchase which may be granted to any participant in the Option Plan.
The exercise price of stock options, and the purchase price of rights to
purchase, granted under the Option Plan to new employees of the Company in
connection with their hiring is the Formula Price as of the date of grant. The
exercise price of all other stock options and the purchase price of the shares
under all other rights to purchase granted under the Option Plan is the weighted
average of the Formula Price in effect during the six months ending on the date
of grant; provided, however, that the exercise price of any such option, and the
purchase price of the shares under any such right to purchase, granted to any
person who, at the time of such grant owns stock possessing 10% or more of the
total combined voting power of all classes of stock of the Company, may not be
less than 110% of the weighted average of the Formula Prices in effect during
the six months ending on the date of grant. The term of each stock option
granted under the Option Plan is determined by the Administrator at the time of
grant; provided, however, that the term may not exceed ten years from the date
of grant. No stock option granted under the Option Plan is transferable
otherwise than by will or the laws of descent and distribution. No stock bonus
or right to purchase granted under the Option Plan is transferable under any
circumstances.
All shares issued under the Option Plan are subject to restrictions on
transferability and the right of the Company to repurchase the shares upon the
termination of the stockholder's association with the Company. These transfer
restrictions and repurchase rights are set forth both in the Option Plan and in
the Company's Certificate of Incorporation.
During fiscal 1996, options covering a total of 471,277 shares were
granted under the Option Plan to a total of 362 employees of the Company. The
following table contains information concerning the grant of stock options under
the Option Plan to the named executive officers:
19
<PAGE> 22
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
- -------------------------------------------------------------------------------------- ------------------------------------
% of Total Market
Options Price
Name and Options Granted to Exercise or on Date
Principal Granted(A)(B) Employees Base Price of Grant Expiration
Position (#) in FiscalYear ($/Sh) ($/Sh) Date 0%($) 5%($) 10%($)
- ---------------------- ------------ ----------------------- ---------- ----------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wayne R. Winton 1,300 .28 4.98 4.48 6/28/00 - 605 2,053
Chief Executive 1,173 .25 5.53 5.35 1/3/01 - 1,141 2,701
Officer, Chairman
Robert C. Sepucha 3,060 .65 4.53 4.48 6/28/00 - 2,801 6,209
Sector President 4,312 .92 5.03 5.35 1/3/01 1,380 6,351 12,086
R. Stephen McCarter 2,110 .45 4.53 4.48 6/28/00 - 1,932 4,282
Sector President 92 .02 5.03 5.35 1/3/01 29 136 258
Carl T. Case 3,144 .67 4.53 4.48 6/28/00 - 2,878 6,380
Sector President 505 .11 5.03 5.35 1/3/01 162 744 1,415
B. Warren Knudson 576 .12 4.53 4.48 6/28/00 - 527 1,169
Chief Financial Officer, 2,558 .55 5.03 5.35 1/3/01 819 3,768 7,170
Vice President
</TABLE>
(A) Options granted in 1996 have a three-year vesting schedule as follows:
20% on the first anniversary of the date of grant, 30% on the second
anniversary and full vesting occurring on the third anniversary.
(B) The options were granted for a term of 4 years, subject to earlier
termination in certain events related to termination of employment.
Option Exercises and Holdings. The following table provides information,
with respect to the named executive officers, concerning the exercise of options
during the year and unexercised options held as of the end of the year:
OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised In-the-Money
Options at FY-End (Market Price
Value Realized Number of Unexercised of Shares at FY-End($5.20) Less
Shares (Market Price Options at FY-End(#) Exercise Price)($)
Name and Acquired at Exercise ------------------------------- -----------------------------
Principal on Exercise Less Exercise
Position (#) Price)($)(A) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ------------ ---------------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Wayne R. Winton
Chief Executive
Officer, President 3,564 1,533 3,979 5,886 $ 160 $ 2,964
Robert C. Sepucha
Sector President 5,899 5,132 7,751 15,641 680 14,186
R. Stephen McCarter
Sector President 5,465 2,375 9,120 6,309 0 6,430
Carl T. Case
Sector President 3,076 2,676 4,769 5,831 892 6,434
B. Warren Knudson
Chief Financial Officer
Vice President 820 713 3,161 4,950 3,603
</TABLE>
(A) Market value of underlying securities at exercise date or year-end, as
the case may be, minus the exercise or base price of "in-the-money"
options.
20
<PAGE> 23
Profit Sharing Plan. The Company has adopted and maintains a defined
contribution Profit Sharing Plan, which provides tax-qualified retirement
benefits to participating employees. All of the Company's employees are eligible
to participate in Company contributions to the Profit Sharing Plan, except those
employees in the Technical Services ("TS") business unit or in the Company's
wholly-owned subsidiary, CTI.
The amount of the Company's annual contribution to the Profit Sharing Plan
is determined by the Board of Directors, in its discretion. The Company has
established a target contribution which represents the amount the Company will
contribute if the Company's actual operating results meet certain guidelines.
The target contribution anticipates a contribution equal to the sum of (a) 15%
of the compensation paid to participants who have completed two years of
employment with the Company since December 31, 1989, (b) 10% of the compensation
paid to participants who have completed at least one but not more than two years
of employment with the Company, and (c) 5% of the compensation paid to
participants who have completed at least 1000 hours of service but less than one
year of employment with the Company. If the full target contribution is made by
the Company for any given year, each eligible participant in the Profit Sharing
Plan for that year receives an allocation to his or her account equal to the
percentage of such participant's compensation indicated above based on the
participant's length of service with the Company, subject to limitations on the
maximum amount of such contribution imposed by the Employee Retirement Income
Security Act of 1974 (ERISA). If the full target contribution is not made by the
Company for any given year, the Company's contribution is allocated among the
eligible participants based on their relative compensation for the year, subject
to any limitations imposed by ERISA, and provided, however, that the allocation
to each participant will not exceed the percentage of such participant's
compensation indicated above based on the length of the participant's service
with the Company. Up to 50% of the Company's annual contribution may be made in
the form of shares of the Company's Common Stock.
Employees in the Company's Technical Services ("TS") business unit and in
the wholly-owned subsidiary, CTI, are not eligible to receive Company
contributions to their Profit Sharing Plan accounts as described above. TS and
CTI employees may, however, elect to defer a portion of their compensation into
their accounts, up to the limits set by the Internal Revenue Service, and the
Company matches up to 20% of their deferrals in the form of fully vested SPARTA
Common Stock. Employees other than those in the TS business unit and CTI may
also elect to defer a portion of their compensation into their accounts in the
Profit Sharing Plan, but their contributions are not matched by the Company.
Jerry R. Fabian, a Vice President and the Chief Administrative Officer of
the Company, serves as Special Trustee of the Profit Sharing Plan, and in that
capacity is the record holder of the Company's Common Stock allocated to
employees' accounts in the Profit Sharing Plan.
Director Compensation
Directors who are not employees of the Company , one of its subsidiaries
or SAIC, receive fees of $2,000 per day for each Board meeting and Board
Committee meeting which they attend. In addition, each director who is not an
employee at the Company's fiscal year-end received stock options based upon
earnings of the Company for the year. Non-employee directors that chair Board
committees are awarded additional options. During 1996, 13,381 stock options
were awarded to outside Board directors and 26,627 stock options were awarded to
all Board directors as a group. The options become exercisable one year after
they are awarded and vest one year to three years from the date of grant and
expire in four years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 1, 1997, information
regarding the ownership of Common Stock by (i) each person known to the Company
to be the beneficial owner of more than 5% of the outstanding shares of the
Company's Common Stock, (ii) each of the directors of the Company who own Common
Stock, (iii) each of the named executive officers in the compensation tables,
and (iv) all executive officers and directors of the Company as a group:
21
<PAGE> 24
<TABLE>
<CAPTION>
Name and Address Number of Shares(1) Percentage of Class
- ---------------- ------------------- -------------------
<S> <C> <C>
Wayne R. Winton(2) 637,544 (3) 10.09%
Robert C. Sepucha 35,627 (4) 0.44%
R. Stephen McCarter 101,286 (5) 1.47%
Jerry R. Fabian 51,990 (6) .75%
B. Warren Knudson 223,358 (7) 3.51%
Robert J. Vickery, Jr. 303,792 (8) 4.80%
Carl T. Case 101,996 (9) 1.55%
John L. Allen 11,320(10) .15%
Robert L. Johnson 19,539(11) .29%
Rock N. Hankin 12,503(12) .16%
John L. Piotrowski 4,397(13) .04%
Clarke E. Reynolds 3,821(14) .04%
James B. Idell 0(15) 0%
All executive officers
and directors as a group
(13 persons named above) 2,149,239(16) 33.31%
</TABLE>
- -------------
*Less than 1%
(1) Except as set forth below, each of the persons included in the above
table has sole voting and investment power over the shares respectively
owned, except shares issuable upon exercise of stock options, and except
as to rights of the person's spouse under applicable community property
laws.
(2) The business address of Mr. Winton is c/o SPARTA, Inc., 23041 Avenida de
la Carlota, Suite 325, Laguna Hills, California 92653-15955
(3) Includes 68,060 shares held for Mr. Winton's account in the Company's
Profit Sharing Plan and 3,979 shares subject to options which may be
exercised within 60 days of February 1, 1997. Excludes 25,679 shares
held of record by Mary Frances Winton, an employee in the Company and
spouse of Wayne R. Winton, with respect to which shares Mr. Winton could
be deemed to share beneficial ownership.
(4) Includes 20,166 shares held in Mr. Sepucha's account in the Company's
Profit Sharing Plan and 7,751 shares subject to options which may be
exercised within 60 days of February 1, 1997.
(5) Includes 66,642 shares held in Mr. McCarter's account in the Company's
Profit Sharing Plan and 9,120 shares subject to options which may be
exercised within 60 days of February 1, 1997.
22
<PAGE> 25
(6) Includes 26,388 shares held in Mr. Fabian's account in the Company's
Profit Sharing Plan and 5,050 shares subject to options which may be
exercised within 60 days of February 1, 1997. Excludes all shares held
by Mr. Fabian as Special Trustee of the Company's Profit Sharing Plan,
as to which shares Mr. Fabian disclaims beneficial ownership.
(7) Includes 52,274 shares held in Mr. Knudson's account in the Company's
Profit Sharing Plan and 3,161 shares subject to options which may be
exercised within 60 days of February 1, 1997.
