<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended January 3, 1999.
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.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 63-0775889
------------------------------ -------------------
(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
- -------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 768-8161
--------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- -------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Options to Purchase Common Stock
--------------------------------
(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 28, 1999 was $60,533,227.
As of February 28, 1999, 6,234,112 shares of the Registrant's common stock, $.01
par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
SPARTA, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
ITEM 1. BUSINESS ............................................................1
ITEM 2. PROPERTIES...........................................................7
ITEM 3. LEGAL PROCEEDINGS....................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................................8
ITEM 6. SELECTED FINANCIAL DATA.............................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................19
ITEM 11. EXECUTIVE COMPENSATION..............................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................................24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................25
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K............................................................26
</TABLE>
<PAGE> 3
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 or 1998 and the partnership will be liquidated in 1999. In 1995, a
new subsidiary, Commercial Technology, Inc. ("CTI"), was formed and in 1996,
1997, and 1998 did business as SPARTA Marine Instrumentation. In the last
quarter of 1998, all active contracts in CTI were contractually assigned and
assumed by another entity unaffiliated with the Company. 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 88% of the Company's
revenues in the fiscal year ended January 3, 1999. Contracts to other non-DOD
government agencies like NASA accounted for an additional 9% of the Company's
revenues and 3% of the Company's revenues 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)
1
<PAGE> 4
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 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 historical
uncertainties of those programs. However, recent congressional concern about the
proliferation of nuclear weapons has stabilized government funding in this area.
Because of this, BMD continues to be a steady and large part of the Company's
business. In 1998, 1997, and 1996, BMD revenues accounted for 39%, 40%, and 41%,
respectively, of sales. Government BMDO funding for government fiscal year
("GFY") 1998 was $3.8 billion, up from $3.6 billion in GFY 1997. The program, as
restructured starting in GFY 1994, emphasized Theater Missile Defense ("TMD")
rather than National Missile Defense ("NMD"). The Company has adjusted to this
change. Sales in the TMD area continue to be strong, primarily due to one very
large contract in the Company's Rosslyn, Virginia office.
The BMDO budget appropriation for GFY 1999 is $3.6 billion with some
renewed emphasis on NMD, as well as continuing support of TMD. Governmental
budget decisions, international events, proliferation of nuclear weapons, and
international arms negotiations, over which the Company has no influence, will
affect BMD. 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. The Company has employees in twenty-eight
offices and four government facilities. The offices are in 11 states in
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
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
2
<PAGE> 5
may require changes in defensive strategies or tactics; and (v) budgetary and
economic considerations. The life-cycle continues through the development,
testing, manufacture, deployment, and maintenance of systems and technology.
Scientific, engineering, and technical assistance firms, such as the
Company, play a significant role in this development process by gathering and
analyzing complex data; developing design alternatives and solutions to
accommodate conflicting requirements; establishing development priorities;
assisting in the preparation of requirements for various programs and in the
evaluation of bids received for those programs; and developing software and
other systems for testing and validating weapons system hardware and software.
Finally, such firms 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.
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").
Although most experts agree that procurement reform has not been very favorable
to small business, it has not adversely impacted the Company's business to date.
Another initiative within the government is to out-source all services, except
those services that are inherently governmental functions, to the maximum extent
possible. Since the Company has a significant engineering service business, this
initiative should be favorable to the Company in the future.
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 706 employees, of which approximately 70% 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 that 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 seven 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, computer security work for the FBI, and range facility information
systems support work for NASA.
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.
3
<PAGE> 6
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 that exploit these military
technologies in the commercial marketplace. Significant investments were made in
1996, 1997, and 1998 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 in 1998.
Organization
No organizational changes were made in 1998. In 1998, 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"). SMI's operations were
discontinued in late 1998 and all existing contractual obligations were
contractually assigned and assumed by a separate unaffiliated company. 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.
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. The Company then
evaluates this information, 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 twenty-eight 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
4
<PAGE> 7
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 and Raytheon, among others.
U.S. Government Contracts
Approximately 97% of the Company's fiscal year 1998 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, 1995. Indirect contract costs for
periods subsequent to fiscal year 1995 have been recorded at amounts which are
expected to be realized upon final settlement. It's expected that fiscal year
1996 and 1997 will be audited and settled in fiscal year 1999.
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 1998. The Company does not
anticipate any termination of programs and contracts in 1999. However, no
assurances can be given that such events will not occur. Changes in government
procurement policies relative to small businesses or a significant reduction in
government
5
<PAGE> 8
expenditures for services of the type provided by the Company also would
materially affect the revenues and income of 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 Congress makes appropriations 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 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:
<TABLE>
<CAPTION>
January 3, January 2,
1999 1998
------------ ----------
<S> <C> <C>
Funded 12-Month Backlog $ 37,600,000 $34,300,000
Unfunded 12-Month Backlog $ 67,100,000 58,900,000
------------ ----------
Total Funded/Unfunded Contract Backlog $104,700,000 $93,200,000
============ ===========
</TABLE>
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
that 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
6
<PAGE> 9
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 business 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
Most of the Company's employees are highly skilled and educated.
Approximately 70% of the Company's employees have college degrees, and 30% 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 1998,
the Company experienced a lower turnover of employees than in prior recent
years. Some of this improvement can be attributed to an organized Company
objective to improve turnover. This was accomplished primarily by a return to
strong incentive compensation rewards and increased training. Another factor was
the 27% appreciation of the employee's Company stock. The Company was able to
attract and hire 190 full-time employees in 1998 to replace 102 terminating
employees and increase full-time employees by 88. Generally, turnover in the
industry is attributable to the intense competition for skilled and educated
technical personnel in the marketplace. The Company believes that continuation
of strong growth is the key to recruiting and retaining a highly qualified
staff. Such growth will provide greater opportunities for advancement within the
Company, 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 that the
Company needs to perform in its business areas. It is uncertain if the Company
will be able to reduce turnover again or achieve its recruitment goals. Future
growth is dependent on achieving these goals.
At January 3, 1999, the Company employed 706 full-time employees, a
majority of which are based in the Company's facilities in California, Virginia,
and Alabama. The number of full-time employees at the end of 1997 was 618. 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 corporate office, comprised of approximately 12,300 square
feet of office space leased through May, 2003, are located in Laguna Hills,
California. The Company's leased offices, aggregating approximately 256,000
square feet in 21 locations in 11 states, include major offices in the cities of
Huntsville, Alabama; San Diego, California; Lancaster, California; El Segundo,
California; LaJolla, California: Lexington, Massachusetts; Rosslyn, Virginia;
McLean, Virginia; Raleigh, North Carolina; Columbia, Maryland; Colorado Springs,
Colorado; and Orlando, Florida. Leases on these and other Company facilities
expire at various times during the next eight years. The aggregate annual rent
paid by the Company for all of its offices and facilities during the fiscal year
ended January 3, 1999, was approximately $3,422,000. In addition to its leased
facilities,
7
<PAGE> 10
the Company has 11 offices in 7 states at locations in close proximity to or
collocated with customers and agencies to which it provides its services. The
Company believes that the existing facilities are adequate to meet its needs for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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, its current employees and directors primarily own
the Company. Accordingly, the Company's 1997 Stock Plan (the "Stock 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 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 that 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 temporarily 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 1998 to repurchase stock with a value of $195,556.
