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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 2, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _________ to __________
Commission file number 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
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 [ ]
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, 1998 was $42,476,853.
As of February 1, 1998, 5,523,648 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 .........................................................3
ITEM 2. PROPERTIES........................................................9
ITEM 3. LEGAL PROCEEDINGS.................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................10
ITEM 6. SELECTED FINANCIAL DATA..........................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............18
ITEM 11. EXECUTIVE COMPENSATION...........................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................24
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.........................................................25
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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 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 re-incorporation,
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.
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 sole contract of this partnership ended in September, 1995 and the contract
warranty expired in September, 1997. OCEANOR SPARTA ANS did not solicit any new
work in 1997 and the partnership will be liquidated in 1998. In 1995, a new
subsidiary, Commercial Technology, Inc. ("CTI"), was formed and in 1996 and 1997
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.
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 91% of the Company's
revenues in the fiscal year ended January 2, 1998. Contracts to other non-DoD
government agencies accounted for an additional 3% of the Company's revenues and
the balance of 6% 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) theater 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
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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 BMD 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. Even though, as a percentage of total
sales, BMD business was lower in 1997, BMD continues to be a large part of the
Company's business. In 1997, 1996, and 1995, BMD revenues accounted for 40%,
41%, and 45%,, respectively, of sales. Government BMDO funding for government
fiscal year ("GFY") 1997 was $3.6 billion, up from $3.4 billion in GFY 1996. 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 BMD business has been in the NMD area prior to GFY 1994. In 1997,
the Company was successful in converting essentially all of its BMD contract
base to the support of TMD. The primary reason for this was a contract win at
the very end of 1996 of a large TMD systems engineering and technical assistance
program at BMDO. This resulted in a substantial increase in the Company's TMD
business as reflected in 1997 sales.
The BMDO budget appropriation for GFY 1998 is $3.7 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 40 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, multitask projects with
multidisciplinary requirements. Located in twenty- five 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.
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 geopolitical
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
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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 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 affect 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"). Because
of this Act, major changes have been made to the government's source selection
procedures. Also, the government has started contracting via electronic
commerce. None of these changes is expected to adversely affect 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 618 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 six 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, evaluation of foreign military systems for
the Army, and computer security work for the FBI.
Due to the size, complexity, and multidisciplinary 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 has
been and will continue to pursue subcontractor roles from the large prime
contractor system developers. The Company will also continue to pursue small
business set-aside programs. The Company expects to remain qualified for small
business programs for a few 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. Significant investments were made in
1996 and 1997 for these technologies. Such technologies include lasers for
interferometers, lasers for ordinance and mine neutralization, secure
communications, and composite materials. There were no significant sales of
these technologies or products in the commercial marketplace
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in 1997.
Organization
No organizational changes were made in 1997. In 1997, the Company's
operations were still organized in the following three sectors: (1) Information
Systems, (2) Defense & Space Systems and (3) Hardware Systems. This approach,
implemented in 1996, 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. The Company's Marine Systems
Division is 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 25 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 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 multidisciplinary 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.
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U.S. Government Contracts
Approximately 95% of the Company's fiscal year 1997 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.
Most of the cost reimbursement contracts are of the task order or delivery order
type.
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
("DCAA") 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 DCAA
through the fiscal year ended December 30, 1994. Indirect contract costs for
periods subsequent to fiscal year 1994 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 is generally obligated to pay the
costs incurred by the Company under the contract plus a fee based upon work
completed. There were no contracts terminated in 1997. The Company does not
anticipate any termination of programs and contracts in 1998. 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 relative to small businesses 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. The
Company's business can
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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 2, 1998 January 3, 1997
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Funded 12-Month Backlog $34,300,000 $34,900,000
Unfunded 12-Month Backlog 58,900,000 41,500,000
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Total Funded/Unfunded Contract Backlog $93,200,000 $76,400,000
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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, and in part due to
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. 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. 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.
Employees
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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 multidisciplinary 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 intense
competition for skilled and educated technical personnel in the marketplace.
Changes and perturbations in the defense industry have also hurt the Company's
retention and recruiting goals. In 1997, the Company rewarded the strong
performers with deserving bonuses. In addition, the stock price appreciated by
29%. This will be a plus for improving retention and achieving recruitment
goals. The Company believes that continuation of strong growth is the key to
recruiting and retaining a highly-qualified staff. Such growth will enhance its
employee stock ownership program and maintain its other incentives at industry
comparative levels. Notwithstanding continued growth and the associated strong
compensation incentives that result from such growth, there is a shortage of
certain technical personnel across the country which the Company needs to
perform in its business areas. It is uncertain if the Company will be able to
reduce turnover significantly or achieve its recruitment goals. Future growth is
dependent on achieving these goals.
At January 2, 1998, the Company employed 618 employees, a majority of
which are based in the Company's facilities in California, Virginia, and
Alabama. The number of employees at the end of 1996 was 508. The Company
believes that its employee relations are good, 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 May, 2003, are located in
Laguna Hills, California. The Company's other offices, aggregating approximately
256,000 square feet, include offices located in the cities of Huntsville,
Alabama; San Diego, California; Lancaster, California; El Segundo, California;
Lexington, Massachusetts; Rosslyn, Virginia; McLean, Virginia; Raleigh, North
Carolina; Columbia, Maryland; Colorado Springs, Colorado and Sierra Vista,
Arizona. These leases 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 2, 1998, was approximately $3,080,000. In
1997, the Company added some small new offices. It also added space in several
existing offices when the leases were renewed during the year. A new office in
Raleigh, North Carolina added about 4,000 square feet. A new office in Sierra
Vista, Arizona added about 3,000 square feet. Offices which expanded were in
Colorado Springs, Colorado, Columbia, Maryland and Rosslyn, Virginia. The
Company has 25 offices and locations in proximity to customers and agencies to
which it provides its services.
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.
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. In 1997, it again became the Company's policy to
repurchase the stockholdings of terminating employees. In support of this policy
the Board of Directors authorized the Plan Administrator to issue, at his
discretion, promissory notes to repurchase terminating employee stock. One new
promissory note was issued in 1997 to repurchase stock with a value of $43,000.
The amount of stock held by former employees decreased from 8.7% (556,000
shares) at the end of 1996 to 7.0% (431,000 shares) at the end of 1997.
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
10
<PAGE> 11
Agreement also grants SAIC, after the second anniversary of the Agreement, the
right to require the Company to repurchase all of the Preferred Stock then held
by SAIC at the then current Formula Price. Repurchase of the stock shall be in
cash to the extent that such cash repurchase does not cause the Company to
violate its self-imposed stock repurchase limitation. In that event, that
portion which cannot be paid in cash shall be paid in a subordinated promissory
note. The Company has used the proceeds from sales of Preferred Stock under the
Agreement to improve the liquidity of the holders of the Company's Common Stock.