(8) The business address of Mr. Vickery is c/o SPARTA, Inc., 23041 Avenida
de la Carlota, Suite 325, Laguna Hills, CA 92653-1595. Excludes 42,719
shares of record by Joan D. Vickery, an employee of the Company and
spouse of Robert J. Vickery, Jr., with respect to which shares Mr.
Vickery could be deemed to share beneficial ownership. Includes 2,155
shares subject to options which may be exercised within 60 days of
February 1, 1997.
(9) Includes 48,869 shares held in Mr. Case's account in the Company's
Profit Sharing Plan and 4,769 shares subject to options which may be
exercised within 60 days of February 1, 1997.
(10) Includes 1,628 shares subject to options held by Mr. Allen which may be
exercised within 60 days of February 1, 1997.
(11) Includes 1,634 shares subject to options held by Mr. Johnson which may
be exercised within 60 days of February 1, 1997.
(12) Includes 2,442 shares subject to options held by Mr. Hankin which may be
exercised within 60 days of February 1, 1997.
(13) Includes 1,897 shares subject to options held by Mr. Piotrowski which
may be exercised within 60 days of February 1, 1997.
(14) Includes 1,321 shares subject to options held by Mr. Reynolds which may
be exercised within 60 days of February 1, 1997.
(15) Mr. Idell is a nominee director pursuant to the Board representation
provision in the SAIC Stock Purchase Agreement as further discussed in
Item 10. SAIC presently holds 569,039 shares of non-voting Preferred
Stock.
(16) Includes the shares referenced in footnotes (3) through (14) above.
Excludes all other shares held of record by Jerry Fabian, the Company's
Vice President and Chief Administrative Officer, as Special Trustee of
the Company's Profit Sharing Plan, as to which shares Mr. Fabian
disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an arrangement with a bank to allow each of the Company's
stockholders to make up to $250,000 in borrowings from the bank collateralized
by their Company stock. However, total borrowings outstanding under this
arrangement cannot exceed $1,500,000 at any point in time. In the event of a
stockholder's default under any of these loans, the Company has agreed to
purchase from the bank the stock held by it as collateral for an amount equal to
the outstanding principal and accrued interest on the loan. As of January 3,
1997, $20,650 in loans were outstanding under this arrangement
Pursuant to the terms of the SPARTA\SAIC Stock Purchase Agreement, SAIC
has acquired Preferred Stock as discussed in Part II, Item 5 of this 10-K. The
preferred stockholder ("SAIC") and the Company have entered into various
subcontract agreements whereby the preferred stockholder subcontracts to the
Company and vice versa. Amounts paid by the Company under such agreements were
$2,864,000 in 1996. The amounts received under such agreements were $718,000 in
1996. At December 31, 1996, the Company's accounts payable and accounts
receivable balances to and from the preferred stockholder were $60,000 and
$187,000, respectively.
23
<PAGE> 26
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report on
Form 10-K:
(1) Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS ..............................................................................F-2
FINANCIAL STATEMENTS
Consolidated Statement of Income for the three years ended
January 3, 1997..............................................................................................F-3
Consolidated Balance Sheet at January 3, 1997 and December 29, 1995.............................................F-4
Consolidated Statement of Stockholders' Equity for the three
years ended January 3, 1997..................................................................................F-5
Consolidated Statement of Cash Flows for the three years ended
January 3, 1997..............................................................................................F-6
Notes to consolidates Financial Statements......................................................................F-7
</TABLE>
(2) Financial Statement Schedules
All financial statement schedules are omitted because
they are not applicable or the required information is
shown in the Company's consolidated financial statements
or the notes thereto.
(3) The exhibits listed in the accompanying Index to
Exhibits at page 27 are filed as part of this report on
Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year covered by this report.
[Signature Page Follows]
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SPARTA, Inc.
March 27, 1997 By: ___________________________________________
Wayne R. Winton, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicates.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Wayne R. Winton Chairman of the Board, March 27, 1997
- ------------------------------------------ Chief Executive Officer and Director
Wayne R. Winton
/s/ Robert C. Sepucha Sector President and Director March 27, 1997
- ------------------------------------------
Robert C. Sepucha
/s/ R. Steve McCarter Sector President and Director March 27, 1997
- ------------------------------------------
R. Steve McCarter
/s/ Carl T. Case Sector President and Director March 27, 1997
- ------------------------------------------
Carl T. Case
/s/ Robert J. Vickery, Jr. Director March 27, 1997
- ------------------------------------------
Robert J. Vickery, Jr.
/S/ John L. Allen Director March 27, 1997
- ------------------------------------------
John L. Allen
/s/ Robert L. Johnson Director March 27, 1997
- ------------------------------------------
Robert L. Johnson
/s/ Rock N. Hankin Director March 27, 1997
- ------------------------------------------
Rock N. Hankin
/s/ John L. Piotrowski Director March 27, 1997
- ------------------------------------------
John L. Piotrowski
/s/ Clarke E. Reynolds Director March 27, 1997
- ------------------------------------------
Clarke E. Reynolds
/s/ B. Warren Knudson Vice President, Treasurer and Chief March 27, 1997
- ------------------------------------------ Financial Officer (Principal
B. Warren Knudson Accounting Officer)
/s/ Jerry R. Fabian Vice President, Secretary and March 27, 1997
- ------------------------------------------ Chief Administrative Officer
Jerry R. Fabian
</TABLE>
25
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
3.1(3) Restated Certificate of Incorporation of the Company
3.2(1) Bylaws of the Company, as currently in effect
3.3(1) Form of Certificate for Common Stock
10.1(2) Forms of Nonqualified Stock Option Agreement, Stock Bonus Agreement and Stock Purchase Agreement
for use under 1987 SPARTA, Inc. Nonqualified Stock Option Plan
10.2(2) SPARTA, Inc. Profit Sharing Plan - 1994 Restatement
10.3(1) Trust Agreement for the SPARTA, Inc. Profit Sharing Plan
10.4(1) Special Trust Agreement for SPARTA, Inc. Profit Sharing Plan
10.5(1) Office Lease, dated December 13, 1990, relating to the Company's Laguna Hills, California
facility
10.6(1) Lease, dated April 20, 1989, as amended, relating to the Company's San Diego, California
facility
10.7(1) Lease, dated as of March 27, 1990, as amended, relating to the Company's McLean, Virginia
facility
10.8(1) Lease, dated as of November 1, 1989, as amended, relating to the Company's Huntsville, Alabama
facility
10.9(1) Sublease, dated as of May 31, 1989, as amended, relating to the Company's Lexington,
Massachusetts facility
10.10(1) Third Amended and Restated Loan Agreement, dated December 8, 1993, between the Company and
Union Bank
10.12(1) Agreement dated July 11, 1989 between the Company and Union Bank, as amended
10.13(2) Agreement dated June 25, 1992 between the Company and Union Bank, as amended
10.14(3) Stock Purchase Agreement dated November 18, 1994 between the Company and Science Applications
International Corporation
10.15(4) Fourth Amended and Restated Loan Agreement, dated August 3, 1995, between the Company and Union
Bank
10.16(5) 1987 SPARTA, Inc. Nonqualified Stock Option Plan
22. The Company has one subsidiary, Commercial Technology Inc., (dba
SPARTA Marine Instrumentation), which is a wholly-owned subsidiary incorporated in
California
23. Consent of Price Waterhouse LLP
27. Financial Data Schedule
</TABLE>
(1) Incorporated herein by reference to the exhibit of the same number
contained in the Company's Registration Statement on Form S-18
(Commission File No. 33-440998-LA)
(2) Incorporated herein by reference to the exhibit of the same number
contained in the Company's report on Form 10K for the year ended
December 31, 1993
(3) Incorporated herein by reference to the exhibit of the same number
contained in the Company's report on Form 10-K for the year ended
December 30, 1994
(4) Incorporated herein by reference to the exhibit of the same number
contained in the Company's report on Form 10-K for the year ended
December 29, 1995.
(5) Option Plan was amended in September 1996
26
<PAGE> 29
SPARTA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS................................................................ F-2
FINANCIAL STATEMENTS(1)
Consolidated Statement of Income for the three years in the period ended December 31, 1996....... F-3
Consolidated Balance Sheet at December 31, 1996 and 1995......................................... F-4
Consolidated Statement of Stockholders' Equity for the three years in the
period ended December 31, 1996................................................................ F-5
Consolidated Statement of Cash Flows for the three years in the period ended
December 31, 1996............................................................................. F-6
Notes to Consolidated Financial Statements....................................................... F-7
</TABLE>
(1) See Note 1(d) to Consolidated Financial Statements.