The amount of stock held by former employees decreased from 7.0% (431,000
shares) at the end of 1997 to 4.9% (305,700 shares) at the end of 1998.
8
<PAGE> 11
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 Agreement also grants SAIC the right to
require the Company to repurchase all of the Preferred Stock 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 the November 1996, Stock
Repurchase Date. As of February 1, 1999, SAIC owned 569,039 shares of Preferred
Stock, which represented 9.1% of the total capital stock outstanding. It is the
Company's intent, which SAIC has agreed, to begin quarterly repurchase of stock
held by SAIC starting with the May 21, 1999 Stock Repurchase Date, using funds
as available within the stock repurchase limitation.
Formula Price
The Formula Price is based upon a formula (the "Formula") 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
9
<PAGE> 12
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 and Sector Presidents before submission to the Chief
Executive Officer.
The Formula Price does not include liquidity as a factor in determining the
stock price. However, it should be noted that any extended period of
non-liquidity might 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. It was last reviewed in April of 1998. The results of that review
determined that the Formula was producing a 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 proceeding the date on which the Formula Price is recalculated. The
Company, without independent review, prepares such information. 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.
Immediately 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
--------------------------
1998 1997
----- -----
<S> <C> <C>
January 21 $7.69 $5.93
April 21 8.32 6.36
July 21 8.09 6.88
October 21 9.15 6.90
</TABLE>
10
<PAGE> 13
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, 1999, there were approximately 565 holders of record of
the Company's Common Stock.
Repurchase Rights of the Company, Restrictions on Transferability
All shares of the Company's Common Stock are subject to the Company's
right (but not obligation) to repurchase such shares in the event of a
termination of the holder's association with the Company. All shares of the
Company's Common Stock are also subject to (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 Stock Plan and are
applicable to all shares issued under that Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of the
Company for each of the five fiscal years in the period ended January 3, 1999.
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)
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $ 97,695 $ 85,470 $ 67,784 $ 62,074 $ 65,258
Costs and expenses 89,585 77,963 62,501 59,687 62,246
Net income(2) 4,704 5,105 3,083 1,385 1,748
Basic Earnings per share(3) $ 0.62 $ 0.75 $ 0.42 $ 0.21 $ 0.28
Diluted Earnings per share(3) $ 0.56 $ 0.70 $ 0.41 $ 0.21 $ 0.27
Adjusted Earnings per share(4) $ 0.58
Weighted average Common
Stock outstanding 6,150,996 6,032,548 6,053,728 6,208,009 6,351,021
</TABLE>
11
<PAGE> 14
Balance Sheet Data:
<TABLE>
<CAPTION>
Years Ended December 31(1)
-----------------------------------------------------------
(Amounts in thousands)
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $37,770 $33,209 $29,054 $28,662 $31,273
Working capital 11,830 12,353 10,010 9,476 10,286
Long term liabilities, including
redeemable Preferred Stock 7,373 8,907 6,962 8,348 10,521
Stockholders' equity 15,838 12,452 10,485 9,410 9,202
</TABLE>
- --------------
(1) The Company's fiscal year is the 52 or 53 week period ending on the Friday
closest to December 31. The last five fiscal years have ended on January 3,
1999; January 2, 1998; January 3, 1997; December 29, 1995; and December 30,
1994. For ease of presentation of summary financial data, the year-ends have
been presented as December 31.
(2) Net income in 1997 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 do not include the effect on diluted earnings
per share of proceeds from an insurance policy on the life of a director and
former officer of the Company.
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, and Section 27A
of the Securities Act of 1933 that involve risks and uncertainties. Those risks
and uncertainties, which are discussed elsewhere in this 10-K, include the
variability of government funding, changing geopolitical conditions, possible
changes in government procurement procedures, and the availability of highly
skilled and educated employees required by the Company. Accordingly, 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,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Sales $97,695,000 $85,470,000 $67,784,000
BMD 39% 40% 41%
Other DOD 49% 51% 47%
Non-DOD 12% 9% 12%
Gross Profits(1) $ 8,891,000 $ 7,922,000 $5,936,000
Profits as a percentage of costs 10.0% 10.2% 9.6%
Net income from operations $ 4,704,000 $ 4,354,000 $3,083,000
Net income(2) $ 4,704,000 $ 5,105,000 $3,083,000
</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.
12
<PAGE> 15
<TABLE>
<CAPTION>
Information Summarizing Financial Position
at December 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Stockholders' equity $15,838,000 $12,452,000 $10,485,000
Equity per share(1) 2.36 1.89 1.64
Stock repurchase notes 833,000 1,123,000 1,730,000
Notes payable $ 1,266,000 $ 2,658,000 $ 461,000
</TABLE>
<TABLE>
<CAPTION>
Backlog
----------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Funded 12-month backlog $ 37,600,000 $34,300,000 $34,900,000
Unfunded 12-month backlog 67,100,000 58,900,000 41,500,000
Total contract backlog $104,700,000 $93,200,000 $76,400,000
</TABLE>
<TABLE>
<CAPTION>
Financial Ratios
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Avg. days sales outstanding ("DSO") 85 88 96
Current ratio 2.1 2.1 1.9
Debt to equity ratio as defined
by the lender 0.5 0.8 0.8
</TABLE>
- --------------
(1) Equity per share based on weighted shares of Common Stock outstanding at
year-end, including weighted shares of Preferred Stock outstanding.
Revenues increased 14.3%, 26.1% and 9.2% over the prior year in 1998, 1997
and 1996, respectively. Growth of 16.5% in 1998 in Ballistic Missile Defense
Organization ("BMDO"), National Aeronautics and Space Administration ("NASA"),
and intelligence agency support was offset by a decrease of 2.2% in other
customer business areas including Army, Air Force, Navy and commercial programs.
The Company has historically received most of its revenues from Department of
Defense ("DOD") programs. Non-DOD revenues represented 12.0%, 9.1% and 12.5% of
total revenue in 1998, 1997, and 1996, respectively. Prior to 1996, support of
the BMD program was the Company's primary source of DOD revenue. Starting in
1996 and continuing through 1998, non-BMD DOD programs have been 6.5%, 11.5% and
10% higher than revenues in BMD DOD Programs. Technical services, engineering
and field services that typically involve lower cost service contracts,
represented the Company's largest growth area. Specifically, technical services
revenue increased 55% over 1997, grew to 12% of total sales, and achieved an
increase in annualized contract backlog of 145%.