SAIC discontinued its purchase of Company Preferred Stock in November, 1996. As
of February 1, 1998, SAIC owned 569,039 shares of Preferred Stock, which
represented 9.3% of the total capital stock outstanding. The Company is unaware
of any plan for SAIC to resume its purchase of 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 "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 common and preferred 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
11
<PAGE> 12
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
periodically (usually 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.
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:
<TABLE>
<CAPTION>
Formula Price
per Share of Common Stock
1997 1996
---- ----
<S> <C> <C>
January 21 $5.93 $4.66
April 21 6.36 4.48
July 21 6.88 4.90
October 21 6.90 5.35
</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 or Preferred 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, 1998, there were approximately 444 holders of record of
the Company's Common Stock.
12
<PAGE> 13
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 (i) the Company's right of first
refusal to purchase such shares in the event a holder desires to transfer them
and (ii) 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 2, 1998.
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 EPS and share data)
-------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales $ 85,470 $ 67,784 $ 62,074 $ 65,258 $ 78,405
Costs and expenses 77,963 62,501 59,687 62,246 72,971
Provision for income taxes 3,153 2,200 1,002 1,264 2,319
Net income(2) 5,105 3,083 1,385 1,748 3,115
Basic Earnings per share(3) $ 0.75 $ 0.42 $ 0.21 $ 0.28 $ 0.42
Diluted Earnings per share(3) $ 0.70 $ 0.41 $ 0.21 $ 0.27 $ 0.40
Adjusted Earnings per share(4) $ 0.58
Weighted average Common
Stock outstanding(5) 6,032,548 6,053,728 6,208,009 6,351,021 8,295,045
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
Years Ended December 31(1)
(Amounts in thousands)
------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C>
Total assets $33,209 $29,054 $28,662 $31,273 $37,430
Working capital 12,353 10,010 9,476 10,286 12,411
Long term liabilities, including 8,907 6,962 8,348 10,521 10,985
redeemable Preferred Stock
Stockholders' equity 12,452 10,485 9,410 9,202 11,668
</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
2, 1998; January 3, 1997; December 29, 1995; December 30, 1994; and
December 31, 1993. For ease of presentation of summary financial data, the
year ends have been presented as December 31.
(2) Net Income is income from operations plus non-recurring receipt of
proceeds from an insurance policy on the life of a director and former
officer of the Company.
(3) Earnings per share ("EPS") have been computed for all prior years and
restated in conformance with the Statement of Financial Accounting
Standards ("SFAS") No. 128.
(4) Adjusted earnings per share does not include the effect on earnings of
receipt of proceeds from an insurance policy on the life of a director and
former officer of the Company.
(5) The weighted average of common stock outstanding has been stated for the
most dilutive case of EPS as defined by the FASB SFAS No. 128 guidelines.
13
<PAGE> 14
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
at December 31,
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $85,470,000 $67,784,000 $62,074,000
BMD 40% 41% 45%
Other DoD 51% 47% 40%
Non-DoD 9% 12% 15%
Gross Profits(1) $7,922,000 $5,936,000 $4,088,000
Profits as a percentage of costs 10.2% 9.6% 7.1%
Net income from operations $4,354,000 $3,083,000 $1,385,000
Net income(2) $5,105,000 $3,083,000 $1,385,000
</TABLE>
(1) 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.
(2) Net income for 1997 includes $751,000 of proceeds from an insurance policy
on the life of a director and former officer of the Company.
<TABLE>
<CAPTION>
Information Summarizing Financial Position
at December 31,
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Stockholders' equity $12,452,000 $10,485,000 $9,410,000
Equity per share(1) 1.89 1.64 1.56
Stock repurchase notes 1,123,000 1,730,000 2,944,000
Notes payable $ 2,658,000 $ 461,000 $ 972,000
</TABLE>
<TABLE>
<CAPTION>
Backlog
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Funded 12-month backlog $34,300,000 $34,900,000 $12,000,000
Unfunded 12-month backlog 58,900,000 41,500,000 55,300,000
Total contract backlog $93,200,000 $76,400,000 $67,300,000
</TABLE>
<TABLE>
<CAPTION>
Financial Ratios
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Avg. days sales outstanding ("DSO") 88 96 126
Current ratio 2.1 1.9 1.9
Debt to equity ratio as defined
by the lender 0.8 0.8 1.0
</TABLE>
(1) Equity per share based on weighted shares of Common Stock outstanding at
year end, including weighted shares of Preferred Stock outstanding.
The Company experienced a three-year decline in sales for the period 1993
through 1995. Sales decreased by 22%
14
<PAGE> 15
from a historical high of $79,578,000 in 1992 to $62,074,000 in 1995. This three
year business decline was reversed in 1996 on sales of $67,784,000, and
continued to improve in 1997 on sales of $85,470,000, an increase of 26.1% from
1996 resutls. The decline from 1993 through 1995 was primarily attributable to a
60% reduction in the government fiscal year 1994 budget for the National Missile
Defense ("NMD") effort of the Ballistic Missile Defense ("BMD") program. The
reduction in NMD funding was accompanied by an increase in funding for the
Theater Missile Defense ("TMD") effort. Historically, the BMD NMD program had
been the Company's major source of revenue. In 1993, BMD business volume
accounted for 47% of Company sales. The Company's BMD business volume as a
percent of sales decreased in 1994 to 31%. BMD programs accounted for 40%, 41%,
and 45% of Company sales in 1997, 1996, and 1995, respectively. This increase
from the 1994 level is a measure of the Company's success in efforts to apply
its NMD ballistic missile defense expertise to TMD problems and winning TMD
contracts. Sales growth in 1997 came primarily from a 200% increase in support
to the Ballistic Missile Defense Organization and an 86% gain in the support to
intelligence agencies. In 1997, the Company derived 91% of its business from DoD
programs.
Gross profitability increased from 9.6% of costs in 1996 to 10.2% of costs
in 1997. Gross profit rate of 7.1% in 1995 was negatively impacted by 1) a
reversal of prior year accrued profits on two commercial oil platform
instrumentation projects, and 2) a loss on disposition of the Company's
ACT/SPARTA subsidiary. Profit levels in 1996 and 1997 were positively impacted
by profits on completed multiyear, fixed price contracts which were under
accrued for in prior years. A restatement of gross profit rate adjusting only
for contract accruals results in 9.2%, 9.3%, and 7.5% in 1997, 1996, and 1995,
respectively.