All schedules for which provision is made in the
applicable regulation of the Securities and Exchange
Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted
F-1
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SPARTA, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
statements of income, of cash flows and of stockholders' equity present fairly,
in all material respects, the financial position of SPARTA, Inc. and its
subsidiary at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
- --------------------------
Price Waterhouse LLP
Costa Mesa, California
March 21, 1997
F-2
<PAGE> 31
CONSOLIDATED STATEMENT OF INCOME
for the years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
SALES $67,784,000 $62,074,000 $65,258,000
----------- ----------- -----------
COSTS AND EXPENSES:
Labor costs and related benefits 34,884,000 31,785,000 34,994,000
Subcontractor costs 17,148,000 14,952,000 14,676,000
Facility costs 7,122,000 7,460,000 8,212,000
Travel and other 3,325,000 4,356,000 3,808,000
Loss on sale of subsidiary (Note 1) 695,000
Interest expense, net 22,000 439,000 556,000
----------- ----------- -----------
TOTAL COSTS AND EXPENSES 62,501,000 59,687,000 62,246,000
----------- ----------- -----------
INCOME BEFORE PROVISION FOR TAXES ON INCOME 5,283,000 2,387,000 3,012,000
PROVISION FOR TAXES ON INCOME (Note 7) 2,200,000 1,002,000 1,264,000
----------- ----------- -----------
NET INCOME $ 3,083,000 $ 1,385,000 $ 1,748,000
=========== =========== ===========
EARNINGS PER COMMON SHARE (Note 1) .42 .22 .28
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-3
<PAGE> 32
CONSOLIDATED BALANCE SHEET
at December 31
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 151,000 $ 222,000
Accounts receivable (Note 2) 21,160,000 19,744,000
Prepaid expenses 306,000 357,000
Income tax receivable 57,000
------------ ------------
TOTAL CURRENT ASSETS 21,617,000 20,380,000
EQUIPMENT AND IMPROVEMENTS, NET (Notes 1 & 3) 6,028,000 5,757,000
OTHER ASSETS (Note 4) 1,409,000 2,525,000
------------ ------------
TOTAL ASSETS $ 29,054,000 $ 28,662,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation (Note 5) $ 3,871,000 $ 2,766,000
Accounts payable and other accrued expenses 3,320,000 4,261,000
Current portion of notes payable (Note 6) 461,000 19,000
Current portion of subordinated notes payable
(Note 6) 640,000 1,209,000
Income taxes payable 466,000
Deferred income taxes (Note 7) 2,849,000 2,649,000
------------ ------------
TOTAL CURRENT LIABILITIES 11,607,000 10,904,000
NOTES PAYABLE (Note 6) 953,000
SUBORDINATED NOTES PAYABLE (Note 6) 1,090,000 1,735,000
DEFERRED INCOME TAXES (Note 7) 2,828,000 4,125,000
COMMITMENTS AND CONTINGENCIES (Note 8)
REDEEMABLE PREFERRED STOCK, $.01 par value;
2,000,000 shares authorized; 569,039 and
376,474 shares issued and outstanding;
original issuance value of $2,400,000
and $1,500,000 at 1996 and 1995,
respectively (Note 1) 3,044,000 1,535,000
STOCKHOLDERS' EQUITY (Notes 1 and 9)
Common stock, $.01 par value;
25,000,000 shares authorized;
12,376,781 and 11,754,560 shares issued 124,000 118,000
Additional paid-in capital 22,229,000 19,823,000
Retained earnings 20,929,000 18,455,000
Treasury stock (32,797,000) (28,986,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,485,000 9,410,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 29,054,000 $ 28,662,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-4
<PAGE> 33
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended December 31
<TABLE>
<CAPTION>
Additional Loans to
Common Stock Paid-in Stock- Retained Treasury
Shares Amount Capital holders Earnings Stock Total
---------- -------- ----------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 10,654,533 $ 107,000 $ 15,204,000 $(2,000) $15,357,000 ($18,998,000) $11,668,000
Issuance of common stock 642,568 6,000 2,673,000 2,679,000
Loan payments from stockholders 2,000 2,000
Acquisition of treasury stock (7,021,000) (7,021,000)
Tax benefit relating to stock plan 126,000 126,000
Net income 1,748,000 1,748,000
---------- -------- ----------- ------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1994 11,297,101 113,000 18,003,000 17,105,000 (26,019,000) 9,202,000
Issuance of common stock 457,459 5,000 1,820,000 1,825,000
Acquisition of treasury stock (2,967,000) (2,967,000)
Accretion of redeemable
preferred stock (35,000) (35,000)
Net income 1,385,000 1,385,000
---------- -------- ----------- ------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1995 11,754,560 118,000 19,823,000 18,455,000 (28,986,000) 9,410,000
Issuance of common stock 622,221 6,000 2,344,000 2,350,000
Acquisition of treasury stock (3,811,000) (3,811,000)
Accretion of redeemable
preferred stock (609,000) (609,000)
Tax benefit relating to stock plan 62,000 62,000
Net income 3,083,000 3,083,000
---------- -------- ----------- ------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1996 12,376,781 $124,000 $22,229,000 $20,929,000 ($32,797,000)$ 10,485,000
========== ======== =========== ======= =========== ============ =============
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-5
<PAGE> 34
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,083,000 $ 1,385,000 $ 1,748,000
Adjustments to reconcile net income to net
cash provided by operating activities, net of acquisition:
Depreciation and amortization 1,536,000 1,729,000 1,805,000
Loss on sale of equipment 294,000 103,000 444,000
Employee compensation paid in stock 1,571,000 1,484,000 1,565,000
Change in assets and liabilities:
Accounts receivable (1,416,000) 1,404,000 1,897,000
Prepaid expenses 51,000 209,000 1,934,000
Income tax receivable 57,000 (57,000) 857,000
Other assets 1,116,000 365,000 (246,000)
Accrued compensation 1,105,000 304,000 743,000
Accounts payable and other accrued expenses (941,000) 328,000 457,000
Income taxes payable 466,000 (881,000) 881,000
Deferred income taxes (1,097,000) (975,000) (1,210,000)
Tax benefit relating to stock plan 62,000 126,000
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,887,000 5,398,000 11,001,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,101,000) (1,042,000) (1,173,000)
Proceeds from sale of equipment 317,000
Cost of acquisition, net of cash acquired (150,000)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,101,000) (1,042,000) (1,006,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable preferred stock 900,000 1,200,000 300,000
Proceeds from issuance of common stock 779,000 341,000 1,116,000
Purchases of treasury stock (3,811,000) (2,967,000) (2,601,000)
Net (repayments) borrowing under line-of-credit agreement (405,000) (1,361,000) (7,678,000)
Principal payments on debt (1,320,000) (1,469,000) (2,172,000)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (3,857,000) (4,256,000) (11,035,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (71,000) 100,000 (1,040,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 222,000 122,000 1,162,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 151,000 $ 222,000 $ 122,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 138,000 $ 461,000 $ 552,000
------------ ------------ ------------
Income taxes $ 2,672,000 $ 2,896,000 $ 613,000
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-6
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a) Description of business - SPARTA, Inc. (The "Company"), is essentially
employee-owned and primarily engaged in the design and analysis of systems
for national defense programs and commercial applications of defense
technology.
b) Principles of consolidation - The consolidated financial statements include
the accounts of SPARTA, Inc. and its wholly-owned subsidiary. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
c) Use of estimates in preparation of financial statements. - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect (1) the reported amounts of assets and liabilities, (2) disclosure
of contingent assets and liabilities at the date of the financial
statements, and (3) the reported amounts of revenues and expenses during
the respective reporting periods. Actual results could differ from those
estimates.
d) Fiscal Year - The Company's fiscal year is the 52 or 53 week period ending
on the Friday closest to December 31. The Company's last three fiscal years
ended on January 3, 1997, December 29, 1995, and December 30, 1994;
however, to aid the reader of the financial statements, the year ends have
been presented as December 31, 1996, 1995 and 1994.
e) Sales - Sales are primarily recorded using the percentage of completion
method and are based on contract costs incurred to date compared with total
estimated costs at completion. To the extent costs at completion are
estimated to exceed contract price, charges are made to current earnings in
the period in which this is first determined. Sales for the years ended
December 31, 1996, 1995 and 1994, were primarily generated through direct
or indirect sales to U.S. government agencies.
f) Property and equipment - Property and equipment are recorded at cost and
are depreciated or amortized using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Office furniture and equipment 5-15 years
Automotive equipment 3-5 years
Leasehold improvements up to 10 years
Capitalized Software 5-10 years
</TABLE>
g) Income taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes" which requires the recognition of deferred tax liabilities and
assets for expected future tax consequences of temporary differences
between the financial statement and tax basis of assets and liabilities at
the applicable enacted tax rates.
h) Statement of cash flows - For the purpose of the statement of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Repurchases of common stock included issuances of notes payable of $0, $0
and $4,420,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
i) Redeemable preferred stock - The Company's redeemable preferred stockholder
has the option to require the Company to repurchase all of the preferred
shares (the "Put") at the common stock formula price as further discussed
below. Redeemable preferred stock activity for the periods indicated are as
follows:
<TABLE>
<CAPTION>
Shares Amount
---------- ----------
<S> <C> <C>
Balance at December 31, 1993 -- $ --
Issuance of redeemable preferred stock 76,727 300,000
---------- ----------
Balance at December 31, 1994 76,727 300,000
Issuance of redeemable preferred stock 299,747 1,200,000
Accretion on redeemable preferred stock 35,000
---------- ----------
Balance at December 31, 1995 376,474 1,535,000
Issuance of redeemable preferred stock 192,565 900,000
Accretion on redeemable preferred stock 609,000
---------- ----------
Balance at December 31, 1996 569,039 $3,044,000
========== ==========
</TABLE>
The Put may be exercised by the stockholder by written notice provided,
however, that the Put may not be exercised as to less than all of the
shares then owned by the shareholder. The Put terminates on November 18,
2004.
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of preferred
stock then outstanding shall be entitled to be paid a liquidation
preference out of the assets of the Company
F-7
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
available for distribution to preferred stock shareholders before any
payment is made to common stockholders. The liquidation preference is the
amount equal to the weighted average price per share paid to the Company
upon the original issuance of all preferred shares outstanding as of the
date of liquidation. The holders of preferred stock shall not have voting
rights to vote on the election of Directors or to vote on any other matter
which may be the subject to stockholder action. Each share of redeemable
preferred stock is automatically convertible into one share of the
Company's common stock upon the closing of the first underwritten public
offering by the Company or in the event of any merger or consolidation of
the Company with or into any other entity in which the Company is not the
surviving corporation.
The preferred stockholder and the Company have entered into various
subcontract agreements whereby the preferred stockholder subcontracts to
the Company and visa versa. Amounts paid by the Company under such
agreements were $2,864,000, $1,515,000 and $269,000 for the years ended
1996, 1995 and 1994, respectively. The amounts received under such
agreements were $718,000, $1,154,000 and $3,936,000 for the years ended
1996, 1995 and 1994, respectively. At December 31, 1996, the Company's
accounts payable and accounts receivable balances to and from the preferred
stockholder were $60,000 and $187,000, respectively.
j) Acquisition and divestiture - Effective January 1, 1994, the Company
acquired substantially all of the assets of Accounting Computer Technology
("ACT") for $150,000 cash and a $150,000 promissory note. ACT provides
accounting software and related consulting services. The acquisition was
accounted for as a purchase and the excess of the purchase price over the
net assets acquired was approximately $265,000.
Effective May 22, 1995, the Company sold the net assets of ACT to certain
of ACT's management. The resulting loss on the disposition totaled
approximately $695,000. ACT revenues and pre-tax operating losses included
in the operations of the Company in 1995 were $574,000 and $352,000,
respectively.
k) Treasury Stock - Treasury stock is shown at cost, and at December 31, 1996,
1995 and 1994, consists of 6,529,181, 5,722,111 and 4,980,049 shares,
respectively, of common stock. During May 1993, 6,434,787 treasury shares
were retired.