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 $93,200,000 in
1997 to $104,700,000 in 1998, an increase of 12.3%. Annual sales as a percent of
prior year annualized contract backlog were 104.8%, 111.9%, and 100.1% in 1998,
1997, and 1996, 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 five 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. Each focuses on
one of three core business areas: (1) system engineering for defense and space
systems; (2) information systems engineering, services, and products; and (3)
engineering services, development, and products for hardware technologies. In
13
<PAGE> 16
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 1998. The Company is structured into
operating entities in each of the three sectors. Each operation has significant
autonomy in conducting business
At the start of each year the Company establishes specific financial
objectives for each of its sectors and operations. The Company also annually
establishes specific corporate business objectives. For 1998, the corporate
business objectives included (i) transition of product lines into income
producing sales, (ii) establishment of structured campaigns in the pursuit of
new business development of, and (iii) reduction of the level of voluntary staff
turnover and enhancement of recruitment. The Company met its 1998 financial plan
in almost all respects. Each of the sectors achieved increases in sales, gross
profit, net profit, and contract backlog. In the area of corporate business
objectives, the Company was unsuccessful in achieving its income objectives on
any of its product lines. The three product lines are SecurEC(TM), an
application of end-to-end security software to commercial Electronic Data
Interchange ("EDI") on the Internet; nanAlign(TM), an electro-optic system to
compensate for air turbulence error sources in the manufacture of integrated
circuits and flat panel displays; and Zeus(TM), a mobile mounted laser system to
neutralize mines and unexploded ordnance on test ranges. Progress was made
toward the objectives for each product line and all three will continue to be
pursued in 1999. Voluntary turnover of personnel was higher in 1997 than the
Company had experienced in recent history. In addition, Company sales growth had
suffered in several areas where available jobs could not be filled with the
requisite technical personnel. A Company objective for 1998 was to reduce the
voluntary turnover rate and structure successful recruiting campaigns. In 1998,
voluntary turnover was reduced to 12% from 18% in 1997. Recruiting, while
improved, remained a problem for the Company in several areas such as software
engineering and systems analysis and in certain geographical locations. This is
a defense industry wide problem brought on, in part, by the increased number of
jobs for software technology skills in both commercial products/ services areas
and government programs.
Stockholders' equity increased 27.2% during 1998. The Company currently
commits 50% of its retained earnings plus the net proceeds from stock
transactions to repurchase stock from stockholders. In 1998, $1,412,000 of funds
available for stock repurchase was not subscribed to in the quarterly
repurchases. As a result, stockholders' equity increased by this amount over
plan for the year. 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 40.7%, from $8,100,000 in 1997 to
$4,800,000 in 1998. Debt-to-equity ratio reached a historical low of 0.5 in 1998
versus 0.8 for the two prior years.
Liquidity and Capital Resource
The Company's primary source of funding its operations in 1998 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
$12,000,000 with all borrowings due December 1, 1999. The Company believes that,
as in the past, it will be able to renew its banking agreement under similar or
improved terms. Interest payments on borrowings under the line of credit were
$271,000 in 1998 compared to $121,800 in 1997. At the end of 1998, borrowings
for working capital were $1,266,000, down from $2,658,000 at the end of 1997.
Days sales outstanding ("DSO") in receivables averaged 85 days in 1998, down
from an average of 88 and 96 days in 1997 and 1996, respectively. Average
monthly borrowing was $3,300,000 in 1998, up from $1,200,000 in 1997. The growth
in sales, continued product lines investment, and implementation of a new
financial accounting system drove the need for additional borrowings in 1998.
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 50% of 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
14
<PAGE> 17
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 a 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. Sale of stock on a pro rata basis
is held quarterly. There is no other market for the sale and purchase of the
Company's stock.
From inception, it has been 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. However, 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 $833,000 at the end of 1998. As
the Company's profit growth improved and 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 continued through 1998. 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 gave the Plan Administrator
the authority to issue new promissory notes, at his discretion, in order to
resume the policy of repurchasing all stock of terminating employees. In 1998,
the Company repurchased all stock of terminating employees and issued one new
promissory note with a value of $195,000. The amount of stock held by former
employees decreased from 7.0% (431,000 shares) at the end of 1997 to 4.9%
(305,700 shares) at the end of 1998.
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 last purchased the Company's Preferred Stock
in August 1996. It is the Company's intent, which SAIC has agreed, to begin
quarterly repurchase of SAIC held stock starting with the May 21, 1999 quarter
trade, using funds as available within the stock repurchase limitation.
Capital Commitments
Commitments for capital expenditures were not material at January 3, 1999.
Effects of Inflation
The majority of the Company's contracts is cost reimbursement type contracts
or is 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, the
effects of inflation have not significantly impacted net income as a percentage
of revenues.
YEAR2000
The statements in the following section constitute "YEAR2000 Readiness
Disclosure" within the meaning of the YEAR2000 Information and Readiness
Disclosure Act.
15
<PAGE> 18
YEAR2000 Plan
In 1997, the Company informally initiated a program on its internal web site
to prepare computing infrastructure for year 2000 ("YEAR2000") readiness. In
1998, the Company initiated a more formal program to complete the preparation
and to perform testing of the Company's computing systems and microchip
dependent infrastructure. In addition to computing and microchip technology, the
evaluation of potential business disruptions relating to vendors, suppliers,
facilities, customers, and utilities is also a part of this program. The Company
has appointed a senior information systems engineer as Corporate Information
Systems Director ("CISD"). Included in the CISD's assignment is the
responsibility for corporate YEAR2000 readiness. The Company's Network Steering
Group ("NSG"), an on-going organization of the Company's top information system
personnel, will support the CISD in YEAR2000 issues. The CISD reports directly
to the Executive Committee and will periodically brief the Audit Committee of
the Board of Directors on YEAR2000 progress. The last briefing to the Executive
and Audit Committees was in February 1999.
IT Systems
The Company is heavily dependent on its internal computing systems to
perform its primary business activity. Systems software includes both internally
developed software/databases and commercial third party supplied
software/databases. The hardware systems are dominated by desktop PCs, graphics
workstations, servers, and networking hardware. The Company has no mainframe
computers at the present time. A portion of the Company's business is also the
development of software for customers and commercial sales.
IT Remediation Plan
The CISD has established a four-phase program, as shown in the accompanying
chart, to ensure that the Company's IT systems will be ready for YEAR2000.
