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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended January 2, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _________ to __________
Commission file number 0-21682
SPARTA, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 63-0775889
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23041 Avenida de la Carlota, Suite 325, Laguna Hills, CA 92653-1595
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 768-8161
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Options to Purchase Common Stock
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant (based upon the "Formula Price", as hereinafter
defined) as of February 27, 2000 was $71,109,317.
As of February 27, 2000, 5,666,081 shares of the Registrant's common stock, $.01
par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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SPARTA, INC.
FORM 10-K
TABLE OF CONTENTS
PART 1
ITEM 1. BUSINESS ........................................................1
ITEM 2. PROPERTIES.......................................................7
ITEM 3. LEGAL PROCEEDINGS................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............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 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............15
ITEM 11. EXECUTIVE COMPENSATION..........................................18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................22
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K........................................................23
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PART I
ITEM 1. BUSINESS
General
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.
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; and composite
materials. 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.
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 83% of the Company's
revenues in the fiscal year ended January 2, 2000. Contracts to other non-DOD
government agencies like NASA accounted for an additional 14% 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
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and support are provided both directly to these agencies or indirectly via
subcontracts from major defense and aerospace contractors. The agencies have
primary responsibility for developing strategic defense systems which include
(i) sophisticated reconnaissance and surveillance equipment, (ii) long range
missile and weapons systems to protect the United States from attack and provide
the United States with retaliatory capability, (iii) theater missile defense,
and (iv) command, control, communication, and intelligence systems which control
and integrate the operations of strategic reconnaissance, surveillance, and
weapons systems.
The Ballistic Missile Defense Organization ("BMDO") was established as a
separate agency of the Department of Defense to integrate into a single agency
all the military activities carried out for defense against ballistic missiles
by the 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 1999, 1998, and 1997, BMD revenues accounted for 37%, 39% and 40%,
respectively, of sales. Government BMDO funding for government fiscal year
("GFY") 1999 was $4.2 billion, up from $3.8 billion in GFY 1998. The program, as
restructured starting in GFY 1994, emphasized Theater Missile Defense ("TMD")
rather than National Missile Defense ("NMD"). On July 23, President Clinton
signed the National Missile Defense Act of 1999, which calls for the
implementation of a system to protect against limited attacks "as soon as is
technologically possible."
The BMDO budget appropriation for GFY 2000 is $3.8 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 the threat posed to
the U.S. by a limited number of warheads, which is the impetus for the NMD Act
of 1999, will result in the continued funding of strategic defense programs 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-two offices,
in three companies, and at six government facilities. The offices are in 10
states in proximity to government agencies and private contractors for which
services are performed. The Company's three business sectors 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
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needs, opportunities, and objectives are identified and the technological
requirements and configuration or design of a system are defined in terms of
those needs, opportunities, or objectives. Requirements definition involves
analyses of numerous and seemingly diverse factors, including (i) the current
state of technology; (ii) the performance of existing weapons and defense
systems; (iii) developments or changes in military and weapons capabilities of
other countries which can create potential new military threats that must be
counteracted; (iv) changes in US strategic or tactical policies and the effects
of geopolitical developments, which may require changes in defensive strategies
or tactics; and (v) budgetary and economic considerations. The life cycle
continues through the development, testing, manufacture, deployment, and
maintenance of systems and technology.
Scientific, engineering, and technical assistance firms, such as the
Company, play a significant role in this development process by gathering and
analyzing complex data; developing design alternatives and solutions to
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. And finally, the
government is now using mostly multiple award/task order type contracts for
engineering and advisory type services. Because of this, there is greater
uncertainty that the Company will receive task orders even after it has been
awarded one of these basic contracts.
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 753 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 eight 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
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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 because the threshold for contracts is typically 1,000
employees or less.
Over the years, the Company has worked on military programs and has
developed certain technologies for military applications. The Company is now
pursuing the development of products and services that exploit these military
technologies in the commercial marketplace. Significant investments were made in
1996, 1997, and 1998 for these technologies. In 1999, investment in these
technologies continued but at a reduced rate. Such technologies include lasers
for interferometers, lasers for ordnance and mine neutralization, secure
communications, advance signal processing software used for filtering and
composite materials. There were no significant sales of these technologies or
products in the commercial marketplace in 1999.
Organization
No organizational changes were made in 1999. In 1999, the Company
continued to be 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. 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 of 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-two locations in
proximity to the agencies and other contractors for which the Company provides
services. The Company also has employees on-site at government customer
facilities in four locations. The
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Company's business sectors are given substantial autonomy in identifying and
pursuing business opportunities for the Company. All staff members are
encouraged to avail themselves of the broad diversity of expertise at other
offices within the Company to ensure that the highest quality of service is
provided to the Company's customers.
The Company frequently forms teaming arrangements with other defense
contractors to bid on large, complex, and multidisciplinary contracts. The
teaming arrangements are also designed to broaden the Company's business base or
to penetrate new market areas and technologies. The Company teams with other
corporations both as a prime and a subcontractor. Corporations which have acted
as subcontractors to the Company include Science Applications International
Corporation, Woodside Summit Group, Nichols Research, TRW, and Camber
Corporation, among others. Companies for which the Company has acted as a
subcontractor include Lockheed Martin, TRW and Raytheon, among others.
U.S. Government Contracts
Approximately 97% of the Company's fiscal year 1999 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 January 2, 1998 (fiscal year 1997). Indirect
contract costs for periods subsequent to fiscal year 1997 have been recorded at
amounts which
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are expected to be realized upon final settlement. It's expected that fiscal
year 1998 will be audited and settled with the Government in fiscal year 2000.
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 1999. The Company does not
anticipate any termination of programs and contracts in 2000. 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 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 the 2000 national elections resulting from changes in
the Administration or leadership in Congress. It also can be affected by any
significant delay between Congress and the Administration in reaching a defense
budget accord for government fiscal year 2001.
Backlog
The following table shows the dollar amount of the Company's 12-month
backlog at the dates stated:
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
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<S> <C> <C>
Funded 12-Month Backlog $ 41,900,000 $ 37,600,000
Unfunded 12-Month Backlog $ 74,300,000 $ 67,100,000
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Total Funded/Unfunded Contract Backlog $116,200,000 $104,700,000
============ ============
</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,
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which enables less established firms to capture contract awards based on price.
Technical capability continues to be an important criterion for awarding
contracts, but cost and past performance have increased in importance in recent
years. Since an important role of firms such as the Company is to develop
requirements for various programs and even, occasionally, to evaluate bids from
weapons systems manufacturers on behalf of government defense procurement
agencies in response to those requirements, conflict-of-interest considerations
usually preclude weapons systems manufacturers from competing for scientific,
engineering and technical assistance service contracts. Principal competitive
factors are technical competence and expertise, cost, and the reputation of the
firm based on prior performance. In addition, project-related experience is an
award criterion, and firms that have performed services in earlier phases of a
project generally have an advantage in obtaining follow-on contracts for later
phases. The Company believes the skills of its technical personnel are the key
to its growth and competitive position in its industry. See "Business-Industry
Background" and "Business-Marketing."
Patents and Proprietary Rights
The Company, at present, holds a small number of patents. All of these
patents are related to defense 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 is 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 1999,
the Company experienced a higher turnover of employees than in 1998, about the
same rate as in 1997. Some of the improvement in 1998 was attributed to an
organized Company objective to improve turnover. Although the same effort was
made in 1999, the turnover rate increased again due to the high demand for
technical staff in both the commercial marketplace and the government contractor
marketplace. The Company was able to attract and hire 213 full-time employees in
1999 to replace 172 terminating employees and increase full-time employees by
41. 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 in 2000 like it did in 1998 or achieve its recruitment goals. Future
growth is dependent on achieving these goals.
At January 2, 2000, the Company employed 753 effective full-time
employees, a majority of which are based in the Company's facilities in
California, Virginia, and Alabama. The Company believes that its employee
relations are good, and it has not experienced any labor disputes or work
stoppages.
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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 22 locations in 10 states, include major offices in the cities of
Huntsville, Alabama; San Diego, California; Lancaster, California; El Segundo,
California; La Jolla, California; Billerica, 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 2, 2000, was approximately $3,849,000. 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
8
<PAGE> 11
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 and eight new promissory notes were issued in 1999 to repurchase stock with
a value of $195,000 and $1,114,000, respectively. The amount of stock held by
former employees decreased from 4.9% (305,700 shares) at the end of 1998 to 4.8%
(291,136 shares) at the end of 1999.