Repurchases of outstanding stock by the Company in exercise of its right of
repurchase upon termination of employment (as defined) are made on a
formula basis. The stock price is recalculated quarterly by management
using a formula approved by the Board of Directors. In accordance with the
preferred stock purchase agreement, the Company's stock price is evaluated
annually by an independent valuation firm. Calculated stock prices at
valuation dates are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
January 21 $ 4.66 $ 4.05 $ 4.82
April 21 4.48 3.84 4.51
July 21 4.90 3.95 4.16
October 21 5.35 4.19 3.91
</TABLE>
l) Earnings per share - Earnings per share are computed based upon the
weighted average number of common shares outstanding during the respective
years. Common stock equivalents including dilutive stock options and
redeemable preferred stock are added to weighted average shares outstanding
for calculating earnings per share, unless consideration of accretion on
redeemable preferred stock results in a more dilutive effect. For the year
ended December 31, 1996, accretion of $609,000 was deducted from net income
in calculating earnings per share. Shares used in computing earnings per
share were 5,898,069 which excludes the weighted average redeemable
preferred shares of 505,645. For the year ended December 31, 1995, shares
used in the computation of earnings per share were 6,401,069 which includes
the weighted average number of redeemable preferred shares of 196,298 since
this produced a more dilutive effect. For the year ended December 31, 1994,
shares used in the computation of earnings per share were 6,351,021. The
effect of the original issuance of 76,727 shares of redeemable preferred
stock in November 1994 was not material to earnings per share for the year
ended December 31, 1994.
m) Disclosures about fair value of financial instruments - The following
assumptions were used to determine the fair value of each class of
financial instruments. The carrying amount of cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities approximates
fair value because of the short maturity of those instruments. The carrying
value of the Company's notes payable approximates fair value based upon
current rates
F-8
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
offered to the Company for obligations with similar remaining maturities.
n) Long-Lived Assets - In March 1995, Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" was issued. SFAS No.
121 required that long-lived assets and certain identifiable intangibles to
be held and used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. During 1996, the Company adopted
this statement and the effect of adoption in 1996 was not material.
o) Accounting for Stock-Based Compensation - The Company accounts for employee
stock based compensation in accordance with Accounting Principles Board
Opinion No. 25 and related interpretations. The disclosures required by
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), have been included in Note 9.
- ----------------------------
Note 2 - Accounts Receivable
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Accounts receivable $ 8,664,000 $ 8,490,000
Accounts receivable - unbilled 12,866,000 11,571,000
Other receivables 361,000 404,000
Less allowance for doubtful
accounts (731,000) (721,000)
------------ ------------
$ 21,160,000 $ 19,744,000
============ ============
</TABLE>
The Company has a concentration of its receivables with U.S. Government agencies
or companies who perform work for U.S. Government agencies. The Company believes
that the credit risk associated with these receivables is minimal.
Unbilled receivables consist primarily of revenues recognized on government
contracts for which billings have not yet been presented. In January 1997 and
1996, $7,760,000 and $5,632,000, respectively, of the unbilled amounts for the
prior year end were billed. Contract costs for certain contracts, including
applicable indirect costs, are subject to audit and adjustment by negotiations
between the Company and U.S. Government representatives. Revenues for such
contracts have been recorded in amounts that are expected to be realized on
final settlement.
Claimed costs associated with terminated contracts, costs incurred in advance of
contract funding and estimated award fees, included in unbilled accounts
receivable, amounted to $1,287,000 and $1,367,000 at December 31, 1996 and 1995,
respectively. These amounts may not be fully recoverable; however, the Company
does not expect to sustain losses of any significant consequence with respect to
such costs.
- ----------------------------
Note 3 - Equipment and Improvements
Equipment and improvements are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Office furniture and equipment $ 14,452,000 $ 14,728,000
Automotive equipment 9,000 9,000
Leasehold improvements 1,446,000 835,000
Capitalized software 597,000 562,000
------------ ------------
16,504,000 16,134,000
Less accumulated depreciation
and amortization (10,476,000) (10,377,000)
------------ ------------
$ 6,028,000 $ 5,757,000
============ ============
</TABLE>
- ----------------------------
Note 4 - Other Assets
Other assets are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Contract retentions $1,189,000 $2,379,000
Deposits 102,000 73,000
Other 118,000 73,000
---------- ----------
$1,409,000 $2,525,000
========== ==========
</TABLE>
- ----------------------------
F-9
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Accrued Compensation
Accrued compensation is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accured bonus payable $1,517,000 $ 860,000
Accrued profit sharing 363,000 592,000
Accrued payroll 1,991,000 1,314,000
---------- ----------
$3,871,000 $2,766,000
========== ==========
</TABLE>
- -----------------------------
Note 6 - Notes Payable
Notes payable is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Bank line of credit, secured by
accounts receivable and certain
fixed assets; interest at prime
(8.25% at December 31, 1996) $ 461,000 $ 866,000
Other notes payable 106,000
--------- ---------
461,000 972,000
Less-current portion (461,000) (19,000)
--------- ---------
-- $ 953,000
========= =========
</TABLE>
At December 31, 1996, the bank line of credit provided borrowings up to $10.0
million with all borrowings due December 1, 1997. Accordingly, the line of
credit has been classified as short-term. The line of credit agreement requires
the Company to maintain certain financial ratios. The Company was in compliance
with such requirements at December 31, 1996.
At December 31, 1996 and 1995, the Company had 9 and 19, respectively,
outstanding unsecured notes payable which are subordinated to the bank arising
from repurchases of the Company's stock. The following notes payable accrue
interest at the lesser of the bank's prime rate, the Federal Reserve discount
rate or 10%, (5.25% at December 31, 1996).
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Subordinated notes payable $ 1,730,000 $ 2,944,000
Less: Current portion (640,000) (1,209,000)
----------- -----------
$ 1,090,000 $ 1,735,000
=========== ===========
</TABLE>
The maturities of notes payable during each fiscal year are as follows: 1997 -
$1,101,000, 1998 - $455,000, 1999 - $368,000, 2000 - $267,000 and 2001 - $0.
- ----------------------------
Note 7 - Income Taxes
The provision (benefit) for taxes on income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 2,651,000 $ 1,657,000 $ 1,729,000
State 584,000 320,000 619,000
----------- ----------- -----------
3,235,000 1,977,000 2,348,000
----------- ----------- -----------
Deferred:
Federal (974,000) (793,000) (760,000)
State (123,000) (182,000) (450,000)
----------- ----------- -----------
(1,097,000) (975,000) (1,210,000)
----------- ----------- -----------
Exercise of stock
options not treated
as a reduction of
income tax
expense 62,000 126,000
----------- ----------- -----------
$ 2,200,000 $ 1,002,000 $ 1,264,000
=========== =========== ===========
</TABLE>
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accelerated depreciation $ 655,000 $ 866,000
Unbilled accounts receivable 2,211,000 2,990,000
Reserves (337,000) (280,000)
Accrued compensation and benefits (1,057,000)
Cash to accrual basis election 3,252,000 4,346,000
Other (104,000) (91,000)
----------- -----------
$ 5,677,000 $ 6,774,000
=========== ===========
</TABLE>
During 1994 the Company changed its tax basis of accounting from the cash method
under a Qualified Personal Service Corporation to the accrual method.
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
F-10
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes
at statutory rate $1,796,000 $ 812,000 $1,057,000
State income taxes,
net of federal income tax
benefit 233,000 91,000 148,000
Other 171,000 99,000 59,000
---------- ---------- ----------
$2,200,000 $1,002,000 $1,264,000
========== ========== ==========
</TABLE>
The exercise of stock options represents tax benefits reflected as reductions of
taxes currently payable, however, they are not treated as a reduction of income
tax expense for financial reporting purposes.
- ----------------------------
Note 8 - Commitments and Contingencies
The Company leases its facilities and certain equipment under operating leases.
Some of the leases contain renewal options, escalation clauses and requirements
that the Company pay taxes, maintenance and insurance costs. Rent expense under
the operating leases was $3,187,000, $3,497,000 and $3,608,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Future minimum lease commitments under operating leases at December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Fiscal
Year Ending
-------------
<S> <C>
1997 $ 2,814,000
1998 2,009,000
1999 1,522,000
2000 1,040,000
2001 654,000
Thereafter 709,000
------------
$ 8,748,000
============
</TABLE>
The Company has an arrangement with a bank to allow stockholders to borrow up to
$250,000 for Company stock purchases. The bank borrowings are collateralized by
the stock. Total collateralized borrowings for all outstanding loans cannot
exceed $1,500,000. In the event of default, the Company has agreed to purchase
the stock back from the bank for an amount equal to the outstanding principal
and accrued interest. At December 31, 1996 and 1995, $21,000 and $30,000,
respectively, in loans were outstanding under this arrangement.
The Company is subject to certain legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, based in part
on the opinion of counsel, the ultimate outcome of such matters will not have a
material impact on the Company's financial position or results of operations.
- ----------------------------
Note 9 - Stock Options and Benefit Plans
The Company has a stock option plan that authorizes the granting of options to
employees and directors to purchase unissued common stock subject to certain
conditions, such as continued employment. Options are generally granted at the
current stock price of the Company's common stock at the date of grant, become
exercisable one year to three years from the date of grant, and expire in four
years. Changes during the years ended December 31, 1996, 1995 and 1994 under the
plan were as follows:
<TABLE>
<CAPTION>
Weighted-
Avg. Exercise Total
Number of Price per Option
Shares Share Value
--------- -------- ------------
<S> <C> <C> <C>
December 31, 1993 2,676,225 $ 5.15 $ 13,795,000
Granted 561,799 4.39 2,466,000
Canceled (642,843) 5.09 (3,270,000)
Exercised (287,462) 3.78 (1,087,000)
--------- -------- ------------
December 31, 1994 2,307,719 5.16 11,904,000
Granted 513,485 3.99 2,051,000
Canceled (843,809) 4.95 (4,173,000)
Exercised (84,750) 4.02 (341,000)
--------- -------- ------------
December 31, 1995 1,892,645 4.99 9,441,000
Granted 507,051 4.84 2,456,000
Canceled (488,994) 6.03 (2,951,000)
Exercised (273,213) 4.14 (1,132,000)
--------- -------- ------------
December 31, 1996 1,637,489 $ 4.77 $ 7,814,000
========= ======== ============
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, options on 447,027,
472,020 and 540,911 shares, respectively, were granted based primarily on
employee success at obtaining new and follow-on business during the year. Prior
to 1991, the number of options earned was based primarily on a formula tied to
an annualized funded value of contract awards. In 1991 and thereafter, options
are earned primarily based on a formula tied to financial recorded gross profit.
Approximately 10% of all option grants are given to new hires and staff based
upon performance as determined at the discretion of management.