Phase one, increasing internal awareness, was begun several years ago and is
an on-going activity assuring that YEAR2000 issues are an integral part of all
IT decisions. Phase two, developing and assessing an inventory of IT systems for
the purpose of identifying YEAR2000 issues has begun and is expected to be
completed by March, 1999. Remediation, phase three, will consist of upgrade or
replacement of hardware and software identified with YEAR2000 issues. This
process has been ongoing for the Company's desktop PCs, servers, and networking
equipment and is estimated to be 80% complete. Remediation of all identified
issues is planned for by July 1999. The fourth phase, testing, has also been
on-going for stand-alone systems once corrected (e.g., upgrading of PC bios) and
will be completed by August, 1999 for all stand-alone and integrated, networked
components. In 1997, the Company determined that its core internal financial
accounting system needed to be replaced. The legacy system had been internally
developed with some use of commercial modules, but was not capable of supporting
the Company's planned future growth, nor was the system YEAR2000 compliant. The
legacy system has been replaced by a commercial system with vendor assurances of
YEAR2000 compliance. During the test phase, the Company will perform tests on
the system to confirm vendor representations.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IT REMEDIATION 7/1/98 TO 10/1/98 TO 1/1/99 TO 4/1/99 TO 7/1/99 TO 10/1/99 TO
9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
- ----------------------------------------------------------------------------------------------------
PI - Increasing Awareness ______________
- ----------------------------------------------------------------------------------------------------
PII - Developing and
Assessing ________________________
- ----------------------------------------------------------------------------------------------------
PIII - Remediation ______________________
- ----------------------------------------------------------------------------------------------------
PIV - Testing
- ----------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
NON-IT REMEDIATION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Evaluation of Embedded
Chip Systems ______________
- ----------------------------------------------------------------------------------------------------
Remediation and Test of
Embedded Systems ____________________
- ----------------------------------------------------------------------------------------------------
Contingency Planning __________________________________
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Company also delivers internally developed software to customers under
contract, sometimes with commercially supplied hardware. In general, contracts
to date for Company developed software have not included requirements for
YEAR2000 compliance. The Company is actively marketing software products
developed for the commercial marketplace. All such software is internally
YEAR2000 compliant, but risk from customer's use on non-compliant computers and
interfaces with non-compliant software cannot be readily assessed. The Company
is making every effort to minimize this risk through licensing and use
agreements.
As of this date, it is management's opinion that the Company will meet its
plan to be YEAR2000 ready for all of its Information Technology systems.
Non-IT Systems
The Company is in the process of inventorying and assessing all non-IT
systems. Embedded processors are found in computer-controlled machinery,
elevators, telephone systems, and security and access systems. The Company has
some embedded chip technology associated with computer controlled manufacturing
equipment in its LaJolla facility, and is in the process of assessing its
YEAR2000 readiness. All of the Company's facilities are leased. Lessors have
been asked to identify all facility equipment using embedded chip technology and
its YEAR2000 readiness. As of this date, approximately 20% have answered the
Company's request for information. The risk to the Company is the temporary
disruption of business in facilities barred from access. The Company expects
such disruptions to be temporary and short in duration, if they occur at all.
However, the Company recognizes it cannot control YEAR2000 readiness in leased
facilities and must depend on the cooperation of lessors and property management
companies in this regard.
Business Partner and Customer YEAR2000 Impacts
To maintain its revenue stream, the Company is dependent on its customers, the
U.S. Government, and the banking industry to implement YEAR2000 readiness
programs. The Company has initiated communications with its business partners to
determine their YEAR2000 readiness and the extent to which the Company may be
vulnerable for their failure to comply. All of the Company's customers,
suppliers, and subcontractors have similar proprietary interests to the Company
in attaining YEAR2000 readiness, and the Company does not anticipate significant
disruption of business from this source. The Company is dependent on the U.S.
Government paying offices for approximately 85% of its contract reimbursements.
The Company has begun contacting its U. S. Government paying offices to
determine their position on expectations for YEAR2000 compliance. Disruption in
the payment process could have a significant impact on the cash flow of the
Company and lead to higher than historical borrowings on its line of credit. As
a contingency against this risk, the Company has negotiated an increase in its
line of credit. Management believes this increase will assure the ability to
operate while the U.S. Government implements alternate disbursement processes.
It is the Company's understanding that the nation's banking industry is under
heavy pressure and scrutiny by government oversight authorities to assure
YEAR2000 readiness. The Company's primary bank has assured management that all
testing for YEAR2000 readiness will be done by June, 1999, and that it expects
to be fully compliant. The Company's business operations are also dependent to
varying degrees on other business partners including utility companies, payroll
processing vendor, insurance and benefit providers, investment fund managers and
trustee's for retirement plans, telecommunications vendors, and delivery vendors
to name the more significant. The Company has begun contacting its business
partners to determine their YEAR2000 readiness and the risk to
17
<PAGE> 20
the Company of any failure to do so. The ability of the Company's business
partners to be YEAR2000 ready is not within the Company's control. Failure of
such third party systems to be ready could have a material adverse effect on the
Company's results of operations and ability to do business. Such failures, where
significant, will be addressed by contingency planning. The Company receives
less than 1% of its revenues from contracts with companies or government
entities in other countries, and does not anticipate significant risk from those
countries' lack of readiness for YEAR2000.
YEAR2000 Remediation Costs
Cost of remediation includes cost to upgrade or replace systems, hardware,
software, internal labor, consulting, and YEAR2000 readiness assessment
software. Cost associated with replacement of hardware, software, and embedded
chip affected machines is not included in the cost if that replacement was
planned and has been merely accelerated for YEAR2000 readiness. For example, the
Company's legacy internal financial accounting system was a planned upgrade and
was accelerated to begin in 1997 to assure YEAR2000 readiness, and will not be
included in remediation costs. To date, the Company estimates it has spent
approximately $40K on this remediation and expects to spend an additional $200K
to complete this effort. All costs, except long-lived assets, will be expensed
as incurred.
Contingency Plans
Upon an assessment of the YEAR2000 issues, particularly with respect to
non-IT issues, the Company will identify reasonable case scenarios. For each
scenario so identified, contingency plans will be developed and communicated
with employees. Current plans include setting up a YEAR2000 Action Team whose
function shall be to make an immediate assessment on Jan 1, 2000 of all facility
security, utility, communication, and computing resources. Based on this
assessment, the Team will have access to on-call technical personnel within the
Company to address problems against its contingency plans. The Team will also
inform management at all Company locations of its initial assessment and
problems. Problems so identified will be prioritized relative to its impact on
the business functions, and addressed in order of priority to the extent
problems cannot be addressed in parallel.
Worst Case Scenarios
A reasonable worst case scenario does not include, for example, the complete
disruption of all local utility services for an extended period of time at all
Company business locations. Although such an event is not impossible, in the
view of management it is highly unlikely. A reasonable worst case scenario may
include, however, the inability of the U. S. Government paying offices to meet
historical invoice turn around times exacerbated by one or more of the Company's
key customers also being late in paying open accounts. Other reasonable worst
case scenarios may include, for example; (1) potential litigation with
customers, suppliers or vendors with respect to YEAR2000 compliance of the
Company's products and services; (2) service problems with payroll, benefits and
insurance vendors; and/or (3) interruption of subcontracted services and
products from vendors required to meet contract obligations on contracts with
performance incentives. The impact of any of these scenarios varies but includes
increased costs for general and administrative support, higher interest expense
to finance operations, and potential reduction or delays in the purchase of
Company products. Due to the speculative nature of the schedule and degree of
compliance of third parties, it is uncertain whether or not the contingency
plans selected will adequately address the impacts on the Company's financial
condition once all issues are known after January 1, 2000.
YEAR2000 Forward Looking Statements
The foregoing statements as to costs, dates, intent, belief, and current
expectations of the Company or its officers with respect to YEAR2000 issues are
forward looking and are made in reliance on the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements are based on
the Company's best estimates and expectations given the information available at
the date hereof and may be updated, as additional information becomes available.