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. The Company began repurchasing the stock held by SAIC starting
with the May 21, 1999 Stock Repurchase Date, using funds as available within the
stock repurchase limitation. As of January 30, 2000, SAIC owned 430,698 shares
of Preferred Stock, which represented 6.9% of the total capital stock
outstanding. It is the Company's intent, with which SAIC agrees, to continue
repurchasing stock held by SAIC using funds as available within the quarterly
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
9
<PAGE> 12
("A"). (For this purpose, "earnings" include both net income and the tax
benefits to the Company from option exercises, and "shares" include both
outstanding shares and shares subject to vested stock options.) The "future
growth factor", or "FG", is the lesser of 1.5 or the number obtained by dividing
(a) the sum of the Company's gross profit for the four fiscal quarters
immediately preceding the date on which the price revision occurs, and the
projected gross profit for the four fiscal quarters immediately following the
end of such prior period by (b) the Company's gross profit during the eight
fiscal quarters immediately preceding the price revision, and squaring the
quotient so obtained. The Formula Price, expressed as an equation, is as
follows:
Formula Price = SE + SN + CX + (7FG x A)
------------
SI + SV
Where:
SE = Stockholders' equity which includes all common and preferred stock
SN = Aggregate principal amount of subordinated notes (long term portion)
CX = Aggregate exercise price of vested stock options
SI = Number of common and preferred shares issued and outstanding
SV = Number of shares subject to vested stock options
FG = The lesser of 1.5 or gross earnings over the past twelve months
plus projected gross earnings over the next twelve months divided by
gross earnings over the past twenty-four months, the quotient of
which is squared
A = Average annual "earnings per share" for the preceding eight quarters
For purposes of the Formula, projected gross profit is determined by the
Company's CEO based on information provided monthly by each of the Company's
Division Managers concerning all contract proposals which have been sent to
customers for evaluation and source selection by his or her division. This
information includes expected contract value, period of performance, funding
profile, expected fee/profit, probable award date, and "probability of win"
assessment. This information is then reviewed and revised by the Company's
Operation Managers 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
10
<PAGE> 13
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
-------------------------
1999 1998
----- ----
<S> <C> <C>
January 21 $ 9.71 $ 7.69
April 21 10.48 8.32
July 21 11.50 8.09
October 21 11.99 9.15
</TABLE>
Dividend Policy
The Company's present policy is to retain earnings for the operation and
expansion of its business. The Company has not paid cash dividends on its Common
Stock or Preferred Stock and does not anticipate that it will do so in the
foreseeable future. The Company's bank loan agreement prohibits the payment of
dividends by the Company without the bank's prior consent.
Record Holders
As of January 30, 2000, there were approximately 617 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 2, 2000.
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)
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $ 115,143 $ 97,695 $ 85,470 $ 67,784 $ 62,074
Costs and expenses 108,988 89,585 77,963 62,501 59,687
Net income (2) 6,155 4,704 5,105 3,083 1,385
Basic Earnings per share(3) $ 0.85 $ 0.62 $ 0.75 $ 0.42 $ 0.21
Diluted Earnings per share(3) $ 0.76 $ 0.56 $ 0.70 $ 0.41 $ 0.21
Adjusted Earnings per share (4) $ 0.58
Weighted average Common
Stock outstanding 6,204,923 6,150,996 6,032,548 6,053,728 6,208,009
</TABLE>
11
<PAGE> 14
Balance Sheet Data:
<TABLE>
<CAPTION>
Years Ended December 31(1)
(Amounts in thousands)
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total assets $43,185 $37,770 $33,209 $29,054 $28,662
Working capital 13,827 11,830 12,353 10,010 9,476
Long term liabilities, including
redeemable Preferred Stock 7,189 7,373 8,907 6,962 8,348
Stockholders' equity 18,549 15,838 12,452 10,485 9,410
</TABLE>
(1) The Company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to December 31. However, in 1997 and prior, the fiscal year ended
on the Friday closest to December 31. The last five fiscal years have ended
on January 2, 2000; January 3, 1999; January 2, 1998; January 3, 1997; and
December 29, 1995. 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 affect 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,
------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales $115,143,000 $ 97,695,000 $ 85,470,000
BMD 37% 39% 40%
Other DOD 46% 49% 51%
Non-DOD 17% 12% 9%
Gross Profits(1) $ 10,094,000 $ 8,891,000 $ 7,922,000
Profits as a percentage of costs 9.6% 10.0% 10.2%
Net income from operations $ 6,155,000 $ 4,704,000 $ 4,354,000
Net income (2) $ 6,155,000 $ 4,704,000 $ 5,105,000
</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 former director and officer of the Company.
12
<PAGE> 15
<TABLE>
<CAPTION>
Information Summarizing Financial Position
at December 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Stockholders' equity $18,549,000 $15,838,000 $12,452,000
Equity per share(1) 3.30 2.81 2.25
Stock repurchase notes 1,232,000 833,000 1,123,000
Notes payable $ 951,000 $ 1,266,000 $ 2,658,000
</TABLE>
(1) Equity per share is based on outstanding shares of Common Stock.
<TABLE>
<CAPTION>
Backlog
----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Funded 12-month backlog $ 41,900,000 $ 37,600,000 $ 34,300,000
Unfunded 12-month backlog 74,300,000 67,100,000 58,900,000
Total contract backlog $116,200,000 $104,700,000 $ 93,200,000
</TABLE>
<TABLE>
<CAPTION>
Financial Ratios
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Avg. days sales outstanding ("DSO") 80 85 88
Current ratio 1.8 2.1 2.1
Debt to equity ratio as defined
by the lender 0.4 0.5 0.8
</TABLE>
Revenues increased 17.9%, 14.3% and 26.1% over the prior year in 1999,
1998 and 1997, respectively. Growth of 127.6% in National Aeronautics and Space
Administration ("NASA") programs, 52.2% in Army Ballistic Missile Defense
("BMD") programs, and 16.2% in intelligence agency support accounted for 102.1%
of the revenue increase in 1999. A net decrease in revenues of 2.1% was realized
in other customer business areas, which included Ballistic Missile Defense
Organization ("BMDO"), 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 16.9%, 11.5% and 9.1% of total revenue in
1999, 1998, and 1997, respectively. Prior to 1996, support of the BMD program
was the Company's primary source of DOD revenue. Starting in 1997 and continuing
through 1999, non-BMD DOD programs have been 11.4%, 10.0% and 11.5% higher than
revenues in BMD DOD Programs in 1999, 1998, and 1997, respectively. As in the
prior year, again in 1999 technical services, engineering, and field services
represented the Company's largest growth area. Specifically, technical service
revenue increased 68% over 1998 and grew to 17% of total revenue.
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 the coming year, increased from
$104,700,000 in 1998 to $116,200,000 in 1999, an increase of 11.0%. Annual sales
as a percent of year-end annualized contract backlog were 110.0%, 104.8% and
111.9% in 1999, 1998, and 1997, respectively. 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
13
<PAGE> 16
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. Each operation
has significant autonomy in conducting business. The organizational structure
continued for 1999.
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 1999, the corporate
business objectives included (i) begin generating significant revenues from
product lines, (ii) increase proposal and opportunity backlog focused on new
customers, and (iii) development of current and future managers. The Company met
its 1999 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 any
significant income on any of its product lines. The three product lines are
SecurECTM, an application of end-to-end security software to commercial
Electronic Data Interchange ("EDI") on the Internet; nanAlignTM, an
electro-optic system to compensate for air turbulence error sources in the
manufacture of integrated circuits and flat panel displays; and ZeusTM, a mobile
mounted laser system to neutralize mines and unexploded ordnance on test ranges.
Progress was made toward the objective for both the ZeusTM and nanAlignTM
product lines and both will continue to be pursued in 2000. Based on the modest
sales of the SecurECTM product, further investment in the product line was
suspended and plans are being developed for the future disposition of the
technology.
Stockholders' equity increased 17.2% during 1999. The Company currently
commits 50% of its net after tax profits plus the net proceeds from stock
transactions to repurchase stock from stockholders. The Company's major
components of debt (deferred income taxes, balance of promissory notes issued to
repurchase stock, and working capital financing) decreased by approximately
4.8%, to $4,570,000 in 1999 from $4,800,000 in 1998. In 1999, the debt-to-equity
ratio achieved a new historical low of 0.4 versus 0.5 in 1998 and 0.8 for 1997.
Liquidity and Capital Resources
The Company's primary source of funding its operations in 1999 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
$10,000,000 with all borrowings due July 2, 2001. 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
$160,000 in 1999 compared to $271,000 in 1998. At the end of 1999, borrowings
for working capital were $951,000, down from $1,266,000 at the end of 1998. Days
sales outstanding ("DSO") in receivables averaged 80 days in 1999, down from an
average of 85 and 88 days in 1998 and 1997, respectively. Average monthly
borrowing was $1,926,000 in 1999, down from $3,256,000 in 1998. A decrease in
investment in product lines combined with a decrease in the DSO resulted in the
lower average borrowing. 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 comprised of 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 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.
14
<PAGE> 17
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 $1,232,000 at the end of 1999. 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 1999. 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
and 1999, the Company repurchased all stock of terminating employees and issued
one new promissory note with a value of $195,000 and eight new promissory notes
with a value of $1,114,000, respectively. The amount of stock held by former
employees decreased from 4.9% (305,700 shares) at the end of 1998 to 4.8%
(291,136 shares) at the end of 1999.