The following information applies to options outstanding and exercisable at
December 31, 1996:
F-11
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Options outstanding at December 31, 1996
- ------------------------------------------------------------------
Range Weighted- Weighted-Avg.
of Exercise Number Average Remaining
Prices Outstanding Exercise Price Contractual Life
- -------------- -------------- ---------------- ------------------
<S> <C> <C> <C>
$5.20-$6.32 377,577 $ 5.91 1 Year
$3.91-$5.20 374,476 $ 4.39 2 Years
$3.84-$4.19 413,218 $ 4.00 3 Years
$4.19-$5.35 472,218 $ 4.84 4 Years
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable at December 31, 1996
- -------------------------------------------------------------
Range Weighted-
of Exercise Number Average
Prices Exercisable Exercise Price
- -------------- ------------ ------------------
<S> <C> <C>
$5.20-$6.32 377,577 $ 5.91
$3.91-$5.20 185,188 $ 4.19
$3.84-$4.19 81,077 $ 4.03
$4.19-$5.35 10,940 $ 4.97
</TABLE>
There have been no charges to income in connection with the issuance of options.
Upon exercise, proceeds from the sale of shares under the stock option plan are
credited to common stock and additional paid-in capital. The Company accounts
for its stock option plan pursuant to APB Opinion No. 25. Had compensation
expense for these plans been determined consistent with SFAS 123, the Company's
net income and net income per share would have been reduced to the pro forma
amounts in the following table. Because the SFAS 123 method of accounting has
not been applied to options prior to December 31, 1994, the resulting pro forma
compensation costs may not be representative of that to be expected in future
years.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
Net income As reported 3,083,000 1,385,000
Pro Forma 2,979,000 1,281,000
Earnings per As reported 0.42 0.22
share Pro Forma 0.40 0.20
</TABLE>
The fair value of each option is estimated at the time of grant as its minimum
value which is calculated by subtracting the present value of the option
exercise price over the expected option term from the stock price at the date of
grant. Present values were calculated using weighted average risk free interest
rates of 6.5% for 1996 and 6.8% for 1995 and a weighted-average expected life of
2.2 years for 1996 and 1995. The weighted-average fair value of options granted
during 1996 and 1995 was $0.61 and $0.57, respectively.
During 1996 and 1995, the Company repriced certain options granted in 1991 and
1992 at exercise prices ranging between $4.17 and $6.03 per share for all
current employees. The adjusted exercise price per share for each option
approximated the then current formula price. No compensation expense was
recorded as a result of the option repricings.
At December 31, 1996, 1995 and 1994 there were options outstanding at prices
ranging from $3.84 to $6.32, $3.84 to $6.82 and $3.91 to $5.96, respectively,
with expiration dates through 2000. Of the options outstanding at December 31,
1996, 1995 and 1994, options to purchase 654,782, 590,527 and 877,108 shares,
respectively, were immediately exercisable at prices ranging from $3.84 to
$6.32, $3.84 to $6.82 and $3.91 to $6.82, per share, respectively.
As of December 31, 1996, 1995 and 1994, 10,974,264, 11,341,329 and 11,689,703
shares, respectively, were reserved for future issuances under the stock option
plan.
The Company also sponsors a restricted stock compensation plan designed to
provide long-term incentive to key employees by making deferred awards of SPARTA
stock which become fully vested after a five year period. Shares are forfeited
if the participant leaves the Company prior to vesting. During 1996, 30,041
shares of restricted stock were granted at a price of $4.66 per share.
Compensation expense of $26,000 was recognized in 1996.
The Company pays a portion of annual bonuses in the form of stock. For the years
ended December 31, 1996, 1995 and 1994, 74,437, 54,146 and 47,219 shares
totaling $442,000, $252,000 and 191,000, respectively were issued under the
plan.
The Company has a defined contribution retirement plan for all eligible
employees except employees in the Technical Systems Division. The Company's
contributions for this plan for the years ended December 31, 1996, 1995 and 1994
were $2,617,000, $2,684,000 and $2,918,000 respectively. A portion of the
contributions to the plan were in the form of common stock. For the years ended
December 31, 1996, 1995 and 1994, 267,644, 319,782 and 304,609 shares, totaling
$1,286,000, $1,279,000 and $1,326,000, respectively, were contributed to the
plan.
F-12
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company offers eligible employees in its Technical Services and Tactical
Systems Division the option to contribute to a deferred compensation 401(k)
plan. Prior to 1991, the Company made no contributions to the plan. In 1991 and
thereafter, the Company made a matching contribution of Company stock of 20% of
the employee contributions. For the years ended December 31, 1996, 1995 and
1994, 6,891, 5,708 and 8,234 shares, totaling $34,000, $23,000 and $35,000
respectively, were contributed to the plan.
F-13
<PAGE> 1
1987 NONQUALIFIED STOCK OPTION
PLAN OF SPARTA, INC.
(Amended and Restated as of August __, 1996)
1. OBJECTIVES OF THE PLAN
The Plan is intended to encourage ownership of Common Stock of Sparta,
Inc., a Delaware corporation (the "Corporation"), by key employees and directors
who contribute to the success of the Corporation. By extending to such persons
the opportunity to achieve a proprietary interest in the Corporation and to
participate in its success, the Plan may be expected to benefit the Corporation
and its shareholders by making it possible to attract and retain the best
available talent and by providing incentives for employees and directors to
exert their best efforts to increase the value of the stock of the Corporation.
2. STOCK RESERVED FOR THE PLAN
The total number of shares of the Common Stock of the Corporation reserved
for issuance under the Plan shall not exceed 14,000,000 shares. Such shares
shall be comprised of authorized but unissued shares of the Corporation's Common
Stock, and/or Treasury shares. The limitation established by the first sentence
of this Article 2 shall be subject to adjustment as provided in Article 16
below. If any option granted under the Plan expires or terminates for any
reason without being exercised in full, then the unpurchased shares subject
thereto shall again be available for the grant of new options or the issuance of
new stock bonuses or rights to purchase under the Plan.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Chief Executive Officer of the
Corporation.(1) Subject to the express provisions of the Plan, the
Administrator shall have full authority, in his or its discretion, to determine
the individuals to whom, and the time or times at which, options, stock bonuses
or rights to purchase shall be granted under the Plan, and the number of shares
to be subject to such options, stock bonuses or rights to purchase. In making
such determinations, the Administrator may take into account the nature of the
services rendered by persons the Administrator deems eligible hereunder, and
such other
__________________________________
(1) The Board of Directors may at any time designate an officer or other
employee of the Corporation, the Board itself, or a committee thereof, to
act as Plan administrator pursuant to Section 3 in place of the Chief
Executive Officer. The Chief Executive Officer or other individual or
group administering the Plan pursuant to the immediately preceding sentence
shall hereinafter be referred to as the "Administrator".
<PAGE> 2
factors as the Administrator in his or its discretion shall deem relevant.
Subject to the express provisions of the Plan, the Administrator shall also
have full authority to interpret the Plan and to make all other determinations
necessary or advisable for the administration of the Plan.
Each option granted under the Plan shall be evidenced by a written option
agreement in such form as the Administrator shall deem appropriate.
4. PLAN DURATION
All stock options, stock bonuses and rights to purchase granted under the
Plan must be granted no later than December 31, 1997.
5. PARTICIPATION
Options, stock bonuses and rights to purchase may be granted only to
full-time or near full-time, non-temporary employees of the Corporation, and
members of the Corporation's Board of Directors, as selected by the
Administrator. However, options, stock bonuses and rights to purchase may be
granted to full-time employees in recognition of contributions previously made
while such persons were part-time employees or consultants of the Corporation.
Stock bonuses may not be granted under the Plan to any person who, at the time
of the grant of the stock bonus, owns stock possessing 10% or more of the total
combined voting power of all classes of stock of the Corporation.
6. EXERCISE AND PURCHASE PRICE, DETERMINATION OF FAIR MARKET VALUE, AND
NOTICE, ETC.
(a) Exercise Price. During such times as there is not a market price
available with respect to the Corporation's Common Stock, the exercise price of
each option granted and the purchase price of shares for which rights to
purchase are offered under the Plan shall be an amount equal to the weighted
average of the Formula Price (as such term is defined below) during the
six-month period ending on the date the option is granted or the right of
purchase is offered; provided, however, that the exercise price of any option
granted, and the purchase price of shares under any right of purchase offered,
to any person who, at the time of grant of the option or offer of the right of
purchase, owns stock possessing 10% or more of the total combined voting power
of all classes of stock of the Corporation, shall not be less than 110% of the
weighted average of the Formula Price during the six-month period ending on the
date of grant of the option or offer of the right of purchase. During such
times as there is a market price available with respect to the Corporation's
Common Stock, the exercise price of each option
- 2 -
<PAGE> 3
granted and the purchase price of shares for which rights to purchase are
offered under the Plan shall be an amount equal to the weighted average of the
fair market value of the Corporation's Common Stock during the six-month period
ending on the date the option is granted or the right of purchase is offered;
provided, however, that the exercise price of any option granted, and the
purchase price of shares under any right of purchase offered, to any person
who, at the time of grant of the option or offer of the right of purchase, owns
stock possessing 10% or more of the total combined voting power of all classes
of stock of the Corporation, shall not be less than 110% of the weighted
average of the fair market value of the Corporation's Common Stock during the
six-month period ending on the date of grant of the option or offer of the
right of purchase. Notwithstanding the foregoing, the exercise price of each
option granted and the purchase price of shares for which rights to purchase
are offered under the Plan to an employee of the Corporation or any subsidiary
in connection with the initial full-time employment of such employee, and the
exercise price of any option granted to a new director shall be an amount equal
to the fair market value of the Corporation's Common Stock on the date of grant
of the option or offer of the right of purchase. The exercise price of options
granted and the purchase price of shares subject to rights of purchase offered
under the Plan shall be subject to adjustment as provided in Article 16 below.
(b) Determination of Fair Market Value. Whenever for purposes of this
Plan the fair market value of the Common Stock of the Corporation is to be
determined as of a specific date, the fair market value shall, if the Common
Stock is not listed or admitted to trading on a stock exchange, be the average
of the closing bid price and asked price of the Common Stock in the
over-the-counter market on such date or, if the Common Stock is then listed or
admitted to trading on any stock exchange, the closing sale price on such date
on the principal stock exchange on which the Common Stock is then listed or
admitted to trading. If no closing bid and asked prices are quoted on such
date, or if no sale takes place on such date on such principal exchange, as the
case may be, then the closing sale price of the Common Stock on such exchange on
the next preceding date on which a sale occurred, or the average of the closing
bid and asked prices on the next preceding date on which such prices are quoted,
as the case may be, shall be the fair market value of the stock. During such
times as there is not a market price available, the fair market value of the
Corporation's Common Stock shall be an amount equal to the Formula Price in
effect on the date in question.