In addition, such statements are not guarantees of future results or
18
<PAGE> 21
outcomes and involve risks and uncertainties, and actual results may differ
materially from those in the forward-looking statements as a result of various
factors. The Company cautions that it is impossible to predict the impact of
certain factors that are not within the control of the Company and there can be
no assurances that these estimates will be achieved. Actual results could differ
materially from those anticipated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Wayne R. Winton 63 Chief Executive Officer and Chairman of
the Board of Directors
Robert C. Sepucha, Ph.D. 55 Sector President and Director
R. Stephen McCarter 67 Sector President and Director
Carl T. Case, Ph.D. 59 Sector President and Director
B. Warren Knudson 61 Corporate Vice President, Treasurer, and
Chief Financial Officer
Jerry R. Fabian 50 Corporate Vice President, Secretary, and
Chief Administrative Officer
John L. Allen, Ph.D. 67 Director
Rock N. Hankin 52 Director
Robert L. Johnson 79 Director
Gen. John L. Piotrowski (USAF Retired) 65 Director
Clarke E. Reynolds 78 Director
Robert B. Buchanan, Ph.D. 58 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 of Science 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
19
<PAGE> 22
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.
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. 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 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.
Mr. Johnson has elected not to serve another term as director.
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.
20
<PAGE> 23
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. Mr. Reynolds has elected not to
serve another term as director.
Robert B. Buchanan, Ph.D., has been a director since 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.
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 1998, 1997, and 1996:
<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 1998 190,577 90,000 11,169 2,151 24,000
Chief Executive 1997 191,154 95,400 3,370 -- 24,000
Officer, Chairman 1996 176,600 80,000 15,400 3,564 15,800
Robert C. Sepucha 1998 165,462 75,000 21,022 1,126 24,000
Sector President 1997 155,925 78,300 14,586 3,541 24,000
1996 155,900 70,000 8,300 5,899 22,500
R. Stephen McCarter 1998 168,432 75,000 58,495 7,785 24,000
Sector President 1997 155,925 55,900 16,402 2,737 24,000
1996 156,100 54,100 1,800 5,465 22,500
Carl T. Case 1998 165,462 65,900 18,948 3,182 24,000
Sector President 1997 155,925 59,800 6,378 2,793 24,000
1996 150,500 55,200 4,600 3,076 22,500
B. Warren Knudson 1998 121,231 27,700 6,743 939 22,339
Chief Financial 1997 115,922 33,669 7,433 1,270 22,400
Officer, Vice 1996 109,200 25,100 820 19,600
President
- ---------------------------------------------------------------------------------------------
</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, consisting of the fair market value of
stock earned as part of bonus compensation, is as follows:
21
<PAGE> 24
<TABLE>
<CAPTION>
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Winton $27,000 - $24,000
Sepucha 22,500 $20,998 21,000
McCarter 22,500 16,230 16,230
Case 19,800 16,562 16,600
Knudson 8,300 $ 7,531 $ 7,500
-----------------------------------------------
</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 1997 Stock Plan (the "Stock 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). This Stock Plan replaces the 1987 Nonqualified Stock Option Plan
that expired in 1997. The shareholders in the first quarter of 1998 approved the
new Stock Plan. There are no substantive changes from the 1987 Nonqualified
Stock Option Plan.
Wayne R. Winton, the Company's Chief Executive Officer, currently
administers the Stock Plan. 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 Stock Plan. Subject to the
express provisions of the Stock Plan, the Administrator has full authority to
interpret the Stock Plan and to make all other determinations necessary or
advisable for the administration of the Stock Plan.
All shares issued under the Stock 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 Stock Plan and in
the Company's Certificate of Incorporation.
During fiscal 1998, options covering a total of 549,195 shares were granted
under the Stock Plan to a total of 745 employees of the Company. The following
table contains information concerning the grant of stock options under the Stock
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 Employees 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 16 .00 7.87 8.32 7/5/02 7 36 69
Chief Executive 15 .00 8.54 9.15 1/3/03 9 24 55
Officer, Chairman
Robert C. Sepucha 2,194 .40 7.87 8.32 7/5/02 987 4,921 9,459
Sector President 1,903 .35 8.54 9.15 1/3/03 1,161 2,993 6,929
R. Stephen McCarter 2,753 .50 7.87 8.32 7/5/02 1,239 6,175 11,869
Sector President 2,342 .43 8.54 9.15 1/3/03 1,429 3,684 8,528
Carl T. Case 250 .05 7.87 8.32 7/5/02 113 561 1,078
Sector President 172 .03 8.54 9.15 1/3/03 105 271 626
B. Warren Knudson 314 .06 7.87 8.32 7/5/02 141 704 1,354
Chief Financial 1,000 .18 8.54 9.15 1/3/03 610 1,573 3,641
Officer, Vice
President
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
(A) Options granted in 1998 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 (Formula Price Number of Unexercised Options at FY-End (Formula Price
Name and on Exercise at Exercise Options at FY-End of Shares at FY-End ($9.15) Less
Principal Less Exercise Exercise Price)($)
Position (Number) Price)($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wayne R. Winton
Chief Executive
Officer, President 2,151 8,811 2,105 998 8,720 3,173
Robert C. Sepucha
Sector President 3,240 11,608 18,722 10,574 79,181 25,000
R. Stephen McCarter
Sector President 7,785 20,897 3,491 6,499 11,461 9,643
Carl T. Case
Sector President 3,182 10,489 6,100 1,930 27,746 8,163
B. Warren Knudson
Chief Financial Officer
Vice President 438 1,105 4,704 2,967 18,776 9,259
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
The Board of Directors determines the amount of the Company's annual
contribution to the Profit Sharing Plan, in its discretion. The Company has
established a target contribution that 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 less than one year. All contributions are subject to at least 1000
hours of service during the year 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.
23
<PAGE> 26
Employees in the Company's Technical Services ("TS") business unit are not
eligible to receive Company contributions to their Profit Sharing Plan accounts
as described above. TS 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 may also elect to defer a portion of their compensation into their accounts
in the Profit Sharing Plan, but the Company does not match their contributions.
Mary Frances Winton, Corporate Director of Special Projects, 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 $2,200 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 1998, 7,336 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, 1999, 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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Name and Address Number of Shares(1) Percentage of Class
- -----------------------------------------------------------------------------
<S> <C> <C>
Wayne R. Winton(2) 512,800(3) 6.99%
Robert C. Sepucha 56,756(4) .62%
R. Stephen McCarter 108,029(5) 1.47%
B. Warren Knudson 196,939(6) 2.65%
Carl T. Case 99,506(7) 1.36%
John L. Allen 8,516(8) .10%
Robert L. Johnson 17,847 .25%
Rock N. Hankin 12,033(9) .15%
John L. Piotrowski 5,201(10) .06%
Clarke E. Reynolds 4,774(11) .05%
Robert B. Buchanan 1,250 .02%
All executive officers
and directors as a group 1,087,317 17.32%
- -----------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
(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 83,627 shares held for Mr. Winton's account in the Company's
Profit Sharing Plan and 1,267 shares subject to options that may be
exercised within 60 days of February 1, 1999. Excludes 30,546 shares and
778 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 23,692 shares held in Dr. Sepucha's account in the Company's
Profit Sharing Plan and 11,367 shares subject to options that may be
exercised within 60 days of February 1, 1999.