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. The Company began quarterly repurchase of SAIC
Preferred Stock starting with the May 21, 1999 quarterly trade with funds
available within the stock repurchase limitation. Additional Preferred Stock was
repurchased from SAIC in the August 21,1999 quarterly trade out. During 1999,
the Company redeemed a total of 121,661 preferred shares from SAIC for
$1,302,000.
Capital Commitments
Commitments for capital expenditures were not material at January 2, 2000.
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have overall currency exposure at December 31, 1999.
The Company's financial instruments consist of cash and cash equivalents and
life insurance policies, and the carrying values of these instruments and/or
transactions related thereto approximated their fair market values. The Company
does not enter into derivative financial instruments. See also Note 1 (h) to the
consolidated financial statements regarding redeemable preferred stock subject
to a buyback "put".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14.
15
<PAGE> 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Wayne R. Winton 64 Chief Executive Officer and Chairman of
the Board of Directors
Robert C. Sepucha, Ph.D. 56 Sector President and Director
R. Stephen McCarter 68 Sector President and Director
Carl T. Case, Ph.D. 60 Sector President and Director
B. Warren Knudson 62 Corporate Vice President, Treasurer, and
Chief Financial Officer
Jerry R. Fabian 51 Corporate Vice President, Secretary, and
Chief Administrative Officer
John L. Allen, Ph.D. 68 Director
Rock N. Hankin 53 Director
Gerald A. Zionic 57 Director
Gen. John L. Piotrowski (USAF Retired) 66 Director
William E. Cook 51 Director
Robert B. Buchanan, Ph.D. 59 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. Prior to founding the Company, Mr. Winton held
positions of increasing responsibility in McDonnell Douglas Astronautics Company
("MDAC"), Mission Research Corporation, the Department of the Army, and Science
Applications International Corporation ("SAIC"). He has led or participated in
numerous joint Government/industry studies addressing issues of analysis and
policy affecting national defense interests. He is recognized as one of the most
capable strategic analysts in the U.S. and is a proficient technical writer and
speaker. 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
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.
16
<PAGE> 19
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 executive of Hankin & Co., a management-consulting firm established in
1986. As chief executive of Hankin & Co. and Hankin Investment Banking, its
licensed broker/dealer, he supervises and leads the activities of the firm. Mr.
Hankin was previously a partner at Price Waterhouse. He is a certified public
accountant and a lawyer. He is the chairman of the Board's Audit Committee and a
member of the Board's Compensation Committee. Mr. Hankin is Vice-Chairman of the
Board of Semtech Corporation and also serves as a member of the board of Alpha
Microsystems. Previously, Mr. Hankin was Chairman of the Board of House of
Fabrics, and a member of the boards of DDL Electronics, Inc., Nichols Institute,
Quidel Corporation and Techniclone.
Gerald A. Zionic has been a director since August of 1999. He is now, and
has been, a Vice President at Lockheed-Martin Corporation's Law & Benefits
Enforcement Division since 1993. Prior to Lockheed-Martin, Mr. Zionic was Vice
President and General Manager of Martin Marietta's Information Systems company
from 1991 to 1992. Mr. Zionic is a member of the Board's Audit Committee and
Compensation Committee.
John L. Piotrowski has been a director since 1991. He is currently a
Corporate Vice President at 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.
17
<PAGE> 20
William E. Cook has been a director since August of 1999. He was the
Chairman and Chief Executive Officer of Uniax Corporation until the company was
sold in March, 2000. He is President of Riptide Holdings, Inc. and has been in
this position since 1996. Riptide Holdings is a personal investment holding
company providing equity and debt investments, management, and Board advice for
early stage technology and turnaround opportunities in manufacturing and
software companies. Prior to starting Riptide Holdings, Mr. Cook was Chairman
and Chief Executive Officer of DDL Electronics, Inc. from 1992 to 1995. Mr. Cook
is a member of the Board's Audit Committee and Compensation Committee. Mr. Cook
also serves as Chairman of the Board of Directors for OMNI Products, Inc.
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 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 is a member of the Board's Audit
Committee and Compensation Committee.
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 1999, 1998, and 1997:
<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 1999 181,385 90,000 14,024 11 24,000
Chief Executive 1998 190,577 90,000 11,169 2,151 24,000
Officer, Chairman 1997 191,154 95,400 3,370 - 24,000
Robert C. Sepucha 1999 177,506 75,000 68,690 2,580 24,000
Sector President 1998 165,462 75,000 21,022 1,126 24,000
1997 155,925 78,300 14,586 3,541 24,000
R. Stephen McCarter 1999 176,308 75,000 17,239 3,540 24,000
Sector President 1998 168,432 75,000 58,495 7,785 24,000
1997 155,925 55,900 16,402 2,737 24,000
Carl T. Case 1999 176,308 39,500 30,089 235 24,000
Sector President 1998 165,462 65,900 18,948 3,182 24,000
1997 155,925 59,800 6,378 2,793 24,000
B. Warren Knudson 1999 127,923 11,200 29,573 1,258 22,339
Chief Financial Officer, 1998 121,231 27,700 6,743 939 22,339
Vice President 1997 115,922 33,669 7,433 1,270 22,400
</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:
18
<PAGE> 21
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Winton $27,000 $27,000 --
Sepucha 22,500 22,500 $20,998
McCarter 22,500 22,500 16,230
Case 11,850 19,800 16,562
Knudson 3,360 8,300 7,531
</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 1999, options covering a total of 599,015 shares were
granted under the Stock Plan to a total of 784 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
Granted to Price Date of for Option Term (4 Yrs)
Name and Employees in Grant Expiration
Principal Position (Number) Fiscal Year ($/Sh) ($/Sh) Date 0%($) 5%($) 10%($)
- ------------------ -------- ------------ -------- -------- ---------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wayne R. Winton 11 .00 9.97 10.48 7/4/03 6 30 59
Chief Executive
Officer, Chairman
Robert C. Sepucha 1,744 .29 9.97 10.48 7/4/03 889 4,828 9,372
Sector President 836 .14 11.60 11.99 1/2/04 326 2,486 4,978
R. Stephen McCarter 1,635 .27 9.97 10.48 7/4/03 833 4,526 8,786
Sector President 1,905 .32 11.60 11.99 1/2/04 743 5,665 11,343
Carl T. Case 235 .04 9.97 10.48 7/4/03 120 651 1,263
Sector President
B. Warren Knudson 12 .00 9.97 10.48 7/4/03 6 33 65
Chief Financial 1,246 .21 11.60 11.99 1/2/04 486 3,706 7,419
Officer, Vice
President
</TABLE>
(A) Options granted in 1999 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.
19
<PAGE> 22
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
Value of Unexercised
In-the-Money
Shares Value Realized Options at FY-End (Formula Price
Acquired (Formula Price Number of Unexercised of Shares at FY-End ($11.99) Less
Name and on Exercise at Exercise Options at FY-End Exercise Price) ($)
Principal Less Exercise -------------------------- ---------------------------------
Position (Number) Price) ($) Exercisable Unexercisable Exercisable Unexercisable
--------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Wayne R. Winton
Chief Executive
Officer, President 2,024 10,144 0 1,135 0 6,678
Robert C. Sepucha
Sector President 8,309 58,014 8,861 14,706 57,869 66,871
R. Stephen McCarter
Sector President 1,410 10,702 1,542 10,578 7,903 34,921
Carl T. Case
Sector President 4,920 23,816 974 2,371 6,221 12,195
B. Warren Knudson
Chief Financial Officer
Vice President 4,037 26,638 0 5,867 0 24,993
</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.
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,
20
<PAGE> 23
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 or 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 1999, 3,150 stock options were awarded to
outside 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 January 30, 2000, 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) 477,999(3) 7.82%
Robert C. Sepucha 56,869(4) .93%
R. Stephen McCarter 110,623(5) 1.81%
B. Warren Knudson 184,971(6) 3.03%
Carl T. Case 97,691(7) 1.60%
John L. Allen 6,927(8) .11%
Rock N. Hankin 11,136(9) .18%
John L. Piotrowski 4,463(10) .07%
Robert B. Buchanan 1,250(11) .02%
William E. Cook 1,150 .02%
Gerald A. Zionic 0 .00%
All executive officers
and directors as a group 953,079 15.59%
</TABLE>
21
<PAGE> 24
(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 97,245 shares held for Mr. Winton's account in the Company's
Profit Sharing Plan and 1,716 shares subject to options that may be
exercised within 60 days of January 30, 2000. Excludes 34,063 shares and 0
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 26,550 shares held in Dr. Sepucha's account in the Company's
Profit Sharing Plan and 10,749 shares subject to options that may be
exercised within 60 days of January 30, 2000.
(5) Includes 76,687 shares held in Mr. McCarter's account in the Company's
Profit Sharing Plan and 1,092 shares subject to options that may be
exercised within 60 days of January 30, 2000.