(c) Formula Price. As used in this Plan, the term "Formula Price" shall
mean the price determined pursuant to the formula adopted by the Board of
Directors of the Corporation for the purpose of determining the fair market
value of the Corporation's
- 3 -
<PAGE> 4
Common Stock, as such formula may be modified from time to time by the Board of
Directors.
(d) Notice, Etc. All persons to whom options, stock bonuses or rights to
purchase have been granted under the Plan during a fiscal year shall be notified
of such grants within 60 days following the end of that fiscal year. Such
notices will identify the number of shares subject to each option, stock bonus
or right of purchase granted, the date of grant of the same, and the exercise or
purchase price thereof. The exercise price of each option granted and the
purchase price of each right to purchase offered under the Plan shall be paid in
full in cash upon the exercise of the same. The proceeds of sale of stock
subject to options or rights to purchase are to be added to the general funds of
the corporation and used for its corporation purposes as the Board of Directors
shall determine.
7. TERM OF OPTIONS
The term of each option granted under the Plan shall not be more than ten
years from the date of grant, subject to earlier termination as hereinafter
provided.
8. EXERCISE OF OPTIONS; VESTING
(a) Vesting, Etc. Options granted under the Plan may be exercised only to
the extent that the right to exercise the same shall have vested in the
optionee. The vesting schedule for each option granted under the Plan shall be
determined by the Administrator at the time of the grant of the option;
provided, however, that the exercisability of each option granted under the Plan
shall vest at a rate of not less than 20% per year, and shall vest in full over
a period of not more than five years following the date of grant of the option.
To the extent that an option has vested, the same shall be exercisable, in whole
at any time, or in part from time to time, at the discretion of the optionee
during the term of the option. The holder of an option granted under the Plan
shall not have any of the rights of a stockholder with respect to the shares
covered by his or her option until such shares shall be issued to him or her
upon the due exercise of the option. The Corporation shall be entitled to
deduct from other compensation payable to each optionee any sums required by
federal, state or local tax law to be withheld with respect to the exercise of
an option or right to purchase, or with respect to any stock bonus, but, in the
alternative, the Corporation may require the party receiving or exercising the
same to pay, or such party may pay, such sums to the Corporation.
(b) Leaves of Absence. Vesting of options and shares acquired as stock
bonuses or upon exercise of rights to purchase shall not be interrupted due to
any leave of absence by the
- 4 -
<PAGE> 5
holder thereof for a period of less than or equal to 90 days, or due to any
leave of absence in excess of 90 days provided that the holder thereafter
returns to full-time employment with the Corporation for a period of at least
one full year. However, if a holder, subsequent to a leave of absence in
excess of 90 days, shall cease to be a full-time employee of the Corporation
for any reason whatsoever prior to the expiration of one year following his or
her return from such leave of absence, vesting of all options held by such
person and of all shares acquired by such person as stock bonuses or upon
exercise of rights to purchase shall be deemed to have ceased as of the date of
commencement of such leave of absence.
9. NON-TRANSFERABILITY
No option granted under the Plan shall be transferable otherwise than by
will or the laws of descent and distribution, and an option may be exercised,
during the lifetime of the person receiving the same, only by him or her. No
stock bonus or right to purchase granted under the Plan shall be transferable
under any circumstances.
10. EFFECT ON OPTIONS OF TERMINATION OF EMPLOYMENT OR STATUS AS A DIRECTOR
(a) Termination Other Than in the Event of Death. In the event that an
optionee who is an employee of the Corporation shall cease to be employed by the
Corporation for any reason other than his or her death, or, in the event that an
optionee who is a director but not an employee of the Corporation shall cease to
be a director of the Corporation for any reason other than his or her death, (i)
all options granted to such optionee pursuant to the Plan which are not
exercisable at the date of such cessation shall terminate immediately and become
void and of no effect, and (ii) all options granted to such optionee pursuant to
the Plan which are exercisable at the date of such cessation may be exercised
(but only to the extent they were exercisable as of the date of such cessation
of the optionee's employment or engagement as a director, as the case may be) at
any time within 30 days after the date of such cessation, but in any event no
later than the date of expiration of the option, and if not so exercised within
such time shall become void and of no effect at the end of such time.
(b) Termination in the Event of Death. In the event that an optionee who
is an employee of the Corporation shall cease to be employed by the Corporation
by reason of his or her death, or, in the event that an optionee who is a
director but not an employee of the Corporation shall cease to be a director of
the Corporation by reason of his or her death, (i) all options granted to such
optionee pursuant to the Plan which are not
- 5 -
<PAGE> 6
exercisable at the date of such death shall terminate immediately and become
void and of no effect, and (ii) all options granted to such optionee pursuant
to the Plan which are exercisable at the date of such death may be exercised
(but only to the extent they were exercisable as of the date of such death) at
any time within one year after the date of such death, but in any event no
later than the date of expiration of the option, and if not so exercised within
such time shall become void and of no effect at the end of such time.
11. TERMS AND CONDITIONS APPLICABLE TO RIGHTS OF PURCHASE UNDER THE PLAN
After the Administrator shall have determined to offer to a person eligible
to participate (hereinafter "offeree") the right to purchase shares under the
Plan, it shall cause to be delivered to the offeree a written notice thereof,
together with a Stock Purchase Agreement which shall constitute the
Corporation's offer of the right to purchase and shall contain the terms and
conditions of purchase, including, without limitation, the number of shares
which the offeree shall be entitled to purchase, the purchase price per share,
any other terms, conditions or restrictions relating thereto, and the number of
days or period the offeree shall have to accept such offer. The execution and
delivery of the Stock Purchase Agreement by the offeree to the Corporation
within such number of days or period shall constitute acceptance of the offer
and such Stock Purchase Agreement shall, thereupon, become a binding obligation
of the Corporation and the offeree. Each Stock Purchase Agreement shall be in
such form as the Administrator shall, from time to time, recommend, but shall
comply with and be subject to the following terms and conditions:
(a) Number of Shares. The Stock Purchase Agreement shall state the total
number of shares which the offeree shall be entitled to purchase and whether or
not the offeree may purchase less than all of the shares offered.
(b) Term of Offer. The Stock Purchase Agreement shall specify the number
of days or other period the offeree shall have to accept the offer, not to
exceed 90 days from the date of such offer. If not accepted by the offeree
within such number of days or other period, the offer shall automatically
terminate upon the expiration thereof, and the offer shall thereupon be null and
void and without further effect, except that the Administrator may extend such
number of days or other period available for acceptance, not to exceed an
additional 90 days. Acceptance of the offer shall occur when the offeree has
executed and redelivered to the Corporation at least two counterparts of the
Stock Purchase Agreement in the form delivered to him by the Corporation and, to
be effective, such acceptance must be without condition or reservation of any
kind whatsoever.
- 6 -
<PAGE> 7
(c) Vesting. The Administrator may, in his or its discretion, provide
that the shares purchased under any right of purchase granted under the Plan
shall "vest" in full immediately, or in such increments and over such periods of
time as may be determined by the Administrator; provided, however, that the
shares purchased under each right to purchase granted under the Plan shall vest
at a rate of not less than 20% per year over a period of not more than 5 years
following the date of the grant of the right to purchase.
12. TERMS AND CONDITIONS APPLICABLE TO STOCK BONUSES UNDER THE PLAN
After the Administrator shall have determined to offer a stock bonus under
the Plan, it shall cause to be delivered to the offeree a written notice
thereof, together with a Stock Bonus Agreement which shall constitute the
Corporation's offer of the stock bonus and shall contain the terms and
conditions of the same, including, without limitation, the number of shares
which shall be subject to the stock bonus, a statement that the shares issuable
pursuant to the Stock Bonus Agreement shall, when issued, be fully paid and
nonassessable shares of the Corporation's Common Stock, any other terms,
conditions or restrictions relating to the stock bonus, and the number of days
or period the offeree shall have to accept such offer. The execution and
delivery of the Stock Bonus Agreement by the offeree to the Corporation within
such number of days or period shall constitute acceptance of the offer and such
Stock Bonus Agreement shall, thereupon, become a binding obligation of the
Corporation and the offeree. Each Stock Bonus Agreement shall be in such form
as the Administrator shall, from time to time, recommend, but shall comply with
and be subject to the following terms and conditions:
(a) Number of Shares. The Stock Bonus Agreement shall state the total
number of shares the offeree shall be entitled to receive.
(b) Term of Offer. The Stock Bonus Agreement shall specify the number of
days or other period the offeree shall have to accept the offer, not to exceed
90 days from the date of such offer. If not accepted by the offeree within such
number of days or other period, the offer shall automatically terminate upon
expiration thereof, and the offer shall thereupon be null and void and without
further effect, except that the Administrator may extend such number of days or
other period available for acceptance, not to exceed an additional 90 days.
Acceptance of the offer shall occur when the offeree has executed and
redelivered to the Corporation at least two counterparts of the Stock Bonus
Agreement in the form delivered to him by the
- 7 -
<PAGE> 8
Corporation and, to be effective, such acceptance must be without condition or
reservation of any kind whatsoever.
(c) Vesting. The Administrator may, in his or its discretion, provide
that the shares acquired under any stock bonus granted under the Plan shall
"vest" in full immediately, or in such increments and over such periods of time
as may be determined by the Administrator; provided, however, that the shares
acquired under each stock bonus granted under the Plan shall vest at a rate of
not less than 20% per year over a period of not more than 5 years following the
date of the grant of the stock bonus.
13. REPURCHASE OF PLAN SHARES UPON TERMINATION OF EMPLOYMENT OR STATUS
AS A DIRECTOR
(a) Repurchase Option. Upon the termination of the association with the
Corporation (as hereinafter defined) of any person, whether by death or any
other reason whatsoever (a "Former Participant"), the Corporation and/or the
other shareholders of the Corporation shall have the option to purchase (i) all
shares held by the Former Participant which were acquired upon the exercise of
options or rights to purchase granted pursuant to this Plan, (ii) all shares
acquired by the Former Participant or his successor upon the exercise of options
subsequent to such termination of association, (iii) all shares held by the
Former Participant which were acquired as a stock bonus under the Plan, and (iv)
all other securities, if any, issued with respect to the shares referred to in
the foregoing clauses (i), (ii) and (iii), by reason of stock split, stock
dividend or the like (collectively, the "Plan Shares"), for the price and upon
the terms set forth in this Article 13. For purposes of the Plan, "termination
of association with the Corporation" shall mean (i) for any person who is an
employee of the Corporation or any subsidiary of the Corporation but not also a
director of the Corporation, the cessation of such person's employment with the
Corporation or such subsidiary, (ii) for any person who is a director of the
Corporation but not also an employee of the Corporation or any subsidiary of the
Corporation, the cessation of such person's status as a director of the
Corporation, and (iii) for any person who is both a director of the Corporation
and an employee of the Corporation or of any subsidiary of the Corporation, the
cessation of both the employment and status as a director of such person.