In the past, the Company's backlog has generally been indicative of its
future revenues. The end of the year annualized contract backlog, representing
expected sales on existing contracts for 1998, increased from $76,400,000 in
1996 to $93,200,000 in 1997, an increase of 22%. Annual sales as a percent of
prior year annualized contract backlog were 111.7%, 100.1% and 109.1% in 1997,
1996, and 1995, respectively. However, although the Company's backlog has 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.
The Company's primary business strategy over the last four years has been
to establish a new foundation for future growth in recognition of the decline of
the DoD market for its traditional engineering business. To implement this
strategy, the Company restructured in 1996 into three sectors, operating
substantially as subsidiaries. Each focuses on one of 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 the first year, the Company successfully
learned how to operate in this new structure, built a contract base for sales
growth in 1997, and initiated a multiyear process of establishing the Company's
selected product lines. The organizational structure continued for 1997.
Specific business objectives for 1997 included (i) further development of
each of the product lines, (ii) achieve a 50% growth in proposal and opportunity
backlog and position the Company for a major prime contract role in information
systems programs, and (iii) enhance staff skills and productivity by instituting
a company wide efficient and effective training program. The Company exceeded
its 1997 financial plan in almost all respects. Each of the sectors achieved
sales increases of 15% or more, contract backlog increases of 16% or more, and
gross profitability increases of 19% or more. One area where the Company fell
short of its objectives was the backlog of proposals outstanding which declined
33% by the end of the year, off of its objective of achieving a 50% increase.
Staff resources for pursuit of new business development suffered in competition
for staff resources with several large new contracts won in late 1996 and early
1997. 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 SecurECTM, an application of
end-to-end security software to commercial Electronic Data Interchange ("EDI")
on the Internet; nanAlignTM, an electro optic system to compensate for air
turbulence error sources in the manufacture of integrated circuits and flat
panel displays; ZeusTM, a mobile mounted laser system to neutralize mines and
unexploded ordnance; RIMS, an integrated hardware and software solution for
communication and management information control of a multifunctional, dispersed
organization; and composites, an application of proprietary technology in
composite material bulk molding and thermal management. Progress and
accomplishments against aggressive plans on development of all product lines
fell short of expectations, although progress was made on each.
15
<PAGE> 16
Stockholders' equity increased 18.7% during 1997. The Company reduced its
major components of debt (deferred income taxes, balance of promissory notes
issued to repurchase stock, and working capital financing) by approximately
$300,000, or 3.6%, in 1997. Debt-to-equity ratio reached a historical low of 0.8
in 1996 and continued at that level in 1997.
Liquidity and Capital Resource
The Company's primary source of funding its operations in 1997 was
self-funding from on-going business activities augmented by borrowings from its
bank line of credit. The bank line of credit provides for borrowings up to
$8,000,000 with all borrowings due December 1, 1999. Interest payments on
borrowings under the line of credit were $114,000 in 1997 compared to $3,000 in
1996. At the end of 1997, borrowings for working capital were $2,658,000, up
from $461,000 at the end of 1996. Days sales outstanding ("DSO") in receivables
averaged 88 days in 1997, down from an average of 96 days in 1996 and 126 days
in 1995. The need for additional borrowings in 1997 under the bank line of
credit was driven by the growth in sales and product line investment which was
only partially offset by the reduction in DSO.
The Company anticipates that increasing costs to fund development of
hardware projects plus anticipated sales growth will create an increased demand
for working capital in 1998. However, 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 negatively
impacted. The repurchase of stock within the available quarterly funds is
prioritized first to the repayment of promissory notes previously issued to
repurchase stock, second to the repurchase of all or portion of the stock of
terminating employees, third 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 relative to their respective stock ownership.
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 years'
stock repurchases declined from $4,224,000 at the end of 1994 to $1,123,000 at
the end of 1997, 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. As the Company's profits improved and as the debt service on
notes declined, and as employee confidence in future stock growth returned as
demonstrated by the exercise of options, the liquidity of the stock returned to
pre-1993 levels in 1996 and 1997. In 1996, the Company resumed partial cash
repurchases of stock from terminating employees, but did not resume the issuance
of promissory notes. In 1997, the Board of Directors authorized the Plan
Administrator to issue new promissory notes, at his discretion, in order to
resume the policy of repurchasing all stock of terminating employees. In 1997,
the Company repurchased essentially all stock of terminating employees, except
for one major stockholder, and issued one new promissory note with a value of
$43,000. The amount of stock held by former employees decreased from 8.7%
(556,000 shares) at the end of 1996 to 7.0% (431,000 shares) at the end of 1997.
Under the Stock Purchase Agreement which the Company entered into with SAIC
in November 1994, SAIC purchased a total of $2,400,000 of Company preferred
Stock in 1994, 1995, and 1996. SAIC elected to suspend purchase of the Company's
Preferred Stock in November, 1996. The Company knows of no plan on the part of
SAIC to resume purchase
16
<PAGE> 17
of Preferred Stock.
Commitments for capital expenditures were not material at January 2, 1998.
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 2, 1998....................................................F-3
Consolidated Balance Sheet at January 2, 1998 and January 3, 1997....F-4
Consolidated Statement of Stockholders' Equity for the three
years ended January 2, 1998........................................F-5
Consolidated Statement of Cash Flows for the three years ended
January 2, 1998....................................................F-6
Notes to Consolidated Financial Statements...........................F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
17
<PAGE> 18
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 62 Chief Executive Officer and Chairman of the
Board of Directors
Robert C. Sepucha, Ph.D. 54 Sector President and Director
R. Stephen McCarter 66 Sector President and Director
Carl R. Case, Ph.D. 58 Sector President and Director
B. Warren Knudson 60 Corporate Vice President, Treasurer and Chief
Financial Officer
Jerry R. Fabian 49 Corporate Vice President, Secretary and
Chief Administrative Officer
John L. Allen, Ph.D. 66 Director
Rock N. Hankin 51 Director
Robert L. Johnson 78 Director
Gen. John L. Piotrowski 64 Director
(USAF Retired)
Clarke E. Reynolds 77 Director
Robert B. Buchanan, Ph.D. 57 Nominee Director
</TABLE>
Wayne R. Winton is a cofounder of the Company and has served as 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. is Sector President of SPARTA's Defense & Space
Systems Sector. Prior to that, he was a Senior Vice President and Group Manager
beginning in 1991. Dr. Sepucha was elected to the Board of Directors in 1993.
From 1984 until joining the Company, Dr. Sepucha was a Senior Vice President of
W. J. Schafer Associates, Inc. Dr. Sepucha holds a Master 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 is Sector President of SPARTA's Hardware Systems
Sector. Prior to that, he was a Senior Vice President and Group Manager
beginning in 1994 and a Vice President and Operations Manager from 1984 to 1990.