(6) Includes 59,557 shares held in Mr. Knudson's account in the Company's
Profit Sharing Plan and 2,298 shares subject to options which may be
exercised within 60 days of January 30, 2000.
(7) Includes 57,175 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 January 30, 2000.
(8) Includes 1,061 shares subject to options held by Dr. Allen that may be
exercised within 60 days of January 30, 2000.
(9) Includes 1,592 shares subject to options held by Mr. Hankin that may be
exercised within 60 days of January 30, 2000.
(10) Includes 1,592 shares subject to options held by Mr. Piotrowski that may
be exercised within 60 days of January 30, 2000.
(11) Includes 459 shares subject to options held by Mr. Buchanan that may be
exercised within 60 days of January 30, 2000.
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 2,
2000 there was one loan outstanding for $24,167 under this arrangement to R.
Stephen McCarter, an officer and director of the Company.
22
<PAGE> 25
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report on Form 10-K:
(1) Financial Statements
Page
REPORT OF INDEPENDENT ACCOUNTANTS ...........................................24
FINANCIAL STATEMENTS(1)
Consolidated Balance Sheet at December 31, 1999 and December 31, 1998.......25
Consolidated Statement of Income for the three years ended
December 31, 1999.........................................................26
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1999.............................................27
Consolidated Statement of Cash Flows for the three years ended
December 31, 1999.........................................................28
Notes to Consolidated Financial Statements...................................29
(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
23
<PAGE> 26
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 23, present fairly, in all material
respects, the financial position of SPARTA, Inc. and its subsidiary at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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 19, 2000
24
<PAGE> 27
CONSOLIDATED BALANCE SHEET
at December 31
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 319,000 $ 174,000
Accounts receivable (Note 2) 30,410,000 25,108,000
Prepaid expenses 545,000 548,000
Income taxes receivable 556,000
------------ ------------
TOTAL CURRENT ASSETS 31,274,000 26,386,000
EQUIPMENT AND IMPROVEMENTS, NET (Notes 1 & 3) 10,007,000 9,634,000
OTHER ASSETS (Note 4) 1,904,000 1,750,000
------------ ------------
TOTAL ASSETS $ 43,185,000 $ 37,770,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation (Note 5) $ 6,486,000 $ 5,820,000
Accounts payable and other accrued expenses 7,746,000 5,525,000
Current portion of subordinated notes payable (Note 6) 972,000 474,000
Income taxes payable 470,000
Deferred income taxes (Note 7) 1,773,000 2,737,000
------------ ------------
TOTAL CURRENT LIABILITIES 17,447,000 14,556,000
NOTES PAYABLE (Note 6) 951,000 1,266,000
SUBORDINATED NOTES PAYABLE (Note 6) 260,000 359,000
DEFERRED INCOME TAXES (Note 7) 614,000 544,000
REDEEMABLE PREFERRED STOCK, $.01 par value; 2,000,000 shares
authorized; 447,378 and 569,039 shares issued;
original issuance value of $1,818,000 and $2,400,000 at
1999 and 1998, respectively (Note 1) 5,364,000 5,207,000
STOCKHOLDERS' EQUITY (Notes 1 and 9)
Common stock, $.01 par value; 25,000,000 shares
authorized; 5,610,805 and 13,886,286 shares issued 56,000 139,000
Additional paid-in capital 18,439,000 32,077,000
Retained earnings 54,000 28,576,000
Treasury stock (44,954,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 18,549,000 15,838,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 43,185,000 $ 37,770,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
25
<PAGE> 28
CONSOLIDATED STATEMENT OF INCOME
for the years ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SALES $115,143,000 $ 97,695,000 $ 85,470,000
------------ ------------ ------------
COSTS AND EXPENSES:
Labor costs and related benefits 59,810,000 52,536,000 44,864,000
Subcontractor costs 33,096,000 26,751,000 23,569,000
Facility costs 8,409,000 7,389,000 6,923,000
Travel and other 3,535,000 2,607,000 2,422,000
Interest expense, net 199,000 302,000 185,000
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 105,049,000 89,585,000 77,963,000
------------ ------------ ------------
INCOME FROM OPERATIONS 10,094,000 8,110,000 7,507,000
KEYMAN INSURANCE PROCEEDS 751,000
------------ ------------ ------------
INCOME BEFORE PROVISION FOR TAXES ON INCOME 10,094,000 8,110,000 8,258,000
PROVISION FOR TAXES ON INCOME (Note 7) 3,939,000 3,406,000 3,153,000
------------ ------------ ------------
NET INCOME $ 6,155,000 $ 4,704,000 $ 5,105,000
============ ============ ============
BASIC EARNINGS PER SHARE (Note 1) .85 .62 .75
============ ============ ============
DILUTED EARNINGS PER SHARE (Note 1) .76 .56 .70
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
26
<PAGE> 29
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the years ended December 31
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 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
Issuance of common stock 696,810 7,000 5,000,000 5,007,000
Acquisition of treasury stock (7,754,000) (7,754,000)
Retirement of treasury stock (8,972,291) (90,000) (19,400,000) (33,218,000) 52,708,000
Accretion of redeemable
Preferred stock (1,459,000) (1,459,000)
Tax benefit relating to stock plan 762,000 762,000
Net income 6,155,000 6,155,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 5,610,805 $ 56,000 $ 18,439,000 $ 54,000 $ 0 $ 18,549,000
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
27
<PAGE> 30
CONSOLIDATED STATEMENT OF CASH FLOW
for the years ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 6,155,000 $ 4,704,000 $ 5,105,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,795,000 1,527,000 1,489,000
Loss on sale of equipment 497,000 114,000 193,000
Employee compensation paid in stock 2,874,000 2,961,000 1,967,000
Change in assets and liabilities:
Accounts receivable (5,302,000) (1,551,000) (2,397,000)
Prepaid expenses 3,000 (100,000) (142,000)
Income tax receivable 556,000 (556,000)
Other assets (154,000) (65,000) (276,000)
Accrued compensation 666,000 98,000 1,852,000
Accounts payable and other accrued expenses 2,221,000 2,520,000 (315,000)
Income taxes payable 470,000 (199,000) (267,000)
Deferred income taxes (894,000) (842,000) (1,554,000)
Tax benefit relating to stock plan 762,000 570,000 156,000
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,649,000 9,181,000 5,811,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,665,000) (3,955,000) (2,974,000)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES: (2,665,000) (3,955,000) (2,974,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of preferred stock (1,302,000)
Proceeds from issuance of common stock 2,133,000 2,215,000 1,994,000
Purchases of treasury Stock (6,640,000) (5,588,000) (6,374,000)
Net (repayments) borrowings under line-of credit agreement (315,000) (1,392,000) 2,197,000
Principal payments on debt (715,000) (485,000) (607,000)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES: (6,839,000) (5,250,000) (2,790,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 145,000 (24,000) 47,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 174,000 198,000 151,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 319,000 $ 174,000 $ 198,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 167,000 $ 305,000 $ 200,000
=========== =========== ===========
Income taxes $ 3,087,756 $ 4,441,000 $ 4,824,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
28
<PAGE> 31
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 Sunday closest to December 31. However, in 1997 the fiscal year
ended on the Friday closest to December 31. The Company's last three fiscal
years ended on January 2, 2000, January 3, 1999, and January 2, 1998;
however, for ease of presentation of the financial statements, the year
ends have been presented as December 31, 1999, 1998 and 1997.
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, 1999, 1998 and 1997, were primarily generated through direct
or indirect sales to U.S. government agencies.
F) EQUIPMENT AND IMPROVEMENTS - Property and equipment are recorded at cost
and are depreciated or amortized using the straight-line method over the
shorter of estimated useful lives or lease periods, 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
$1,114,000, $195,000 and $43,000 for the years ended December 31, 1999,
1998 and 1997, 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, 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
Redemption of preferred stock (121,661) (1,302,000)
Accretion on redeemable
preferred stock 1,459,000
----------- -----------
Balance at December 31, 1999 447,378 $ 5,364,000
=========== ===========
</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 a liquidation preference out of
the assets of the Company before any payment is made to common
stockholders. The liquidation preference is the amount equal to the
weighted average price per share paid to the Company upon the original
issuance of all preferred shares outstanding as of the date of liquidation.
The holders of preferred stock shall not have voting rights to vote on the
election of Directors or to vote on any other matter which may be the
subject of
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 vice versa. Amounts paid by the Company under such
agreements were $6,740,000, $5,327,000 and $4,988,000 for the years ended
1999, 1998 and 1997, respectively. The amounts received under such
agreements were $86,000, $396,000 and $1,246,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the
Company's accounts payable to and accounts receivable balances from the
preferred stockholder were $1,033,000 and $62,000, respectively.
J) TREASURY STOCK - Treasury stock is shown at cost, and at December 31, 1999,
1998 and 1997, consisted of 0, 8,256,847 and 7,541,820 shares,
respectively, of common stock. During December 1999, all treasury shares
outstanding, a total of 8,972,291 common shares, were retired.