(b) Repurchase By Corporation. The Corporation shall have the first
option to purchase the Plan Shares of any Former Participant, which option shall
be exercisable by the Corporation at any time within 30 days following the
termination of the Former Participant's employment or status as a director, as
the case may be (or, with respect to any Plan Shares acquired upon
- 8 -
<PAGE> 9
the exercise of an option subsequent to the termination of such employment or
engagement as a director, at any time within 30 days following such exercise);
provided, however, that the Corporation's right to exercise its option shall be
subject to (i) any applicable laws governing the right of the Corporation to
purchase its own shares, and (ii) the "Repurchase Limitation" established
pursuant to Article 15 below. The purchase price for the Plan Shares to be
purchased by the Corporation shall be paid in cash.
(c) Repurchase By Shareholders. In the event that the Corporation does
not elect to purchase all of the Plan Shares of any Former Participant, the
Secretary of the Corporation shall so notify all other shareholders of the
Corporation and such shareholders shall thereupon have the option, exercisable
at any time within 60 days following the termination of employment or status as
a director, as the case may be, of the Former Participant (or, with respect to
any Plan Shares acquired upon the exercise of an option subsequent to the
termination of such employment or engagement as a director, at any time within
60 days following such exercise) to purchase for cash those of the Plan Shares
not purchased by the Corporation, pro rata based on the ratio which the number
of shares of the Corporation's capital stock held by each such shareholder bears
to the total number of shares of the Corporation's capital stock held by all
such shareholders electing to purchase. Should any of the Corporation's
shareholders fail to exercise such option, the remaining shareholders of the
Corporation shall have the option for a further period of 10 days to purchase,
on a pro rata basis, the Plan Shares not so purchased by the declining
shareholders.
(d) Repurchase Price.
(i) Price for Plan Shares Other Than Unvested Stock. The price per
share for Plan Shares purchased by the Corporation or the Corporation's
shareholders pursuant to this Article 13 (other than shares of Unvested Stock,
as defined below) shall be the higher of (A) the fair market value per share of
the Corporation's Common Stock as of the date of the termination of employment
or status as a director, as the case may be, giving rise to such purchase and
sale, determined pursuant to Article 6 of the Plan, or (B) the price per share
paid for such shares upon the issuance thereof (or, with respect to shares
issued as a stock bonus, the fair market value per share of the Corporation's
Common Stock as of the date of issuance of such shares, determined pursuant to
Article 6 of the Plan). Notwithstanding the foregoing, however, if the Former
Participant whose Plan Shares are subject to purchase shall have theretofore
taken a leave of absence in excess of 90 days and shall not have completed one
full year of service with the Corporation subsequent to the end of such leave of
absence, the price per
- 9 -
<PAGE> 10
share for such Former Participant's Plan Shares (other than shares of Unvested
Stock) shall be the higher of (A) the price per share paid for such shares upon
the issuance thereof (or, with respect to shares issued as a stock bonus, the
fair market value per share of the Corporation's Common Stock as of the date of
issuance of such shares, determined pursuant to Article 6 of the Plan), or (B)
the lesser of (1) the fair market value of the Corporation's Common Stock as of
the date of the Former Participant's termination of employment or status as a
director, as the case may be, determined pursuant to Article 6 of the Plan, or
(2) the fair market value of the Corporation's Common Stock as of the date of
commencement of such leave of absence, determined pursuant to Article 6 of the
Plan.
(ii) Price for Unvested Stock. The price per share for Plan Shares
purchased by the Corporation or the Corporation's shareholders pursuant to this
Article 13 which are shares which were issued as a stock bonus or upon exercise
of a right to purchase granted under the Plan, and which have not, as of the
date of the event giving rise to the purchase and sale of the same, "vested"
under the terms of the Stock Bonus Agreement or Stock Purchase Agreement
pursuant to which the same were issued ("Unvested Stock"), shall be the lower of
(A) the fair market value per share of the Corporation's Common Stock as of the
date of the termination of employment or status as a director, as the case may
be, giving rise to such purchase and sale, determined pursuant to Article 6 of
the Plan, or (B) the fair market value per share of the Corporation's Common
Stock as of the date of the issuance of such shares, determined pursuant to
Article 6 of the Plan. Notwithstanding the foregoing, however, if the Former
Participant whose Plan Shares are subject to purchase shall have theretofore
taken a leave of absence in excess of 90 days and shall not have completed one
full year of service with the Corporation subsequent to the end of such leave of
absence, the price per share for such Former Participant's Unvested Stock shall
be the lower of (A) the price per share paid for such shares upon the issuance
thereof (or, with respect to shares issued as a stock bonus, the fair market
value per share of the Corporation's Common Stock as of the date of issuance of
such shares, determined pursuant to Article 6 of the Plan), or (B) the lesser of
(1) the fair market value of the Corporation's Common Stock as of the date of
the Former Participant's termination of employment or status as a director, as
the case may be, determined pursuant to Article 6 of the Plan, or (2) the fair
market value of the Corporation's Common Stock as of the date of commencement of
such leave of absence, determined pursuant to Article 6 of the Plan.
(e) Procedure; Termination of Shareholder Rights. If the Corporation or
its shareholders shall elect to purchase the Plan Shares of a Former Participant
pursuant to this Article 13, the
- 10 -
<PAGE> 11
Corporation or such shareholders, as the case may be, shall give written notice
to the Former Participant of such election to purchase (the "Purchase Notice").
The Former Participant shall, within 15 days following the giving of the
Purchase Notice, surrender to the Corporation the stock certificate or
certificates representing the Plan Shares, duly endorsed for transfer, against
payment of the purchase price thereof. If the Purchase Notice is given, and if
the purchase price for the Plan Shares shall be paid or set aside for that
purpose, then notwithstanding that the certificate or certificates evidencing
the Plan Shares shall not have been surrendered, all rights of the Former
Participant with respect to the Plan Shares shall forthwith cease and terminate
(except for the right to receive the purchase price thereof as provided in this
Article 13).
(f) Plan Shares Not Repurchased. All Plan Shares of a Former Participant
not purchased by the Corporation and/or the Corporation's shareholders as
provided herein shall remain subject to the restrictions on transfer set forth
in Article 14 below.
(g) Termination of Repurchase Rights. The repurchase rights provided for
in this Article 13 shall automatically terminate upon the earlier to occur of
(i) the closing of the first underwritten public offering of any class of the
Corporation's equity securities pursuant to an effective registration statement
under the Securities Act of 1933, or (ii) the listing by the Corporation of any
class of its equity securities for trading on the National Association of
Securities Dealers Automated Quotation System or on any securities exchange.
14. RESTRICTIONS ON TRANSFER OF PLAN SHARES
(a) General Restriction on Transferability. No holder of Plan Shares
shall be able to transfer, assign, hypothecate or in any way alienate any of
such Plan Shares, or any right or interest therein, whether voluntarily or by
operation of law, except (i) a transfer to the holder's account in the
Corporation's Profit Sharing Plan, (ii) a transfer to the Corporation pursuant
to paragraph (b) of this Article 14, (iii) a transfer pursuant to paragraph (c)
of this Article 14, or (iv) hypothecation to any lender which has been
specifically designated by the Corporation's Board of Directors, provided that
the loan to which such hypothecation relates has been specifically approved by
the Corporation's Board of Directors and is made on terms which include the
right of the Corporation to repurchase such shares in the event of default under
the loan. Any Plan Shares transferred to the Corporation's Profit Sharing Plan
shall remain subject to the restrictions on retransfer set forth in this Article
14, and to the repurchase rights of the Corporation and its shareholders set
forth in Article 13 above.
- 11 -
<PAGE> 12
(b) Sale to the Corporation. Notwithstanding the foregoing restrictions
on transfer, any holder of Plan Shares may offer all or any portion thereof
(except shares of Unvested Stock) for sale to the Corporation on February 21,
May 21, August 21 or November 21 of any year, or at such other interim dates as
the Board of Directors may hereafter designate from time to time (each a "Stock
Repurchase Date"), at a per share price equal to the fair market value of the
Corporation's Common Stock as of the date of such purchase and sale, determined
as provided in Article 6 above. If the Corporation elects to purchase the Plan
Shares of any person on any Stock Repurchase Date or any other date, and the
Corporation cannot purchase all of the Plan Shares and other shares of the
Corporation, if any, then being offered due to (i) any legal restrictions on the
right of the Corporation to purchase its own shares, or (ii) the Repurchase
Limitation established pursuant to Article 15 below, or if the Corporation
elects for any other reason not to purchase all such offered shares, the shares
offered for sale shall be accepted for purchase by the Corporation, up to the
total number thereof to be purchased on such date, in such order and priority as
the Corporation's Board of Directors may determine from time to time. The
purchase price for shares acquired by the Corporation pursuant to this paragraph
(b) shall be paid in cash; provided, however, that if such cash payment would
cause the Corporation to violate any applicable law governing the right of the
Corporation to repurchase its own shares, or to violate the Repurchase
Limitation, the Corporation may pay cash for those of the Plan Shares which it
can purchase for cash without violating such restrictions and deliver a
promissory note for the remaining Plan Shares. With respect to Plan Shares
issued after the effective date of the Merger(2) (excluding Plan Shares issued
upon the exercise of options granted under the Plan prior to the date of the
Merger unless the holder of any such option consents in writing), any such
promissory note shall have such term, not exceeding seven (7) years, as the
Administrator shall determine, shall bear interest at a rate equal to the lesser
of ten percent (10%) or the discount rate of the Federal Reserve Bank of San
Francisco, as the same may change from time to time, and shall be payable in
equal quarterly installments. Notwithstanding any other provision of this
paragraph 14(b), however, the Corporation shall not purchase pursuant to this
paragraph 14(b) any shares which have been issued and outstanding for less than
six (6)
__________________________________
(2) The term "Merger" in Article 14(b) of the Plan refers to the merger
of Sparta, Inc., an Alabama corporation and predecessor to the
Corporation ("Sparta Alabama"), with and into the Corporation, as a
result of which Sparta Alabama completed its reincorporation as a Delaware
corporation. The effective date of the Merger was December 20, 1989.