He also served as President of MI SPARTA, Inc., the Company's wholly owned
subsidiary from 1991 to 1994. Mr. McCarter first became a member of the Board of
Directors in 1994. Mr. McCarter holds a Master of Science degree in electrical
engineering from New York University.
Carl T. Case, Ph.D. is Sector President of SPARTA's Information Systems
Sector. From 1984 to 1987, Dr. Case was the Division Manager of the Systems
Analysis Division in Huntsville, Alabama. He became an Operation Manager and
Vice President in 1988 for SPARTA's Systems Integration Operation and then for
the Information Systems Operation in 1994. Prior to joining SPARTA in 1984, Dr.
Case served as a U.S. Air Force officer for twenty-one years, retiring as a
Colonel in 1984. Dr. Case first became a member of the Board of Directors in
1996. Dr. Case holds a Master 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.
18
<PAGE> 19
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.
John L. Allen, Ph.D. has been a director since 1982. He is currently a
private consultant operating as John L. Allen Associates, Ltd. and participates
on 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's Audit Committee and Compensation Committee.
Rock N. Hankin has been a director 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 affiliate. Mr. Hankin was previously a partner at Price
Waterhouse. He is a certified public accountant and a lawyer. Mr. Hankin is the
chairman of the Board's Audit Committee and a member of the Board's 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 Data-Design
Laboratories Electronics.
Robert L. Johnson has been a director 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 served as Assistant Secretary of the Army (Research and Development).
Mr. Johnson is a member of the Board's Compensation Committee and Audit
Committee.
John L. Piotrowski has been a director since 1991. He is currently a
Corporate Vice President at Science Applications International Corporation
(SAIC). Prior to SAIC, Mr. Piotrowski was a private consultant and key
participant on many DoD advisory groups. Mr. Piotrowski served as Commander of
the U.S. Space Command and Vice Chief of Staff of the Air Force. He is the
chairman of the Board's Compensation Committee and a member of the Board's Audit
Committee. Mr. Piotrowski also serves as a director of Eclipse Space Lines and
Military Professional Resources.
Clarke E. Reynolds has been a director since 1992. He is retired from
NCR Corporation where his last position was Vice President of 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's Audit Committee and Compensation Committee. Mr. Reynolds also serves as
Chairman of the Board of Directors of Alpha Microsystems.
Robert B. Buchanan, Ph.D., has been nominated as a Board member for
shareholder vote at the next stockholders meeting on May 1, 1998. He is, and has
been since 1993, the Group Manager of the Defense Analyses Group for Science
Applications International Corporation (SAIC). Prior to joining SAIC, Dr.
Buchanan was President of Sunbird Exploration, Inc. from 1990 to 1991. Before
Sunbird Exploration, Inc., Dr. Buchanan was with BDM International, Inc. from
1969 to 1990. His last position at BDM was Corporate Vice President, in which
position he was responsible for a wide variety of activities, such as
simulation-based work in advanced technology and work on strategic defense
programs. Dr. Buchanan holds a Ph.D. in electrical engineering from Oklahoma
State University.
Robert J. Vickery, Jr., a cofounder of the Company, resigned from the
Board on February 6, 1997, due to failing health. Mr. Vickery died on September
21, 1997.
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 1997, 1996 and 1995:
19
<PAGE> 20
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation and Long Term Compensation Awards
----------------------------------------------------------------------------------
Other Annual All Other
Name and Salary(1) Bonus(2) Compensation(3) Options Compensation(4)
Principal Position Year ($) ($) ($) (#) ($)
--------------------- ---- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Wayne R. Winton 1997 191,154 95,400 3,370 - 24,000
Chief Executive 1996 176,600 80,000 15,400 3,564 15,800
Officer, Chairman 1995 182,700 31,500 15,900
Robert C. Sepucha 1997 155,925 78,300 14,586 3,541 24,000
Sector President 1996 155,900 70,000 8,300 5,899 22,500
1995 141,300 57,400 8,457 22,500
R. Stephen McCarter 1997 155,925 55,900 16,402 2,737 24,000
Sector President 1996 156,100 54,100 1,800 5,465 22,500
1995 147,400 14,000 20,500
Carl T. Case 1997 155,925 59,800 6,378 2,793 24,000
Sector President 1996 150,500 55,200 4,600 3,076 22,500
1995 134,500 34,100 614 20,000
B. Warren Knudson 1997 115,922 33,669 7,433 1,270 22,400
Chief Financial Officer, 1996 109,200 25,100 820 19,600
Vice President 1995 104,000 21,900 0 15,700
</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, for the fair market value of stock
earned as part of bonus compensation, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Winton - $24,000 $6,000
Sepucha $20,998 21,000 16,900
McCarter 16,230 16,230 4,200
Case 16,562 16,600 10,200
Knudson $7,531 $7,500 $6,600
------- ------ ------
</TABLE>
(3) Includes stock gain on exercised options and pay out of absence accrued but
untaken. (4) The amounts shown in this column are Company contributions to the
Profit Sharing Plan.
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 a ten year plan which
expired at the end of 1997. The Company has submitted its 1997 Stock Option to
the California Department of Corporations for their review and approval. There
are no substantive changes from the 1987 Stock Plan.
The Option Plan is currently administered by Wayne R. 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.
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.