Repurchases of outstanding stock by the Company in exercise of its right of
repurchase upon termination of employment (as defined) are made on a
formula basis. The stock price is recalculated quarterly by management
using a formula approved by the Board of Directors. The Company's stock
price is evaluated bi-annually by an independent valuation firm. Formula
stock prices at valuation dates are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
January 21 $ 9.71 $ 7.69 $ 5.93
April 21 10.48 8.32 6.36
July 21 11.50 8.09 6.88
October 21 11.99 9.15 6.90
</TABLE>
K) EARNINGS PER SHARE (EPS) - During 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." All
earnings per share amounts presented for prior years have been restated in
accordance with SFAS No. 128.
Basic earnings per share is computed based on the weighted-average number
of common shares outstanding during the respective years. Diluted earnings
per share include the dilutive effects of stock options and shares granted
under the restricted stock compensation plan. Accretion is deducted from
net income available to common stockholders 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 for 1997 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>
1999 Income Shares EPS
---- ------ ------ ---
<S> <C> <C> <C>
Net income $ 6,155,000
Less accretion (1,459,000)
------------
Basic EPS 4,696,000 5,536,971 $ .85
=======
Dilutive effect:
Stock options 565,557
Deferred stock 102,395
------------ -----------
Diluted EPS 4,696,000 6,204,923 .76
============ =========== =======
<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
============ =========== =======
<CAPTION>
1997 Income Shares EPS
---- ------ ------ ---
<S> <C> <C> <C>
Net income 5,105,000
Less accretion (882,000)
------------
Basic EPS 4,223,000 5,597,940 .75
=======
Dilutive effect:
Stock options 386,018
Deferred stock 48,590
------------ -----------
Diluted EPS 4,223,000 6,032,548 .70
============ =========== =======
</TABLE>
L) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying
amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued liabilities approximate 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.
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 1998 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 133; Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS No.
133 is required to be adopted in fiscal years beginning after June 15, 2000
and establishes accounting and reporting standards for derivative
instruments and for hedging activities. The Company does not anticipate
that the adoption of SFAS 133 will have a material impact on its financial
position or results of operations.
- ----------------------------
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accounts receivable $12,257,000 $ 9,155,000
Accounts 18,590,000 15,857,000
receivable-unbilled
Other receivables 112,000 975,000
Less provision for doubtful
accounts (549,000) (879,000)
------------ -----------
$30,410,000 $25,108,000
============ ===========
</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 $2,470,000 and $2,566,000 at December 31, 1999 and 1998,
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>
1999 1998
---- ----
<S> <C> <C>
Computer equipment including
capitalized software $ 11,667,000 $ 10,877,000
Office furniture and 7,688,000 8,583,000
equipment
Automotive equipment 9,000 9,000
Leasehold improvements 2,030,000 1,743,000
------------ ------------
21,394,000 21,212,000
Less accumulated
depreciation
and amortization (11,387,000) (11,578,000)
------------ ------------
$ 10,007,000 $ 9,634,000
============ ============
</TABLE>
- ---------------------------
NOTE 4 - OTHER ASSETS
Other assets are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Contract retentions $ 1,494,000 $ 1,463,000
Deposits 153,000 156,000
Other 257,000 131,000
----------- -----------
$ 1,904,000 $ 1,750,000
=========== ===========
</TABLE>
- ----------------------------
NOTE 5 - ACCRUED COMPENSATION
Accrued compensation is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accrued bonus payable $ 2,296,000 $ 2,126,000
Accrued profit sharing 612,000 593,000
Accrued payroll 3,578,000 3,101,000
----------- ------------
$ 6,486,000 $ 5,820,000
=========== ============
</TABLE>
- -----------------------------
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE
Notes payable is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Bank line of credit, secured
by accounts receivable
and certain
fixed assets; interest at
prime
(8.5% at December 31, 1999) $951,000 $1,266,000
</TABLE>
At December 31, 1999, the bank line of credit provided borrowings up to $10.0
million with all borrowings due July 2, 2001. 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, 1999.
At December 31, 1999 and 1998, the Company had 11 and 6, respectively,
outstanding unsecured notes payable arising from repurchases of the Company's
stock that are subordinated to the bank. The following notes payable accrue
interest at the lesser of the bank's prime rate, the Federal Reserve discount
rate (5.0% at December 31, 1999) or 10%.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Subordinated notes payable $ 1,232,000 $ 833,000
Less: Current portion (972,000) (474,000)
------------ ---------
$ 260,000 $ 359,000
============ =========
</TABLE>
The maturities of notes payable during each fiscal year are as follows: 2000 -
$972,000 and 2001 - $260,000.
- ----------------------------
NOTE 7 - INCOME TAXES
The provision (benefit) for taxes on income is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 3,302,000 $ 3,310,000 $ 3,777,000
State 769,000 368,000 774,000
------------ ------------ ------------
4,071,000 3,678,000 4,551,000
------------ ------------ ------------
Deferred:
Federal (764,000) (688,000) (1,348,000)
State (130,000) (154,000) (206,000)
------------ ------------ ------------
(894,000) (842,000) (1,554,000)
------------ ------------ ------------
Exercise of stock
options not treated
as a reduction of
income tax
expense 762,000 570,000 156,000
------------ ------------ ------------
$3,939,000 $ 3,406,000 $ 3,153,000
============ ============ ============
</TABLE>
Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accelerated depreciation $ (737,000) $ (544,000)
Unbilled accounts receivable (2,158,000) (2,094,000)
Reserves 108,000 336,000
Accrued compensation and
benefits 308,000
Cash to accrual basis (1,065,000)
election
Other 92,000 86,000
----------- -----------
$(2,387,000) $(3,281,000)
=========== ===========
</TABLE>
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes
at statutory rate $ 3,432,000 $ 2,757,000 $ 2,808,000
State income taxes, net
of federal income tax
benefit 440,000 384,000 358,000
Other 67,000 265,000 (13,000)
----------- ----------- -----------
$ 3,939,000 $ 3,406,000 $ 3,153,000
=========== =========== ===========
</TABLE>
The exercise of stock options represents tax benefits reflected as a reduction
of taxes currently payable. However, the tax benefits are not treated as a
reduction of income tax expense for financial reporting purposes.
- -------------------------------------------------------------------------------
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $3,849,000, $3,426,000 and $3,253,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Future minimum lease commitments under operating leases at December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Fiscal Lease
Year Ending Commitment
---------------------- ----------------
<S> <C>
2000 $ 4,230,000
2001 3,894,000
2002 2,877,000
2003 2,219,000
2004 1,200,000
Thereafter 1,965,000
-----------
$16,385,000
===========
</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, 1999 and 1998, $24,000 and $34,000,
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, 1999, 1998 and 1997 under the
plan were as follows:
<TABLE>
<CAPTION>
Avg. Total
Number of Exercise Option
Shares Price per Value
Share
------------ --------- ------------
<S> <C> <C> <C>
December 31, 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
Granted 599,015 10.93 6,545,000
Canceled (159,946) 6.51 (1,041,000)
Exercised (403,546) 4.88 (1,968,000)
------------ --------- ------------
December 31, 1999 1,860,769 $ 8.09 $ 15,061,000
============ ========= ============
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, options on 536,604,
548,987 and 623,704 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, 1999:
<TABLE>
<CAPTION>
Options outstanding at December 31, 1999
- ----------------------------------------------------------
Range Weighted- Weighted-Avg.
of Exercise Number Average Remaining
Prices Outstanding Exercise Contractual
Price Life
----------- ----------- --------- ------------
<C> <C> <C> <C>
$4.53-$ 6.84 777,389 $ 5.89 2 Years
$7.38-$11.86 1,083,380 $ 9.68 4 Years
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable at December 31, 1999
- ----------------------------------------------------------
Range
of Exercise Number Weighted-Average
Prices Exercisable Exercise Price
----------- ----------- ----------------
<C> <C> <C>
$4.53 - $ 6.84 406,212 $ 5.71
$7.38 - $11.86 45,484 $ 8.37
</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.
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 costs to be
expected in future years.
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Net income
As reported $6,155,000 $4,704,000 $5,105,000
Pro Forma 5,797,000 4,401,000 4,970,000
Basic earnings per share
As reported .85 .62 .75
Pro Forma .78 .56 .73
Diluted earnings per share
As reported .76 .56 .70
Pro Forma .70 .51 .68
</TABLE>
The fair value of each option is estimated at the time of grant as its minimum
value, which is calculated by subtracting the present value of the option
exercise price over the expected option term from the stock price at the date of
grant. Present values were calculated using weighted average risk free interest
rates of 6.0%, 5.5% and 6.5% for 1999, 1998 and 1997 respectively, and a
weighted-average expected life of 4 years. The weighted-average fair value of
options granted during 1999, 1998 and 1997 was $2.31, $1.76 and $1.24,
respectively.