(5) Includes 75,502 shares held in Mr. McCarter's account in the Company's
Profit Sharing Plan and 742 shares subject to options that may be exercised
within 60 days of February 1, 1999.
(6) Includes 58,578 shares held in Mr. Knudson's account in the Company's
Profit Sharing Plan and 6,598 shares subject to options which may be
exercised within 60 days of February 1, 1999.
(7) Includes 56,010 shares held in Dr. Case's account in the Company's Profit
Sharing Plan and no shares subject to options that may be exercised within
60 days of February 1, 1999.
(8) Includes 946 shares subject to options held by Dr. Allen that may be
exercised within 60 days of February 1, 1999.
(9) Includes 1,420 shares subject to options held by Mr. Hankin that may be
exercised within 60 days of February 1, 1999.
(10) Includes 1,000 shares subject to options held by Mr. Piotrowski that may be
exercised within 60 days of February 1, 1999.
(11) Includes 862 shares subject to options held by Mr. Reynolds that may be
exercised within 60 days of February 1, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an arrangement with a bank to allow any 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 3,
1999, there was one loan outstanding for $34,167 under this arrangement to R.
Stephen McCarter, an officer and director of the Company.
25
<PAGE> 28
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 ...............................................27
FINANCIAL STATEMENTS(1)
Consolidated Balance Sheet at December 31, 1998 and December 31, 1997...........28
Consolidated Statement of Income for the three years ended
December 31, 1998.............................................................29
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1998.................................................30
Consolidated Statement of Cash Flows for the three years ended
December 31, 1998.............................................................31
Notes to Consolidated Financial Statements.......................................32
</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 39 are filed as part of this report on Form 10-K.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the last quarter
of the fiscal year covered by this report.
(1) See Note 1(d) to Consolidated Financial Statement
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
26
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SPARTA, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 26, present fairly, in all material
respects, the financial position of SPARTA, Inc. and its subsidiary at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, 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/
PricewaterhouseCoopers LLP
Costa Mesa, California
March 26, 1999
27
<PAGE> 30
CONSOLIDATED BALANCE SHEET
at Decemer 31
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 174,000 $ 198,000
Accounts receivable (Note 2) 25,108,000 23,557,000
Prepaid expenses 548,000 448,000
Income taxes receivable 556,000
------------ ------------
TOTAL CURRENT ASSETS 26,386,000 24,203,000
EQUIPMENT AND IMPROVEMENTS, NET (Notes 1 & 3) 9,634,000 7,321,000
OTHER ASSETS (Note 4) 1,750,000 1,685,000
------------ ------------
TOTAL ASSETS $ 37,770,000 $ 33,209,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation (Note 5) $ 5,820,000 $ 5,723,000
Accounts payable and other accrued expenses 5,525,000 3,005,000
Current portion of subordinated notes payable (Note 6) 474,000 477,000
Income taxes payable 199,000
Deferred income taxes (Note 7) 2,737,000 2,446,000
------------ ------------
TOTAL CURRENT LIABILITIES 14,556,000 11,850,000
NOTES PAYABLE (Note 6) 1,266,000 2,658,000
SUBORDINATED NOTES PAYABLE (Note 6) 359,000 646,000
DEFERRED INCOME TAXES (Note 7) 544,000 1,677,000
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 1998 and 1997, respectively (Note 1) 5,207,000 3,926,000
STOCKHOLDERS' EQUITY (Notes 1 and 9)
Common stock, $.01 par value; 25,000,000 shares
authorized; 13,886,286 and 13,070,700 shares issued 139,000 131,000
Additional paid-in capital 32,077,000 26,340,000
Retained earnings 28,576,000 25,152,000
Treasury stock (44,954,000) (39,171,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,838,000 12,452,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 37,770,000 $ 33,209,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
28
<PAGE> 31
CONSOLIDATED STATEMENT OF INCOME
for the years ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
SALES $97,695,000 $85,470,000 $67,784,000
----------- ----------- -----------
COSTS AND EXPENSES:
Labor costs and related benefits 52,536,000 44,864,000 34,884,000
Subcontractor costs 26,751,000 23,569,000 17,148,000
Facility costs 7,389,000 6,923,000 7,122,000
Travel and other 2,607,000 2,422,000 3,325,000
Interest expense, net 302,000 185,000 22,000
----------- ----------- -----------
TOTAL COSTS AND EXPENSES 89,585,000 77,963,000 62,501,000
----------- ----------- -----------
INCOME FROM OPERATIONS 8,110,000 7,507,000 5,283,000
KEYMAN INSURANCE PROCEEDS 751,000
----------- ----------- -----------
INCOME BEFORE PROVISION FOR TAXES ON INCOME 8,110,000 8,258,000 5,283,000
PROVISION FOR TAXES ON INCOME (Note 7) 3,406,000 3,153,000 2,200,000
----------- ----------- -----------
NET INCOME $ 4,704,000 $ 5,105,000 $ 3,083,000
=========== =========== ===========
BASIC EARNINGS PER SHARE (Note 1) .62 .75 .42
=========== =========== ===========
DILUTED EARNINGS PER SHARE (Note 1) .56 .70 .41
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
29
<PAGE> 32
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended December 31
<TABLE>
Common Stock Additional
---------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- -------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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
Issuance of common stock 815,586 8,000 5,167,000 5,175,000
Acquisition of treasury stock (5,783,000) (5,783,000)
Accretion of redeemable
Preferred stock (1,280,000) (1,280,000)
Tax benefit relating to
stock plan 570,000 570,000
Net income 4,704,000 4,704,000
----------- -------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1998 13,886,286 $139,000 $32,077,000 $28,576,000 $(44,954,000) $15,838,000
=========== ======== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
30
<PAGE> 33
CONSOLIDATED STATEMENT OF CASH FLOW
for the years ended December 31
<TABLE>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,704,000 $ 5,105,000 $ 3,083,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,527,000 1,489,000 1,536,000
Loss on sale of equipment 114,000 193,000 294,000
Employee compensation paid in stock 2,961,000 1,967,000 1,571,000
Change in assets and liabilities:
Accounts receivable (1,551,000) (2,397,000) (1,416,000)
Prepaid expenses (100,000) (142,000) 51,000
Income tax receivable (556,000) 57,000
Other assets (65,000) (276,000) 1,116,000
Accrued compensation 98,000 1,852,000 1,105,000
Accounts payable and other accrued expenses 2,520,000 (315,000) (941,000)
Income taxes payable (199,000) (267,000) 466,000
Deferred income taxes (842,000) (1,554,000) (1,097,000)
Tax benefit relating to stock plan 570,000 156,000 62,000
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,181,000 5,811,000 5,887,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,955,000) (2,974,000) (2,101,000)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,955,000) (2,974,000) (2,101,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable preferred stock 900,000
Proceeds from issuance of common stock 2,215,000 1,994,000 779,000
Purchases of treasury stock (5,588,000) (6,374,000) (3,811,000)
Net (repayments) borrowing under line-of-credit
agreement (1,392,000) 2,197,000 (405,000)
Principal payments on debt (485,000) (607,000) (1,320,000)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (5,250,000) (2,790,000) (3,857,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (24,000) 47,000 (71,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 198,000 151,000 222,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 174,000 $ 198,000 $ 151,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 305,000 $ 200,000 $ 138,000
=========== =========== ===========
Income taxes $ 4,441,000 $ 4,824,000 $ 2,672,000
=========== =========== ===========
</TABLE>
31
<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 3, 1999, January 2, 1998, and January 3, 1997; however, for
ease of presentation of the financial statements, the year ends have been
presented as December 31, 1998, 1997 and 1996.