20
<PAGE> 21
During fiscal 1997, options covering a total of 622,504 shares were
granted under the Option Plan to a total of 596 employees of the Company. The
following table contains information concerning the grant of stock options under
the Option Plan to the named executive officers:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable Value
------------------------------------------------- --------------------------
Options % of Total Exercise Market Assumed Annual Rates of
Granted (A)(B) Options or Base Price on Stock Price Appreciation
Name and Granted to Price Date of for Option Term (4 Yrs)
Principal Employee in Grant Expiration
Position (Number) Fiscal Year ($/Sh) ($/Sh) Date 0%($) 5%($) 10%($)
-------- -------- ----------- ------ ------ ---- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wayne R. Winton 346 .11 6.05 6.36 7/4/01 107 581 1,129
Chief Executive 419 .13 6.84 6.90 12/31/01 25 648 1,367
Officer, Chairman
Robert C. Sepucha 4,346 1.43 6.05 6.36 7/4/01 1,347 7,304 14,175
Sector President 5,172 1.63 6.84 6.90 12/31/01 340 8,001 16,873
R. Stephen McCarter 2,017 .66 6.05 6.36 7/4/01 645 3,390 6,579
Sector President 1,797 .57 6.84 6.90 12/31/01 108 2,780 5,862
Carl T. Case 1,925 .63 6.05 6.36 7/4/01 597 3,235 6,279
Sector President 684 .22 6.84 6.90 12/31/01 41 1,058 2,231
B. Warren Knudson 294 .10 6.05 6.36 7/4/01 91 494 959
Chief Financial 2,223 .70 6.84 6.90 12/31/01 133 3,439 7,252
Officer, Vice
President
</TABLE>
(A) Options granted in 1997 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:
<TABLE>
<CAPTION>
OPTION EXERCISES AND YEAR-END VALUE TABLE
- --------------------------------------------------------------------------------------------------------------------
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
- --------------------------------------------------------------------------------------------------------------------
Shares Value Realized Value of Unexercised In-the-Money
Acquired (Market Price Number of Unexercised Options at FY-End (Market Price
Name and on Exercise at Exercise Options at FY-End of Shares at FY-End ($6.90) Less
Principal Less Exercise Exercise Price) ($)
Position (Number) Price) ($)(A) Exercisable Unexercisable Exercisable Unexercisable
-------- -------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Wayne R. Winton
Chief Executive
Officer, President 3,845 4,970 735 4,533 1,797 7,828
Robert C. Sepucha
Sector President 1,749 1,207 8,006 20,433 21,144 29,929
R. Stephen McCarter
Sector President 6,204 6,648 5,797 6,883 14,759 9,769
Carl T. Case
Sector President 2,419 1,162 5,220 5,570 13,860 9,497
B. Warren Knudson
Chief Financial
Officer
Vice President 3,161 2,730 960 6,810 2,603 9,621
</TABLE>
(A) Market value of underlying securities at exercise date minus the price.
21
<PAGE> 22
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, which does business as SPARTA Marine
Instrumentation ("SMI").
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 , (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 may elect to have a larger
than 50% share paid in the form of Company stock.
Employees in the Company's Technical Services ("TS") business unit and in
the wholly-owned subsidiary, SMI, are not eligible to receive Company
contributions to their Profit Sharing Plan accounts as described above. TS and
SMI 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 SMI 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 1997, 5,880 stock options were awarded to
outside Board directors. The options can be exercised 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, 1998, 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:
22
<PAGE> 23
<TABLE>
<CAPTION>
Name and Address Number of Shares(1) Percentage of Class
- ---------------- ------------------- -------------------
<S> <C> <C>
Wayne R. Winton(2) 573,833(3) 9.40%
Robert C. Sepucha 44,027(4) 0.58%
R. Stephen McCarter 103,296(5) 1.60%
Jerry R. Fabian 59,034(6) .95%
B. Warren Knudson 217,485(7) 3.55%
Vickery Family Trust 170,416(8) 2.80%
Carl T. Case 99,839(9) 1.55%
John L. Allen 9,505(10) .14%
Robert L. Johnson 18,806(11) .29%
Rock N. Hankin 11,900(12) .17%
John L. Piotrowski 4,339(13) .07%
Clarke E. Reynolds 3,912(14) .04%
Robert B. Buchanan 0(15) 0.00%
All executive officers
and directors as a group
(12 persons named above) 1,145,976(16) 20.64%
</TABLE>
(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 92653-1545.
(3) Includes 70,077 shares held for Mr. Winton's account in the Company's
Profit Sharing Plan and 969 shares subject to options which may be
exercised within 60 days of February 1, 1998. Excludes 27,953 shares and
518 exercisable options 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 22,159 shares held in Dr. 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, 1998.
(5) Includes 72, 169 shares held in Mr. McCarter's account in the Company's
Profit Sharing Plan and 5,815 shares subject to options which may be
exercised within 60 days of February 1, 1998.
(6) Includes 36,111 shares held in Mr. Fabian's account in the Company's
Profit Sharing Plan and 939 shares subject to options which may be
exercised within 60 days of February 1, 1998. 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.
23
<PAGE> 24
(7) Includes 57,201 shares held in Mr. Knudson's account in the Company's
Profit Sharing Plan and 1,094 shares subject to options which may be
exercised within 60 days of February 1, 1998.
(8) Mr. Vickery died in September of 1997. His shares have been transferred
to the Vickery Family Trust for which his spouse, Joan D. Vickery, is
the Trustee. Joan D. Vickery is an employee of the Company. Excludes
39,911 shares of record by Joan D. Vickery, with respect to which shares
the Vickery Family Trust could be deemed to share beneficial ownership.
(9) Includes 54,483 shares held in Dr. Case's account in the Company's
Profit Sharing Plan and 5,321 shares subject to options which may be
exercised within 60 days of February 1, 1998.
(10) Includes 1,226 shares subject to options held by Dr. Allen which may be
exercised within 60 days of February 1, 1998.
(11) Includes 901 shares subject to options held by Mr. Johnson which may be
exercised within 60 days of February 1, 1998.
(12) Includes 1,839 shares subject to options held by Mr. Hankin which may be
exercised within 60 days of February 1, 1998.
(13) Includes 138 shares subject to options held by Mr. Piotrowski which may
be exercised within 60 days of February 1, 1998.
(14) Includes 1,412 shares subject to options held by Mr. Reynolds which may
be exercised within 60 days of February 1, 1998.
(15) Dr. Buchanan is a nominee director pursuant to the Board representation
provision in the SAIC Stock Purchase Agreement. SAIC presently holds
569,039 shares of non-voting Preferred Stock.
(16) Includes the shares referenced in footnotes (3) through (7) and (9)
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 a Company stockholder
and current employee to make up to $250,000 in borrowings from the bank using
Company stock as collateral. However, total borrowings outstanding under this
arrangement cannot exceed $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 2,
1998, there was one loan outstanding for $44,167 under this arrangement to R.
Stephen McCarter, an Officer and Director of the Company.
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
$4,988,000 in 1997. The amounts received under such agreements were $1,246,000
in 1997. At January 2, 1998, the Company's accounts payable and accounts
receivable balances to and from the preferred stockholder were $182,000 and
$10,000, respectively.