At December 31, 1999, 1998 and 1997 there were options outstanding at prices
ranging from $4.53 to $11.86, $3.91 to $9.15 and $3.91 to $6.90, respectively,
with expiration dates through 2003. Of the options outstanding at December 31,
1999, 1998 and 1997, options to purchase 451,696, 563,483 and 518,132 shares,
respectively, were immediately exercisable at prices ranging from $4.53 to
$11.86, $3.91 to $9.15 and $3.84 to $6.90, per share, respectively.
As of December 31, 1999, 1998 and 1997, 9,065,245, 9,664,260 and 10,282,766
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, 1999, 1998 and
1997, 10,751, 11,216 and 9,052 shares, totaling $117,000, $93,000 and $60,000
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 1999, 18,537
shares of restricted stock were granted at a price of $9.71 per share. 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 $117,000, $81,000 and $48,000 was
recognized in 1999, 1998 and 1997, respectively.
The Company pays a portion of annual bonuses in the form of stock. For the years
ended December 31, 1999, 1998 and 1997, 54,974, 65,363 and 110,340 shares
totaling $690,000, $635,000 and $856,000 respectively were issued under the
plan.
The Company has a defined contribution retirement plan for all eligible
employees except employees in the Technical Systems Division. The Company's
contributions for this plan for the years ended December 31, 1999, 1998 and 1997
were $4,291,000, $3,821,000 and $3,055,000 respectively. A portion of the
contributions to the plan were in the form of common stock. For the years ended
December 31, 1999, 1998 and 1997, 198,933, 236,080 and 232,620 shares, totaling
$2,127,000, $1,927,000 and $1,492,000 respectively, were contributed to the
plan.
34
<PAGE> 37
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 , 2000
- ------------------------------- Chief Executive Officer and Director ------
Wayne R. Winton
/s/ Robert C. Sepucha Director March 26 , 2000
- ------------------------------- ------
Robert C. Sepucha
/s/ R. Steve McCarter Director March 26 , 2000
- ------------------------------- ------
R. Steve McCarter
/s/ Carl T. Case Director March 26 , 2000
- ------------------------------- ------
Carl T. Case
/s/ John L. Allen Director March 26 , 2000
- ------------------------------- ------
John L. Allen
/s/ William E. Cook Director March 26 , 2000
- ------------------------------- ------
William E. Cook
/s/ Rock N. Hankin Director March 26 , 2000
- ------------------------------- ------
Rock N. Hankin
/s/ John L. Piotrowski Director March 26 , 2000
- ------------------------------- ------
John L. Piotrowski
/s/ Gerald A. Zionic Director March 26 , 2000
- ------------------------------- ------
Gerald A. Zionic
/s/ Robert B. Buchanan
Robert B. Buchanan Director March 26 , 2000
------
/s/ B. Warren Knudson Vice President, Treasurer and Chief March 26 , 2000
- ------------------------------- Financial Officer (Principal ------
B. Warren Knudson Accounting Officer)
</TABLE>
35
<PAGE> 38
INDEX TO EXHIBITS
Number Description
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 Fifth Amended and Restated Loan Agreement, dated July 2, 1999,
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
(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
January 2, 1999.
(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)
36
<PAGE> 1
EXHIBIT 10.15
[LOGO] UNION BANK OF CALIFORNIA
LOAN AGREEMENT
THIS LOAN AGREEMENT ("AGREEMENT") is made and entered into as of
7/2/1999, by and between Sparta, Inc., a Delaware corporation ("Borrower"), and
UNION BANK OF CALIFORNIA, N.A. ("Bank"). This Agreement supercedes and replaces
that certain Fourth Amended and Restated Loan Agreement dated August 3, 1995, as
amended.
SECTION 1. THE LOAN
1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount
not to exceed Ten Million Dollars ($10,000,000) outstanding in the aggregate at
any one time (the "Revolving Loan"). Borrower may borrow, repay and reborrow all
or part of the Revolving Loan in accordance with the terms of the Revolving
Note. All borrowings of the Revolving Loan must be made before July 2, 2001 at
which time all unpaid principal and interest of the Revolving Loan shall be due
and payable. The Revolving Loan shall be evidenced by a promissory note (the
"Revolving Note") on the standard form used by Bank for commercial loans. Bank
shall enter each amount borrowed and repaid in Bank's records and such entries
shall be deemed to be the amount of the Revolving Loan outstanding. Omission of
Bank to make any such entries shall not discharge Borrower of its obligation to
repay in full with interest all amounts borrowed.
1.2 TERMINOLOGY.
As used herein the word "Loan" shall mean, collectively,
all the credit facilities described above.
As used herein the word "Note" shall mean, collectively,
all the promissory notes described above.
As used herein, the words "Loan Documents" shall mean all
documents executed in connection with this Agreement.
1.3 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall
be used for working capital and general corporate purposes.
1.4 INTEREST. The unpaid principal balance of the Revolving
Loan shall bear interest at the rate or rates provided in the Revolving Note and
selected by Borrower. The Revolving Loan may be prepaid in full or in part only
in accordance with the terms of the Revolving Note and any such prepayment shall
be subject to the prepayment fee provided for therein.
1.5 UNUSED COMMITMENT FEE. Commencing on March 31, 2000 and on
the last calendar day of each three month period thereafter, or the earlier
termination of the Loan, Borrower shall pay to Bank a fee of one eighth of one
percent (.125%) per year on the average unused portion of the Loan for the
preceding quarter computed on the basis of actual days elapsed of a year of 360
days. For the period commencing December 1, 1999 through December 31, 1999,
Borrower shall pay the aforementioned fee prorated for such period.
<PAGE> 2
1.6 BALANCES. Borrower shall maintain its major depository
accounts with Bank until the Note and all sums payable pursuant to this
Agreement have been paid in full.
1.7 DISBURSEMENT. Upon execution hereof, Bank shall disburse
the proceeds of the Loan as provided in Bank's standard form Authorization
executed by Borrower.
1.8 SECURITY. Prior to any disbursement of the Loan, Borrower
shall have executed a security agreement, on Bank's standard form, and a
financing statement, suitable for filing in the office of the Secretary of State
of the State of California and any other state designated by Bank, granting to
Bank a first priority security interest in such of Borrower's property as is
described in said security agreement. Exceptions to Bank's first priority, if
any, are permitted only as otherwise provided in this Agreement. At Bank's
request, Borrower will also obtain executed landlord's and mortgagee's waivers
on Bank's form covering all of Borrower's property located on leased or
encumbered real property.
1.9 CONTROLLING DOCUMENT. In the event of any inconsistency
between the terms of this Agreement and any Note or any of the other Loan
Documents, the terms of such Note or other Loan Documents will prevail over the
terms of this Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the
proceeds of the Loan unless at or prior to the time for the making of such
disbursement, the following conditions have been fulfilled to Bank's
satisfaction:
2.1 COMPLIANCE. Borrower shall have performed and complied
with all terms and conditions required by this Agreement to be performed or
complied with by it prior to or at the date of the making of such disbursement
and shall have executed and delivered to Bank the Note and other documents
deemed necessary by Bank.
2.2 BORROWING RESOLUTION. Borrower shall have provided Bank
with copies of resolutions duly adopted by the Board of Directors of Borrower,
authorizing this Agreement and the Loan Documents. Such resolutions shall also
designate the persons who are authorized to act on Borrower's behalf in
connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.3 CONTINUING COMPLIANCE. At the time any disbursement is to
be made, there shall not exist any event, condition or act which constitutes an
event of default under Section 6 hereof or any event, condition or act which
with notice, lapse of time or both would constitute such event of default; nor
shall there be any such event, condition, or act immediately after the
disbursement were it to be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of Borrower is
the analysis and design of systems for national defense programs.
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<PAGE> 3
3.2 AFFILIATES AND SUBSIDIARIES. Borrower's affiliates and
subsidiaries (those entities in which Borrower has either a controlling interest
or at least a 25% ownership interest) and their addresses, and the names of
Borrower's principal shareholders, are as provided on a schedule delivered to
Bank on or before the date of this Agreement.
3.3 AUTHORITY TO BORROW. The execution, delivery and
performance of this Agreement, the Note and all other agreements and instruments
required by Bank in connection with the Loan are not in contravention of any of
the terms of any indenture, agreement or undertaking to which Borrower is a
party or by which it or any of its property is bound or affected.
3.4 FINANCIAL STATEMENTS. The financial statements of
Borrower, including both a balance sheet at December 31, 1998, together with
supporting schedules, and an income statement for the twelve (12) months ended
December 31, 1998 have heretofore been furnished to Bank, and are true and
complete and fairly represent the financial condition of Borrower during the
period covered thereby. Since December 31, 1998, there has been no material
adverse change in the financial condition or operations of Borrower.
3.5 TITLE. Except for assets which may have been disposed of
in the ordinary course of business, Borrower has good and marketable title to
all of the property reflected in its financial statements delivered to Bank and
to all property acquired by Borrower since the date of said financial
statements, free and clear of all liens, encumbrances, security interests and
adverse claims except those specifically referred to in said financial
statements.