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, 1998, 1997 and 1996, 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 useful life
ranging from 5 to 15 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 $195,000,
$43,000 and $0 for the years ended December 31, 1998, 1997 and 1996,
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, 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
Accretion on redeemable preferred stock 1,281,000
------- ----------
Balance at December 31, 1998 569,039 $5,207,000
======= ==========
</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
32
<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 $5,327,000, $4,988,000 and $2,864,000 for the years ended December 31,
1998, 1997 and 1996, respectively. The amounts received under such
agreements were $396,000, $1,246,000 and $718,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the
Company's accounts payable and accounts receivable balances to and from the
preferred stockholder were $283,000 and $9,000, respectively.
i) TREASURY STOCK - Treasury stock is shown at cost, and at December 31, 1998,
1997 and 1996, consists of 8,256,847, 7,541,820 and 6,529,181 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
January 21 $7.69 $5.93 $4.66
April 21 8.32 6.36 4.48
July 21 8.09 6.88 4.90
October 21 9.15 6.90 5.35
</TABLE>
k) EARNINGS PER SHARE (EPS) - During 1997, the Company adopted Statement of
Financial Standards 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.
Basic earnings 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 with an exercise price above fair market value totaling 58,235
shares and 611,303 shares for 1997 and 1996 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>
1998 Income Shares EPS
----------- --------- -----
<S> <C> <C> <C>
Net income $ 4,704,000
Less accretion (1,281,000)
-----------
Basic EPS 3,423,000 5,561,057 $ .62
=====
Dilutive effect:
Stock options 521,081
Deferred stock 68,858
----------- ---------
Diluted EPS 3,423,000 6,150,996 .56
=========== ========= =====
1997
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
=========== ========= =====
1996
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
=========== ========= =====
</TABLE>
l) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount
of cash and cash
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
m) 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.
n) 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
were adopted effective Jan. 1, 1998, did not have any 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>
1998 1997
---- ----
<S> <C> <C>
Accounts receivable $ 9,155,000 $ 9,581,000
Accounts receivable-unbilled 15,857,000 14,074,000
Other receivables 975,000 598,000
Less allowance for doubtful
accounts (879,000) (696,000)
----------- -----------
$25,108,000 $23,557,000
=========== ===========
</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 $2,566,000 and $1,292,000 at December 31, 1998 and 1997,
respectively. These amounts may not be fully recoverable; however, the Company
does not expect to sustain losses of any significant consequence with respect to
such costs.
- ----------------------------
NOTE 3 - EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Office furniture and equipment $ 18,095,000 $ 15,839,000
Automotive equipment 9,000 9,000
Leasehold improvements 1,743,000 1,557,000
Capitalized software 1,365,000 702,000
------------ ------------
21,212,000 18,107,000
Less accumulated depreciation
and amortization (11,578,000) (10,786,000)
------------ ------------
$ 9,634,000 $ 7,321,000
============ ============
</TABLE>
NOTE 4 - OTHER ASSETS
Other assets are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Contract retentions $1,463,000 $1,341,000
Deposits 156,000 172,000
Other 131,000 172,000
---------- ----------
$1,750,000 $1,685,000
========== ==========
</TABLE>
- ----------------------------
NOTE 5 - ACCRUED COMPENSATION
Accrued compensation is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued bonus payable $2,126,000 $2,865,000
Accrued profit 593,000 385,000
Accrued payroll 3,101,000 2,473,000
---------- ----------
$5,820,000 $5,723,000
========== ==========
</TABLE>
- -----------------------------
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE
Notes payable is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Bank line of credit, secured by
accounts receivable and certain
fixed assets; interest at prime
(7.75% at December 31, 1998) $1,266,000 $2,658,000
</TABLE>
At December 31, 1998, the bank line of credit provided borrowings up to $12.0
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, 1998.
At December 31, 1998 and 1997, the Company had 6 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 (4.5% at December 31,
1998) or 10%.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Subordinated notes payable $ 833,000 $1,123,000
Less: Current portion (474,000) (477,000)
--------- ----------
$ 359,000 $ 646,000
========= ==========
</TABLE>
The maturities of notes payable during each fiscal year are as follows: 1999 -
$474,000, 2000 - $359,000 and 2001 - $0.
NOTE 7 - INCOME TAXES
The provision (benefit) for taxes on income is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $3,310,000 $3,777,000 $2,651,000
State 368,000 774,000 584,000
---------- ----------- -----------
3,678,000 4,551,000 3,235,000
---------- ----------- -----------
Deferred:
Federal (688,000) (1,348,000) (911,000)
State (154,000) (206,000) (186,000)
---------- ----------- -----------
$ (842,000) $(1,554,000) $(1,097,000)
========== =========== ===========
</TABLE>
<TABLE>
<S> <C> <C> <C>
Exercise of stock options not
treated as a reduction of
income tax expense 570,000 156,000 62,000
---------- ---------- ----------
$3,406,000 $3,153,000 $2,200,000
========== ========== ==========
</TABLE>
Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accelerated depreciation $ 544,000 $ 548,000
Unbilled accounts receivable 2,094,000 1,785,000
Reserves (336,000) (272,000)
Accrued compensation and
benefits
Cash to accrual basis election 1,065,000 2,181,000
Other (86,000) (119,000)
---------- ----------
$3,281,000 $4,123,000
========== ==========
</TABLE>
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes
at statutory rate $2,757,000 $2,808,000 $1,796,000
---------- ---------- ----------
State income taxes, net
benefit 384,000 358,000 233,000
Other 265,000 (13,000) 171,000
---------- ---------- ----------
$3,406,000 $3,153,000 $2,200,000
========== ========== ==========
</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 $3,426,000, $3,253,000 and $3,187,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Future minimum lease commitments under operating leases at December 31, 1998 are
as follows:
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Fiscal Lease
Year Ending Commitment
----------- ----------
<S> <C>
1999 $ 3,367,000
2000 2,817,000
2001 2,301,000
2002 1,431,000
2003 918,000
Thereafter 212,000
-----------
$11,046,000
===========
</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, 1998 and 1997, $34,000 and $44,000,
respectively, in loans were outstanding under this arrangement.