24
<PAGE> 25
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 2, 1998.................................................................F-3
Consolidated Balance Sheet at January 23, 1998 and January 3, 1997.................F-4
Consolidated Statement of Stockholders' Equity for the three
years ended January 2, 1998.....................................................F-5
Consolidated Statement of Cash Flows for the three years ended
January 2, 1998.................................................................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 25 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]
25
<PAGE> 26
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, 1998 By: /s/ Wayne R. Winton
---------------------------------
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, 1998
- -------------------------------- Chief Executive Officer and Director
Wayne R. Winton
/s/ Robert C. Sepucha Director March 27, 1998
- --------------------------------
Robert C. Sepucha
/s/ R. Steve McCarter Director March 27, 1998
- --------------------------------
R. Steve McCarter
/s/ Carl T. Case Director March 27, 1998
- --------------------------------
Carl T. Case
/s/ John L. Allen Director March 27, 1998
- --------------------------------
John L. Allen
/s/ Robert L. Johnson Director March 27, 1998
- --------------------------------
Robert L. Johnson
/s/ Rock N. Hankin Director March 27, 1998
- --------------------------------
Rock N. Hankin
/s/ John L. Piotrowski Director March 27, 1998
- --------------------------------
John L. Piotrowski
/s/ Clarke E. Reynolds Director March 27, 1998
- --------------------------------
Clarke E. Reynolds
/s/ B. Warren Knudson Vice President, Treasurer March 27, 1998
- -------------------------------- and Financial Officer
B. Warren Knudson (Principal Accounting Officer)
/s/ Jerry R. Fabian Vice President, Secretary and March 27, 1998
- -------------------------------- Chief Administrative Officer
Jerry R. Fabian
</TABLE>
26
<PAGE> 27
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
10.12(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, as amended.
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) 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
January 3, 1997.
27
<PAGE> 28
SPARTA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<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, 1997..........F-3
Consolidated Balance Sheet at December 31, 1997 and 1996............................................F-4
Consolidated Statement of Stockholders' Equity for the three years in the
period ended December 31, 1997...................................................................F-5
Consolidated Statement of Cash Flows for the three years in the period ended
December 31, 1997................................................................................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> 29
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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, 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, 1998
F-2
<PAGE> 30
CONSOLIDATED STATEMENT OF INCOME
for the years ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SALES $85,470,000 $67,784,000 $62,074,000
----------- ----------- -----------
COSTS AND EXPENSES:
Labor costs and related benefits 44,864,000 34,884,000 31,785,000
Subcontractor costs 23,569,000 17,148,000 14,952,000
Facility costs 6,923,000 7,122,000 7,460,000
Travel and other 2,422,000 3,325,000 4,356,000
Loss on sale of subsidiary (Note 1) 695,000
Interest expense, net 185,000 22,000 439,000
----------- ----------- -----------
TOTAL COSTS AND EXPENSES 77,963,000 62,501,000 59,687,000
----------- ----------- -----------
INCOME FROM OPERATIONS 7,507,000 5,283,000 2,387,000
KEYMAN INSURANCE PROCEEDS 751,000
----------- ----------- -----------
INCOME BEFORE PROVISION FOR TAXES ON INCOME 8,258,000 5,283,000 2,387,000
PROVISION FOR TAXES ON INCOME (Note 7) 3,153,000 2,200,000 1,002,000
----------- ----------- -----------
NET INCOME $5,105,000 $3,083,000 $1,385,000
=========== =========== ===========
BASIC EARNINGS PER SHARE (Note 1) .75 .42 .21
=========== =========== ===========
DILUTED EARNINGS PER SHARE (Note 1) .70 .41 .21
=========== =========== ===========
</TABLE>
F-3
<PAGE> 31
CONSOLIDATED STATEMENT BALANCE SHEET
at December 31
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $198,000 $151,000
Accounts receivable (Note 2) 23,557,000 21,160,000
Prepaid expenses 448,000 306,000
----------- -----------
TOTAL CURRENT ASSETS 24,203,000 21,617,000
EQUIPMENT AND IMPROVEMENTS, NET (Notes 1 & 3) 7,321,000 6,028,000
OTHER ASSETS (Note 4) 1,685,000 1,409,000
----------- -----------
TOTAL ASSETS $33,209,000 $29,054,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation (Note 5) $5,723,000 $3,871,000
Accounts payable and other accrued expenses 3,005,000 3,320,000
Current portion of notes payable (Note 6) 461,000
Current portion of subordinated notes payable (Note 6) 477,000 640,000
Income taxes payable 199,000 466,000
Deferred income taxes (Note 7) 2,446,000 2,849,000
----------- -----------
TOTAL CURRENT LIABILITIES 11,850,000 11,607,000
NOTES PAYABLE (Note 6) 2,658,000
SUBORDINATED NOTES PAYABLE (Note 6) 646,000 1,090,000
DEFERRED INCOME TAXES (Note 7) 1,677,000 2,828,000
COMMITMENTS AND CONTINGENCIES (Note 8)
REDEEMABLE PREFERRED STOCK, $.01 par value; 2,000,000 shares authorized; 569,039
shares issued and outstanding; original issuance value of $2,400,000
at 1997 and 1996, respectively (Note 1) 3,926,000 3,044,000
STOCKHOLDERS' EQUITY (Notes 1 and 9)
Common stock, $.01 par value; 25,000,000 shares
authorized; 13,070,700 and 12,376,781 shares issued 131,000 124,000
Additional paid-in capital 26,340,000 22,229,000
Retained earnings 25,152,000 20,929,000
Treasury stock (39,171,000) (32,797,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 12,452,000 10,485,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $33,209,000 $29,054,000
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-4
<PAGE> 32
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the years ended December 31
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- -------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock 693,919 7,000 3,955,000 3,962,000
Acquisition of treasury stock (6,374,000) (6,374,000)
Accretion of redeemable
preferred stock (882,000) (882,000)
Tax benefit relating to stock plan 156,000 156,000
Net income 5,105,000 5,105,000
------------- ----------- ------------- ------------- --------------- -------------
BALANCE AT DECEMBER 31, 1997 13,070,700 $131,000 $26,340,000 $25,152,000 $(39,171,000) $12,452,000
============= =========== =============== ============= =============== =============
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-5
<PAGE> 33
CONSOLIDATED STATEMENT OF CASH FLOW
for the years ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,105,000 $3,083,000 $1,385,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,489,000 1,536,000 1,729,000
Loss on sale of equipment 193,000 294,000 103,000
Employee compensation paid in stock 1,967,000 1,571,000 1,484,000
Change in assets and liabilities:
Accounts receivable (2,397,000) (1,416,000) 1,404,000
Prepaid expenses (142,000) 51,000 209,000
Income tax receivable 57,000 (57,000)
Other assets (276,000) 1,116,000 365,000
Accrued compensation 1,852,000 1,105,000 304,000
Accounts payable and other accrued expenses (315,000) (941,000) 328,000
Income taxes payable (267,000) 466,000 (881,000)
Deferred income taxes (1,554,000) (1,097,000) (975,000)
Tax benefit relating to stock plan 156,000 62,000
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,811,000 5,887,000 5,398,000
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,974,000) (2,101,000) (1,042,000)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (2,974,000) (2,101,000) (1,042,000)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable preferred stock 900,000 1,200,000
Proceeds from issuance of common stock 1,994,000 779,000 341,000
Purchases of treasury stock (6,374,000) (3,811,000) (2,967,000)
Net (repayments) borrowing under line-of-credit agreement 2,197,000 (405,000) (1,361,000)
Principal payments on debt (607,000) (1,320,000) (1,469,000)
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (2,790,000) (3,857,000) (4,256,000)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH 47,000 (71,000) 100,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 151,000 222,000 122,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $198,000 $151,000 $222,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid
during the year for:
Interest $200,000 $138,000 $461,000
========== ========== ==========
Income taxes $4,824,000 $2,672,000 $2,896,000
========== ========== ==========
</TABLE>
F-6
<PAGE> 34
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, and (3) the reported amounts of
revenues and expenses. 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 2, 1998, January 3, 1997, and December 29, 1995; however,
for ease of presentation of the financial statements, the year ends have
been presented as December 31, 1997, 1996 and 1995.