3.6 LITIGATION. There is no litigation or proceeding pending
or threatened against Borrower or any of its property which is reasonably likely
to affect the financial condition, property or business of Borrower in a
materially adverse manner or result in liability in excess of Borrower's
insurance coverage.
3.7 DEFAULT. Borrower is not now in default in the payment of
any of its material obligations, and there exists no event, condition or act
which constitutes an event of default under Section 6 hereof and no condition,
event or act which with notice or lapse of time, or both, would constitute an
event of default.
3.8 ORGANIZATION. Borrower is duly organized and existing
under the laws of the state of its organization, and has the power and authority
to carry on the business in which it is engaged and/or proposes to engage.
3.9 POWER. Borrower has the power and authority to enter into
this Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 AUTHORIZATION. This Agreement and all things required by
this Agreement have been duly authorized by all requisite action of Borrower.
3.11 QUALIFICATION. Borrower is duly qualified and in good
standing in any jurisdiction where such qualification is required.
3.12 COMPLIANCE WITH LAWS. Borrower is not in violation with
respect to any applicable laws, rules, ordinances or regulations which
materially affect the operations or financial condition of Borrower.
3.13 ERISA. Any defined benefit pension plans as defined in
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrower meet, as of the date hereof, the minimum funding standards of Section
302 of ERISA, and
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<PAGE> 4
no Reportable Event or Prohibited Transaction as defined in ERISA has occurred
with respect to any such plan.
3.14 REGULATION U. No action has been taken or is currently
planned by Borrower, or any agent acting on its behalf, which would cause this
Agreement or the Note to violate Regulation U or any other regulation of the
Board of Governors of the Federal Reserve System or to violate the Securities
and Exchange Act of 1934, in each case as in effect now or as the same may
hereafter be in effect. Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock as one of its
important activities and none of the proceeds of the Loan will be used directly
or indirectly for such purpose.
3.15 CONTINUING REPRESENTATIONS. These representations shall
be considered to have been made again at and as of the date of each disbursement
of the Loan and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
4.1 USE OF PROCEEDS. Borrower will use the proceeds of the
Loan only as provided in subsection 1.3 above.
4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge
promptly all taxes, assessments and other governmental charges and claims levied
or imposed upon it or its property, or any part thereof, provided, however, that
Borrower shall have the right in good faith to contest any such taxes,
assessments, charges or claims and, pending the outcome of such contest, to
delay or refuse payment thereof provided that adequately funded reserves are
established by it to pay and discharge any such taxes, assessments, charges and
claims.
4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and
preserve its existence and assets and all rights, franchises, licenses and other
authority necessary for the conduct of its business and will maintain and
preserve its property, equipment and facilities in good order, condition and
repair. Bank may, at reasonable times, visit and inspect any of the properties
of Borrower.
4.4 RECORDS. Borrower will keep and maintain full and accurate
accounts and records of its operations according to generally accepted
accounting principles and will permit Bank to have access thereto, to make
examination and photocopies thereof, and to make audits during regular business
hours. Costs for such audits shall be paid by Borrower.
4.5 INFORMATION FURNISHED. Borrower will furnish to Bank:
(a) Within sixty (60) days after the close of each
fiscal quarter, except for the final quarter of each fiscal year, its unaudited
balance sheet as of the close of such fiscal quarter, its unaudited income and
expense statement with supportive schedules and statement of retained earnings
for that fiscal quarter, prepared in accordance with generally accepted
accounting principles;
(b) Within one hundred and twenty (120) days after
the close of each fiscal year, a copy of its statement of financial condition
including at least its balance sheet as of the close of such fiscal year, its
income and expense statement and retained earnings statement for such fiscal
year, examined and prepared on an audited basis by
-4-
<PAGE> 5
independent certified public accountants selected by Borrower and reasonably
satisfactory to Bank, in accordance with generally accepted accounting
principles applied on a basis consistent with that of the previous year;
(c) As soon as available, copies of such financial
statements and reports as Borrower may file with any state or federal agency;
(d) Such other financial statements and information
as Bank may reasonably request from time to time;
(e) In connection with each fiscal year-end statement
required hereunder, any management letter of Borrower's certified public
accountants;
(f) Prompt written notice to Bank of all events of
default under any of the terms or provisions of this Agreement or of any other
agreement, contract, document or instrument entered, or to be entered into with
Bank; and of any litigation which, if decided adversely to Borrower, would have
a material adverse effect on Borrower's financial condition; and of any other
matter which has resulted in, or is likely to result in, a material adverse
change in its financial condition or operations; and
(g) Prior written notice to Bank of any changes in
Borrower's officers and other senior management; Borrower's name; and location
of Borrower's assets, principal place of business or chief executive office.
4.6 CURRENT RATIO. Borrower will at all times maintain a
ratio of current assets to current liabilities of at least 1.25:1.0, as such
terms are defined by generally accepted accounting principles except that, for
the purposes of this calculation, any amounts borrower under the Revolving Loan
shall be considered a current liability.
4.7 TANGIBLE NET WORTH. Borrower will at all times maintain
Tangible Net Worth of not less than Fourteen Million Dollars ($14,000,000).
"Tangible Net Worth" shall mean net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks, trade
names, goodwill and other similar intangible assets, organizational expenses,
and monies due from affiliates (including officers, shareholders and directors).
4.8 DEBT TO TANGIBLE NET WORTH. Borrower will at all times
maintain a ratio of total liabilities to tangible net worth of not greater than
2.00:1.00. "Tangible Net Worth" shall mean net worth increased by indebtedness
of Borrower subordinated to Bank and decreased by patents, licenses, trademarks,
trade names, goodwill and other similar intangible assets, organizational
expenses, and monies due from affiliates (including officers, shareholders and
directors).
4.9 CASH FLOW. Borrower will maintain a ratio of Cash Flow to
Debt Service of not less than 1.25:1.00. Compliance with this subsection shall
be measured as of the end of each fiscal quarter. "Cash Flow" shall mean net
profit after taxes to which depreciation, amortization, tax benefits relating to
the stock plan, cash proceeds of stock sales and other noncash expenses are
added, and from which cash purchases of stock are subtracted for the twelve (12)
month period immediately preceding the date of calculation. "Debt Service" shall
mean that portion of long-term liabilities and capital leases coming due within
twelve (12) months of the date of calculation.
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<PAGE> 6
4.10 INSURANCE. Borrower will keep all of its insurable
property, real, personal or mixed, insured by good and responsible companies
against fire and such other risks as are customarily insured against by
companies conducting similar business with respect to like properties. Borrower
will maintain adequate worker's compensation insurance and adequate insurance
against liability for damages to persons and property.
4.11 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon
demand by Bank, take such further action and execute all such additional
documents and instruments in connection with this Agreement as Bank in its
reasonable discretion deems necessary, and promptly supply Bank with such other
information concerning its affairs as Bank may request from time to time.
4.12 LITIGATION AND ATTORNEYS' FEES. Borrower will pay
promptly to Bank upon demand, reasonable attorneys' fees (including but not
limited to the reasonable estimate of the allocated costs and expenses of
in-house legal counsel and legal staff) and all costs and other expenses paid or
incurred by Bank in collecting, modifying or compromising the Loan or in
enforcing or exercising its rights or remedies created by, connected with or
provided for in this Agreement or any of the Loan Documents, whether or not an
arbitration, judicial action or other proceeding is commenced. If such
proceeding is commenced, only the prevailing party shall be entitled to
attorneys' fees and court costs.
4.13 BANK EXPENSES. Borrower will pay or reimburse Bank for
all costs, expenses and fees incurred by Bank in preparing and documenting this
Agreement and the Loan, and all amendments and modifications thereof, including
but not limited to all filing and recording fees, costs of appraisals, insurance
and attorneys' fees, including the reasonable estimate of the allocated costs
and expenses of in-house legal counsel and legal staff.
4.14 REPORTS UNDER PENSION PLANS. Borrower will furnish to
Bank, as soon as possible and in any event within 15 days after Borrower knows
or has reason to know that any event or condition with respect to any defined
benefit pension plans of Borrower described in Section 3 above has occurred, a
statement of an authorized officer of Borrower describing such event or
condition and the action, if any, which Borrower proposes to take with respect
thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or
any other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 ENCUMBRANCES AND LIENS. Borrower will not create, assume
or suffer to exist any mortgage, pledge, security interest, encumbrance, or lien
(other than for taxes not delinquent and for taxes and other items being
contested in good faith) on property of any kind, whether real, personal or
mixed, now owned or hereafter acquired, or upon the income or profits thereof,
except to Bank and except for minor encumbrances and easements on real property
which do not affect its market value, and except for existing liens on
Borrower's personal property and future purchase money security interests
encumbering only the personal property purchased.