The Company is subject to certain legal proceedings and claims that 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, 1998, 1997 and 1996 under the
plan were as follows:
<TABLE>
<CAPTION>
Avg.
Exercise Total
Number Price per Option
of Shares Share Value
--------- ----- -----------
<S> <C> <C> <C>
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
Granted 618,506 8.16 5,045,000
Canceled (92,036) 5.81 (534,000)
Exercised (434,844) 4.56 (1,982,000)
--------- ----- -----------
December 31, 1998 1,825,246 $6.31 $11,525,000
========= ===== ===========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, options on 548,987,
623,704 and 447,027 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 11% 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, 1998:
<TABLE>
<CAPTION>
Options outstanding at December 31, 1998
- ----------------------------------------------------------------
Range Weighted- Weighted-Avg.
of Exercise Number Average Remaining
Prices Outstanding Exercise Price Contractual Life
------ ----------- -------------- ----------------
<S> <C> <C> <C>
$3.91-$5.85 647,942 $4.50 2 Years
$6.06-$9.11 1,177,304 $7.31 4 Years
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable at December 31, 1998
- ----------------------------------------------------
Range
of Exercise Number Weighted-Average
Prices Exercisable Exercise Price
------ ----------- --------------
<S> <C> <C>
$3.91-$5.85 442,772 $4.33
$6.06-$9.11 120,711 $6.66
</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.
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
Net income
<S> <C> <C> <C>
As reported $4,704,000 $5,105,000 $3,083,000
Pro Forma 3,431,000 5,406,360 2,979,000
Basic earnings per share
As reported .62 .75 .42
Pro Forma .62 .73 .40
Diluted earnings per share
As reported .56 .70 .41
Pro Forma .56 .68 .39
</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 5.5%, 6.5% and 6.5% for 1998, 1997 and 1996 respectively, and a
weighted-average expected life of 4 years for 1997 and 1998 and 2.2 years for
1996. The weighted-average fair value of options granted during 1998, 1997 and
1996 was $1.76, $1.24 and $0.61, respectively.
At December 31, 1998, 1997 and 1996 there were options outstanding at prices
ranging from $3.91 to $9.15, $3.91 to $6.90 and $3.84 to $6.32, respectively,
with expiration dates through 2002. Of the options outstanding at December 31,
1998, 1997 and 1996, options to purchase 563,483, 518,132 and 654,782 shares,
respectively, were immediately exercisable at prices ranging from $3.91 to
$9.15, $3.84 to $6.90 and $3.84 to $6.32, per share, respectively.
As of December 31, 1998, 1997 and 1996, 9,664,260, 10,282,766 and 10,974,264
shares, respectively, were reserved for future issuances under the stock option
plan.
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, 1998, 1997 and
1996, 11,216, 9,052 and 6,891 shares, totaling $93,000, $60,000 and $34,000
respectively, were contributed to the 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 1998, 22,106
shares of restricted stock were granted at a price of $7.69 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 $81,000 and $48,000 was recognized in 1998 and
1997, respectively.
The Company pays a portion of annual bonuses in the form of stock. For the years
ended December 31, 1998, 1997 and 1996, 65,363, 110,340 and 74,437 shares
totaling $635,000, $856,000 and $442,000 respectively were issued under the
plan.
The Company has a defined contribution retirement plan for all eligible
employees except employees in the Company's technical systems business unit. The
Company's contributions for this plan for the years ended December 31, 1998,
1997 and 1996 were $3,821,000, $3,055,000 and $2,617,000 respectively. A portion
of the contributions to the plan were in the form of common stock. For the years
ended December 31, 1998, 1997 and 1996, 236,080, 232,620 and 267,644 shares,
totaling $1,927,000, $1,492,000 and $1,286,000 respectively, were contributed to
the plan.
37
<PAGE> 40
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.
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 26, 1999
- ----------------------------- Chief Executive Officer and Director
Wayne R. Winton
/s/ Robert C. Sepucha Director March 26, 1999
- -----------------------------
Robert C. Sepucha
/s/ R. Steve McCarter Director March 26, 1999
- -----------------------------
R. Steve McCarter
/s/ Carl T. Case Director March 26, 1999
- -----------------------------
Carl T. Case
/s/ John L. Allen Director March 26, 1999
- -----------------------------
John L. Allen
/s/ Robert L. Johnson Director March 26, 1999
- -----------------------------
Robert L. Johnson
/s/ Rock N. Hankin Director March 26, 1999
- -----------------------------
Rock N. Hankin
/s/ John L. Piotrowski Director March 26, 1999
- -----------------------------
John L. Piotrowski
/s/ Clarke E. Reynolds Director March 26, 1999
- -----------------------------
Clarke E. Reynolds
/s/ Robert B. Buchanan
- ----------------------------- Director March 26,1999
Robert B. Buchanan
/s/ B. Warren Knudson Vice President, Treasurer and Chief March 26, 1999
- ----------------------------- Financial Officer (Principal
B. Warren Knudson Accounting Officer)
</TABLE>
38
<PAGE> 41
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
10.13(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, as amended
10.17(6) Second Amendment to Office Lease, dated August 20, 1997, relating to
the Company's Laguna Hills, California Facility
10.18(7) 1997 Stock Plan.
10.19(7) Forms of Stock Option Agreement and Stock Bonus Agreement used under
1997 Stock Plan
22. The Company had one subsidiary, Commercial Technology Inc., (dba
SPARTA Marine Instrumentation ["SMI"]), which was a wholly-owned
subsidiary incorporated in California. The Company has closed SMI
operations and assigned and transferred rights, title, and interest
in all but the primary contracts to a legal entity separate from the
Company.
23. Consent of PricewaterhouseCoopers 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.
(6) 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 2, 1998.
(7) Incorporated herein by reference to the exhibit contained in the Company's
report on Form S-8 (Commission File No. 333-72541).
39
<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, 33-45915, 333-40883, and 333-72541) of
SPARTA, Inc. and its subsidiary of our report dated March 26, 1999 appearing on
Page 27 of this Form 10-K.
PricewaterhouseCoopers
Costa Mesa, California
April 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 174
<SECURITIES> 0
<RECEIVABLES> 25,987
<ALLOWANCES> 879
<INVENTORY> 0
<CURRENT-ASSETS> 26,386
<PP&E> 21,212
<DEPRECIATION> 11,578
<TOTAL-ASSETS> 37,770
<CURRENT-LIABILITIES> 14,556
<BONDS> 0
5,207
0
<COMMON> 32,216
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,770
<SALES> 97,695
<TOTAL-REVENUES> 97,695
<CGS> 89,283
<TOTAL-COSTS> 89,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> 8,110
<INCOME-TAX> 3,406
<INCOME-CONTINUING> 4,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,704
<EPS-PRIMARY> .62
<EPS-DILUTED> .56
</TABLE>