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, 1997, 1996 and 1995, 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:
Office furniture and equipment 5-15 years
Automotive equipment 3-5 years
Leasehold improvements up to 10 years
Capitalized Software 5-10 years
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 $43,000,
$0 and $0 for the years ended December 31, 1997, 1996 and 1995,
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, 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
Accretion on redeemable
preferred stock 882,000
-------- ----------
Balance at December 31, 1997 569,039 $3,926,000
======== ==========
</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 available for distribution to preferred stock shareholders
before any payment is made to common stockholders. The liquidation preference is
F-7
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $4,988,000, $2,864,000 and $1,515,000 for the years ended
1997, 1996 and 1995, respectively. The amounts received under such
agreements were $1,246,000, $718,000 and $1,154,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, the
Company's accounts payable and accounts receivable balances to and from the
preferred stockholder were $180,000 and $10,000, 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, 1997,
1996 and 1995, consists of 7,541,820, 6,529,181 and 5,722,111 shares,
respectively, of common stock.
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. Formula stock prices at
valuation dates are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
January 21 $5.93 $4.66 $4.05
April 21 6.36 4.48 3.84
July 21 6.88 4.90 3.95
October 21 6.90 5.35 4.19
</TABLE>
l) EARNINGS PER SHARE (EPS) - During 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." All
earnings per share amounts presented for prior years have been restated in
accordance with SFAS No. 128.
Basicearnings per share are computed based on the weighted average number
of common shares outstanding during the respective years. Diluted earnings
per share include the dilutive effect of stock options and shares granted
under the restricted stock compensation plan. Accretion is deducted from
net income available to stock holders in computing both basic and diluted
earnings per share. Because the impact would have been antidilutive, stock
options totaling 58,235 shares, 611,303 shares and 1,741,944 shares for
1997, 1996 and 1995 respectively, were not included in the calculation of
diluted earnings per share.
A reconciliation of the numerators and denominators for the basic and
diluted earnings per share computations are shown below:
<TABLE>
<CAPTION>
1997 Income Shares EPS
---- ------ ------ ---
<S> <C> <C> <C>
Net income $5,105,000
Less accretion (882,000)
---------
Basic EPS 4,223,000 5,597,940 $.75
=======
Dilutive
effect:
Stock options 386,018
Deferred stock 48,590
--------- ---------
Diluted EPS 4,223,000 6,032,548 .70
========= ========= ===
</TABLE>
F-8
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996
----
<S> <C> <C> <C>
Net income 3,083,000
Less accretion (609,000)
------------
Basic EPS 2,474,000 5,898,069 .42
=====
Dilutive
effect:
Stock options 125,618
Deferred stock 30,041
------------ -----------
Diluted EPS 2,474,000 6,053,728 .41
============ =========== =====
1995
Net income 1,385,000
Less accretion (72,000)
------------
Basic EPS 1,313,000 6,204,771 .21
=====
Dilutive
effect:
Stock options 3,238
Deferred stock
Diluted EPS $1,313,000 6,208,009 $.21
============ =========== ======
</TABLE>
m) DISCLOSURES ABOUT FAIR VALUE 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 offered to the Company for
obligations with similar remaining maturities.
n) 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.
o) NEW ACCOUNTING STANDARDS - In 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These statements, which
are effective for fiscal years beginning after December 15, 1997, expand or
modify disclosures and will have no impact on our consolidated financial
position, results of operations or cash flows.
- ----------------------------
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accounts receivable $ 9,581,000 $ 8,664,000
Accounts 14,074,000 12,866,000
receivable-unbilled
Other receivables 598,000 361,000
Less allowance for doubtful
accounts (696,000) (731,000)
------------- --------------
$23,557,000 $21,160,000
============= ==============
</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. 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 $1,145,000 and $1,287,000 at December 31, 1997 and 1996,
respectively. These amounts may notbe 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>
1997 1996
---- ----
<S> <C> <C>
Office furniture and $15,839,000 $14,452,000
equipment
Automotive equipment 9,000 9,000
Leasehold improvements 1,557,000 1,446,000
Capitalized software 702,000 597,000
------------- -------------
18,107,000 16,504,000
Less accumulated
depreciation and amortization (10,786,000) (10,476,000)
------------- -------------
$ 7,321,000 $ 6,028,000
============= =============
</TABLE>
F-9
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - OTHER ASSETS
Other assets are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Contract retentions $1,341,000 $1,189,000
Deposits 172,000 102,000
Other 172,000 118,000
------------- --------------
$1,685,000 $1,409,000
============= ==============
</TABLE>
- ----------------------------
NOTE 5 - ACCRUED COMPENSATION
Accrued compensation is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued bonus payable $2,865,000 $1,517,000
Accrued profit sharing 385,000 363,000
Accrued payroll 2,473,000 1,991,000
--------------- ---------------
$5,723,000 $3,871,000
=============== ===============
</TABLE>
- -----------------------------
NOTE 6 - NOTES PAYABLE
Notes payable is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Bank line of credit, secured by
accounts receivable and certain
fixed assets; interest at prime
(8.5% at December 31, 1997) $2,658,000 $461,000
------------ -----------
2,658,000 461,000
Less-current portion (461,000)
------------ -----------
$2,658,000 -
============ ===========
</TABLE>
At December 31, 1997, the bank line of credit provided borrowings up to $8.0
million with all borrowings due December 1, 1999. The line of credit agreement
prohibits the payment of dividends by the Company without the bank's prior
consent and requires the Company to maintain certain financial ratios. The
Company was in compliance with such requirements at December 31, 1997.
At December 31, 1997 and 1996, the Company had 6 and 9, 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 (5.0% at December 31, 1997) or 10%.