- 12 -
<PAGE> 13
months prior to their purchase by the Corporation, except for shares held by
any Former Participant.
(c) Right of First Refusal.
(i) In the event that any holder of Plan Shares shall desire to sell
or otherwise transfer all or any portion of the same other than pursuant to
paragraph (b) of this Article 14, he or she may do so provided that he or she
first shall have offered such shares (the "Offered Shares") to the Corporation
as provided in this paragraph (c). At least 30 days prior to any proposed sale
or other transfer, the holder of the Offered Shares shall give written notice
(the "Notice") of such proposed transfer to the Corporation. The Notice must
set forth the name of the proposed transferee, the number of shares to be
transferred, the price per share, and all other terms and conditions of the
proposed transfer, and must state that the same constitutes a bona fide, good
faith transaction. The Notice shall constitute the grant of an option to the
Corporation to purchase the Offered Shares as provided in this paragraph (c).
The Corporation shall thereupon, for a period of 30 days following the
Corporation's receipt of the Notice, have the right to purchase all, but not
less than all, of the Offered Shares for a price equal to the price specified in
the Notice. The terms of payment shall be, at the Corporation's election, (A)
cash, or (B) as provided in the Notice.
(ii) In the event that the Corporation does not elect to purchase all
of the Offered Shares within 30 days after its receipt of the Notice, the holder
of the same may transfer the Offered Shares within 30 days from the expiration
date of such 30 day option period to the person, at the price, and on the terms
specified in the Notice; provided that such transferee agrees to receive and
hold all of the Offered Shares subject to all of the provisions and restrictions
contained in this Article 14, and executes and delivers to the Corporation such
documents as may reasonably be requested by the Corporation to effectuate the
same. If the Offered Shares have not been transferred within such 30 day
period, the Offered Shares shall again become subject to all of the provisions
of this Article 14 and may not thereafter be transferred except in the manner
and on the terms provided for herein.
(d) Legend on Certificates. All shares issued upon the exercise of
options or rights of purchase granted pursuant to the Plan or issued as stock
bonuses under the Plan shall bear a legend referring to the restrictions on
transfer and the repurchase rights set forth in Articles 13 and 14 of the Plan.
(e) Termination of Transfer Restrictions. The transfer restrictions set
forth in this Article 14 shall automatically
- 13 -
<PAGE> 14
terminate upon the earlier to occur of (i) the closing of the first
underwritten public offering of any class of the Corporation's equity
securities pursuant to an effective registration statement under the Securities
Act of 1933, or (ii) the listing by the Corporation of any class of its equity
securities for trading on the National Association of Securities Dealers
Automated Quotation System or any securities exchange.
15. REPURCHASE LIMITATION
During any three (3) month period ending on a Stock Repurchase Date, the
Corporation shall not repurchase shares of its capital stock if and to the
extent that the excess, if any, of (i) the sum of the quarterly average of the
cash cost to the Corporation of such purchases during the four (4) fiscal
quarters immediately preceding the Stock Repurchase Date (excluding the cost
represented by any promissory note issued as a part of the purchase price of any
such purchase), plus the quarterly average of the amount of payments of
principal made by the Corporation during the four (4) fiscal quarters
immediately preceding the Stock Repurchase Date on any outstanding promissory
notes theretofore issued by the Corporation as consideration for previous
repurchases by the Corporation of shares of its capital stock over (ii) the sum
of the average quarterly Proceeds (as such term is defined below) received from
issuances of its capital stock during the four (4) fiscal quarters immediately
preceding the Stock Repurchase Date and the average quarterly tax benefit to the
Corporation resulting from exercises of stock options or disqualifying
dispositions of incentive stock options during the four (4) fiscal quarters
immediately preceding the Stock Repurchase Date, exceeds an amount equal to a
percentage (to be determined by the Board of Directors) of the quarterly average
of the Corporation's Net Profit (as such term is defined below) for the four (4)
fiscal quarters immediately preceding the Stock Repurchase Date (the "Repurchase
Limitation"). For purposes of this paragraph, the term "Proceeds" shall mean
the aggregate amount of the cash and the fair market value of the property and
services received or rendered to the Corporation as consideration for the
issuance of capital stock, plus the aggregate fair market value of all capital
stock issued by the Corporation without the receipt of consideration as a stock
bonus or as a contribution by the Corporation to any pension, profit sharing or
other plan now or hereafter maintained by the Corporation for the benefit of its
employees. The fair market value of any such capital stock shall be deemed to
be an amount per share equal to the Formula Price then in effect. For purposes
of this paragraph, the term "Net Profit" shall mean the Corporation's net
income, after taxes, as computed in accordance with generally accepted
accounting principles consistently applied.
- 14 -
<PAGE> 15
16. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND CORPORATION CHANGES
If the outstanding shares of the Common Stock of the Corporation are
changed into, or exchanged for a different number or kind of shares or
securities of the Corporation through reorganization, merger or consolidation in
which the Corporation is the surviving entity, or through recapitalization,
reclassification, or otherwise, or if the number of outstanding shares is
changed through a stock split, stock dividend or stock consolidation, an
appropriate adjustment shall be made in the number and kind of shares as to
which options, rights to purchase and stock bonuses may thereafter be granted. A
corresponding adjustment changing the number or kind of shares allocated to
unexercised options and rights to purchase, or portions thereof, which shall
have been granted prior to any such change, shall likewise be made. Any such
adjustment in an outstanding option or right to purchase, however, shall be made
without change in the total price applicable to the unexercised portion of the
option or right to purchase but with a corresponding adjustment in the price for
each share covered by the option or right to purchase.
In the event that the Corporation at any time proposes to (i) merge into,
consolidate with or to enter into any other reorganization (including the sale
of substantially all of its assets) in which the Corporation is not the
surviving corporation, or (ii) enter into a merger or other reorganization as a
result of which the outstanding shares of Common Stock of the Corporation will
be changed into or exchanged for shares of the capital stock or other securities
of another corporation or for cash or other property, then the Plan and all
unexercised options and rights to purchase granted hereunder shall terminate,
unless provision is made in writing in connection with such transaction for the
continuance of the Plan and for the assumption of options and rights to purchase
theretofore granted, or the substitution for such options and rights to purchase
of new options and rights to purchase covering the shares of a successor
corporation, with appropriate adjustments as to number and kind of shares and
prices, in which event the Plan and the options and rights to purchase
theretofore granted or the new options and rights to purchase substituted
therefor, shall continue in the manner and under the terms so provided. If such
provision is not made in such transaction for the continuance of the Plan and
the assumption of options and rights to purchase theretofore granted or the
substitution for such options and rights to purchase of new options and rights
to purchase covering the shares of a successor corporation, then the Board of
Directors shall cause written notice of the proposed transaction to be given to
the persons holding options and rights to purchase not less than 30 days prior
to the anticipated effective date of
- 15 -
<PAGE> 16
the proposed transaction, and all options and rights to purchase shall be
accelerated and, concurrent with the effective date of the proposed
transaction, such persons shall have the right to exercise options and rights
to purchase in respect of any or all shares then subject thereto.
Adjustments under this Article 16 shall be made by the Board of Directors,
whose determination as to what adjustments shall be made shall be final and
conclusive. No fractional shares of stock shall be issued under the Plan on
account of any such adjustment.
17. CONTINUATION OF EMPLOYMENT OR DIRECTORSHIP
Neither the existence of the Plan nor the grant of any option, right to
purchase or stock bonus under the Plan shall impose any obligation on the
Corporation or its shareholder to continue the directorship or employment with
the Corporation of any optionee.
18. GOVERNMENT AND STOCK EXCHANGE REGULATIONS
The Corporation shall not be required to issue any shares upon the exercise
of any option or acceptance of any right to purchase unless and until any then
applicable requirements of the Securities and Exchange Commission, other
regulatory agencies having jurisdiction and of any exchanges upon which stock of
the Corporation may be listed, shall have been fully complied with.
19. INFORMATION TO OPTIONEES
The Corporation shall provide to each holder of an outstanding option under
the Plan a copy of the Corporation's financial statements for each fiscal year
of the Corporation within a reasonable time after such financial statements are
prepared and approved by the Corporation's management. The Corporation shall
also provide each holder of an outstanding option under the Plan with a copy of
any annual or other report generally distributed by the Corporation to its
shareholders.
20. AMENDMENT AND TERMINATION
The Plan may be terminated, modified, or amended by the stockholders of the
Corporation or by the Board of Directors at any time they shall deem advisable;
provided, however, that no such amendment shall adversely affect rights and
obligations of an option holder with respect to options at the time outstanding
under the Plan unless the option holder consents to such amendment.
- 16 -
<PAGE> 17
21. LOANS; CANCELLATION OF DEBT UPON REPURCHASE
(a) Loans. The Administrator may, in his or its discretion, assist any
person to whom options or rights to purchase have been granted under the Plan
(including any such person who is an officer or director of the Corporation) in
the exercise of one or more options or rights to purchase under the Plan,
including the satisfaction of any federal and state income and employment tax
liabilities arising therefrom, by authorizing the extension of a loan from the
Corporation to such person. Any such loan shall be extended on such terms and
conditions, with such security and with such repayment provisions (which may
include automatic payroll deductions) as the Administrator may deem appropriate.
Loans may be granted with or without security, collateral or interest, but the
maximum credit available to any person shall not exceed the sum of (i) the
aggregate exercise price payable for the purchased shares plus (ii) any federal
and state income and employment tax withholding liability incurred in connection
with such exercise.
(b) Cancellation of Debt Upon Repurchase. Notwithstanding any other
provision of the Plan, or of any Stock Option Agreement, Stock Bonus Agreement
or Stock Purchase Agreement entered into pursuant to the Plan, to the contrary,
the Corporation shall have the right, but not the obligation, to pay all or any
portion of the purchase price of Plan Shares being repurchased by the
Corporation (whether pursuant to Article 13 or paragraphs (b) or (c) of Article
14 of the Plan or otherwise) in cash and/or by cancellation of all or a
specified amount of indebtedness owed to the Corporation by the person from whom
the Plan Shares are to be so repurchased pursuant to any promissory note or
other payment obligation delivered by such person to the Corporation as
consideration for his or her purchase of such Plan Shares.
- 17 -
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-44150 and 33-45915) of SPARTA, Inc. and its
subsidiary of our report dated March 21, 1997 appearing on Page F-2 of this
Form 10-K.
/s/ PRICE WATERHOUSE LLP
- ---------------------------
Price Waterhouse LLP
Costa Mesa, California
March 28, 1997
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