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Subordinated notes payable $1,123,000 $1,730,000
Less: Current portion (477,000) (640,000)
-------------- -------------
$646,000 $1,090,000
============== =============
</TABLE>
The maturities of notes payable during each fiscal year are as follows: 1998 -
$477,000, 1999 - $379,000, 2000 - $267,000 and 2001 - $0.
- ----------------------------
NOTE 7 - INCOME TAXES
The provision (benefit) for taxes on income is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $3,777,000 $2,651,000 $1,657,000
State 774,000 584,000 320,000
------------- ------------- --------------
4,551,000 3,235,000 1,977,000
------------- ------------- --------------
Deferred:
Federal (1,348,000) (911,000) (699,000)
State (206,000) (186,000) (276,000)
------------- ------------- --------------
(1,554,000) (1,097,000) (975,000)
------------- ------------- --------------
Exercise of stock
options not treated
as a reduction of
income tax
expense 156,000 62,000
------------- ------------- --------------
$3,153,000 $2,200,000 $1,002,000
============= ============= ==============
</TABLE>
Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Accelerated depreciation $ 548,000 $ 655,000
Unbilled accounts receivable 1,785,000 2,211,000
Reserves (272,000) (337,000)
Accrued compensation and
benefits
Cash to accrual basis 2,181,000 3,252,000
election
Other (119,000) (104,000)
------------- -------------
$4,123,000 $5,677,000
============= =============
</TABLE>
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
F-10
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision for income
taxes at statutory rate $2,808,000 $1,796,000 $ 812,000
State income taxes, net of
federal income tax benefit 358,000 233,000 91,000
Other (13,000) 171,000 99,000
---------- ---------- ----------
$3,153,000 $2,200,000 $1,002,000
========== ========== ==========
</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 $3,253,000, $3,187,000 and $3,497,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease commitments under operating leases at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
Fiscal Lease
Year Ending Commitment
--------------------- ----------------
<S> <C>
1998 $3,168,000
1999 2,541,000
2000 1,897,000
2001 1,470,000
2002 959,000
Thereafter 524,000
----------------
$10,559,000
================
</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 $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, 1997 and 1996, $44,000 and $21,000,
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, 1997, 1996 and 1995 under the
plan were as follows:
<TABLE>
<CAPTION>
Avg. Total
Number of Exercise Option
Shares Price per Value
Share
------------ ----------- -------------
<S> <C> <C> <C>
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
Granted 691,498 6.45 4,460,000
Canceled (254,460) 6.31 (1,607,000)
Exercised (340,907) 4.90 (1,671,000)
------------ ----------- -------------
December 31, 1997 1,733,620 $5.19 $8,996,000
============ =========== =============
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, options on 623,704,
447,027 and 472,020 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, 1997:
F-11
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Options outstanding at December 31, 1997
- ---------------------------------------------------------
Range Weighted- Weighted-Avg.
of Exercise Number Average Remaining
Prices Outstanding Exercise Contractual
Price Life
- -------------- ------------ -------------- --------------
<S> <C> <C> <C>
$ 3.91-$ 5.85 1,094,109 $ 4.44 2 Years
$ 6.06-$ 6.90 639,511 $ 6.47 4 Years
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable at December 31, 1997
- ----------------------------------------------------------
Range
of Exercise Number Weighted-Average
Prices Exercisable Exercise Price
- ---------------- ------------ ------------------
<S> <C> <C>
$ 3.91-$ 5.85 513,316 $ 4.27
$ 6.06-$ 6.90 4,816 $ 6.46
</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>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Net income
As reported $ 5,105,000 $3,083,000 $1,385,000
Pro Forma 5,406,360 2,979,000 1,281,000
Basic earnings per share
As reported .75 .42 .21
Pro Forma .73 .40 .19
Diluted earnings per share
As reported .70 .41 .21
Pro Forma .68 .39 .19
</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%, 6.5% and 6.8% for 1997, 1996 and 1995 respectively, and a
weighted-average expected life of 4 years for 1997, and 2.2 years for 1996 and
1995. The weighted-average fair value of options granted during 1997, 1996 and
1995 was $1.24, $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, 1997, 1996 and 1995 there were options outstanding at prices
ranging from $3.91 to $6.90, $3.84 to $6.32 and $3.84 to $6.32, respectively,
with expiration dates through 2001. Of the options outstanding at December 31,
1997, 1996 and 1995, options to purchase 518,132, 654,782 and 590,527 shares,
respectively, were immediately exercisable at prices ranging from $3.84 to
$6.90, $3.84 to $6.32 and $3.84 to $6.32, per share, respectively.
As of December 31, 1997, 1996 and 1995, 10,282,766, 10,974,264 and 11,341,329
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. During
1997, 25,294 shares of restricted stock were granted at a price of $5.93 per
share and 8,583 shares previously granted at a price of $4.66 per share were
retired. Compensation expense of $48,000 and $26,000 was recognized in 1997 and
1996, respectively.
The Company pays a portion of annual bonuses in the form of stock. For the years
ended December 31, 1997, 1996 and 1995, 110,340, 74,437 and 54,146 shares
totaling $856,000, $442,000 and $252,000 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, 1997, 1996 and 1995
were $3,055,000, $2,617,000 and $2,684,000 respectively. A portion of the
contributions to the plan were in the form of common stock. For the years ended
December 31, 1997, 1996 and 1995, 232,620, 267,644 and 319,782 shares, totaling
$1,492,000, $1,286,000 and $1,279,000 respectively, were contributed to the
plan.
F-12
<PAGE> 40
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, 1997, 1996 and
1995, 9,052, 6,891 and 5,708 shares, totaling $60,000, $34,000 and $23,000
respectively, were contributed to the plan.
F-13
<PAGE> 1
EXHIBIT 23
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, 1998 appearing on Page F-2 of this Form
10-K.
Price Waterhouse LLP
Costa Mesa, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 198
<SECURITIES> 0
<RECEIVABLES> 24,253
<ALLOWANCES> 696
<INVENTORY> 0
<CURRENT-ASSETS> 24,203
<PP&E> 18,107
<DEPRECIATION> 10,786
<TOTAL-ASSETS> 32,209
<CURRENT-LIABILITIES> 11,850
<BONDS> 0
3,926
0
<COMMON> 26,471
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 33,209
<SALES> 85,470
<TOTAL-REVENUES> 85,470
<CGS> 77,778
<TOTAL-COSTS> 77,778
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185
<INCOME-PRETAX> 8,258
<INCOME-TAX> 3,153
<INCOME-CONTINUING> 5,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,105
<EPS-PRIMARY> .75
<EPS-DILUTED> .70
</TABLE>