5.2 BORROWINGS. Borrower will not sell, discount or otherwise
transfer any account receivable or any note, draft or other evidence of
indebtedness, except to Bank or except to a financial institution at face value
for deposit or collection purposes only and without any fee other than fees
normally charged by the financial institution for deposit or collection
services. Borrower will not borrow any money, become contingently liable to
borrow money, nor enter any agreement to directly or indirectly obtain borrowed
money,
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<PAGE> 7
except (a) pursuant to agreements made with Bank, and (b) indebtedness incurred
for the purpose of purchasing stock from current or former employees provided,
however, that payments arising from such obligations do not exceed Borrower's
quarterly stock repurchase limitation.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will
neither liquidate nor dissolve nor enter into any consolidation, merger,
partnership or other combination, nor convey, nor sell, nor lease all or the
greater part of its assets or business, nor purchase or lease all or the greater
part of the assets or business of another in excess of 9500,000 without Bank's
written consent, except for the sale of Borrower's preferred stock pursuant to
the Stock Purchase Agreement dated November 18, 1994 between Borrower and
Science Applications International Corporation ("SAIC") representing a maximum
of twenty percent (20%) of the aggregate shares outstanding.
5.4 LOANS, ADVANCES AND GUARANTIES. Borrower will not, except
in the ordinary course of business as currently conducted, make any loans or
advances, become a guarantor or surety, pledge its credit or properties in any
manner or extend credit, except as allowed by Borrower's Stock Option Plan.
5.5 INVESTMENTS. Borrower will not purchase the debt or equity
of another person or entity except for savings accounts and certificates of
deposit of Bank, direct U.S. Government obligations and commercial paper issued
by corporations with the top ratings of Moody's or Standard & Poor's, provided
all such permitted investments shall mature within one year of purchase.
5.6 PAYMENT OF DIVIDENDS. Borrower will not declare or pay any
dividends, other than a dividend payable in its own common stock, or authorize
or make any other distribution with respect to any of its stock now or hereafter
outstanding.
5.7 SUBORDINATION OF CERTAIN INDEBTEDNESS. Not at any time
permit the aggregate principal amount outstanding under all promissory notes
issued by Borrower to all former employees of Borrower and other persons in full
or partial consideration for Borrower's repurchase of shares of stock in
Borrower from such former employees and other persons to exceed One Million
Dollars ($1,000,000) unless all such amounts in excess of One Million Dollars
($1,000,000) are subordinated to all obligations now or hereafter owed by
Borrower to Bank pursuant to subordination agreements on Bank's standard form.
Bank hereby acknowledges and agrees, however, that each of such subordination
agreements shall permit Borrower to make, and shall permit the payee of the
promissory note(s) subordinated thereby to receive, regularly scheduled payments
of principal and interest under such promissory note(s) so long as Borrower has
made each and every payment of principal and interest due and owing to Bank and
is not in default under any of its agreements with Bank.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default")
shall terminate any obligation on the part of Bank to make or continue the Loan
and automatically, unless otherwise provided under the Note, shall make all sums
of interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Borrower shall default in the due and punctual payment of
the principal of or the interest on the Note or any of the other Loan Documents;
or
6.2 Any default shall occur under the Note; or
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<PAGE> 8
6.3 Borrower shall default in the due performance or
observance of any covenant or condition of the Loan Documents; or
6.4 Any guaranty or subordination agreement required hereunder
is breached or becomes ineffective, or subordinating creditor dies, disavows or
attempts to revoke or terminate such guaranty or subordination agreement; or
6.5 There is a change in ownership or control of ten percent
(10%) or more of the issued and outstanding stock of Borrower excluding the
effects of the Stock Purchase Agreement with SAIC.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and remedies given
to Bank hereunder shall be cumulative and not alternative and shall be in
addition to all rights, powers and remedies given to Bank by law against
Borrower or any other person, including but not limited to Bank's rights of
setoff or banker's lien.
7.2 NONWAIVER. Any forbearance or failure or delay by Bank in
exercising any right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or remedy shall
not preclude the further exercise thereof. No waiver shall be effective unless
it is in writing and signed by an officer of Bank.
7.3 INUREMENT. The benefits of this Agreement shall inure to
the successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment by Borrower without Bank's consent shall be null
and void.
7.4 APPLICABLE LAW. This Agreement and all other agreements
and instruments required by Bank in connection therewith shall be governed by
and construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective. In the event of any conflict between the
provisions of this Agreement and the provisions of any note or reimbursement
agreement evidencing any indebtedness hereunder, the provisions of such note or
reimbursement agreement shall prevail.
7.6 INTEGRATION CLAUSE. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
between Bank and Borrower regarding the Loan and all prior communications verbal
or written between Borrower and Bank shall be of no further effect or
evidentiary value.
7.7 CONSTRUCTION. The section and subsection headings herein
are for convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
7.8 AMENDMENTS. This Agreement may be amended only in writing
signed by all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank may execute one or more
counterparts to this Agreement, each of which shall be deemed an original, but
when together shall be one and the same instrument.
-8-
<PAGE> 9
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or
allowed hereunder shall be effective only when given by one of the following
methods and addressed to the respective party at its address given with the
signatures at the end of this Agreement and shall be considered to have been
validly given: (a) upon delivery, if delivered personally; (b) upon receipt, if
mailed, first class postage prepaid, with the United States Postal Service; (c)
on the next business day, if sent by overnight courier service of recognized
standing; and (d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given
may be changed from time to time by notice delivered as provided above.
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. SPARTA, INC.
By: /s/ Jim Heim By: /s/ Wayne Winton
------------------------------- -------------------------------
Name: Jim Heim Name: Wayne Winton
Title: Vice President Title: President
By: /s/ Lance Zediker By: /s/ B. Warren Knudson
------------------------------- -------------------------------
Name: Lance Zediker Name: B. Warren Knudson
Title: AVP Title: CFO & VP
Address: 500 S. Main St. Address: 23041 Av de la Carlota
Suite 200 Suite 325
Orange, CA 92868 Laguna Hills, CA 92653
Attention: Jim Heim Attention: B. Warren Knudson
Telecopier: (714) 565-5725 Telecopier (949) 770-4632
Telephone: (714) 565-5752 Telephone (949) 707-3406
-9-
<PAGE> 10
EXHIBIT A
Location of Collateral
4901 Corporate Drive
Huntsville, Alabama 35805
23041 Avenida de la Carlota, Suite 325
Laguna Hills, CA 92653
10540 Heater Court
San Diego, CA 92128-2446
7926 Jones Branch Drive
Suite 900
McLean, VA 22102-3303
1911 N. Fort Myer Drive
Suite 1100
Arlington, VA 22209-1603
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<PAGE> 11
[LOGO] UNION BANK OF CALIFORNIA
ORANGE COMMERCIAL BANKING GROUP
August 26, 1999
Mr. Wayne Winton, PRESIDENT
SPARTA, INC.
23041 de La Carlota, Suite 325
Laguna Hills, CA 92653-1507
Dear Wayne:
This Letter Agreement ("Agreement") will confirm the availability until July 2,
2001 of a Guideline of Credit ("Guideline") in the amount of Five Hundred
Thousand Dollars ($500,000) by Union Bank of California, N. A. ("Bank") to
qualifying employees of Sparta, Inc. ("Borrowers"). Advances under this
Guideline ("Loans") made by Bank to Borrowers shall be for amounts not less than
Twenty Five Thousand Dollars ($25,000) nor greater than Two Hundred Fifty
Thousand Dollars ($250,000). At no time will Loans made to any single Borrower
exceed Two Hundred Fifty Thousand Dollars ($250,000) singly or in aggregate. The
aggregate amount of all loans to Borrowers as provided herein shall at no time
exceed Five Hundred Thousand Dollars ($500,000). These Loans shall be
collateralized by stock in Sparta, Inc. owned by individual Borrowers. Bank will
lend against 40% of the value of the stock offered as collateral.
Any stock pledged to Bank to secure any Loans shall serve solely as collateral
for the relevant Loans and Bank shall be obligated to relinquish said stock when
the Loans and any Interest accrued thereon have been repaid in full.
Loans made under the Guideline shall be payable in equal monthly installments
over a period to be selected by the Borrowers, but at a minimum of one year to a
maximum of five years. The loans shall bear interest at the following rates on
the following amounts:
1. Loans of $25,000 to $200,000 at date of funding shall bear interest
at the Bank's Reference Rate plus one and one-half percent (1.5%).
2. Loans greater than $200,000 shall bear interest at the Bank's
Reference Rate plus one percent (1%).
Reference Rate means the rate announced by Bank from time to time at its
Corporate Headquarters as its Reference Rate. The rate on the Loans shall vary
concurrently with any change in such rate plus the applicable margin.
Borrowers shall pay an upfront commitment fee of 'Two Hundred Fifty Dollars
($250) for each transaction. No portion of this fee shall be refundable.
500 South Main Street, 2nd Floor, Orange, California 92868-4538
714 565 5722 714 565 5662 Fax 714 565 5725 714 565 5770
<PAGE> 12
All financial information submitted by Borrowers to Bank is true and correct in
all respects upon submission insofar as may be necessary to give Bank a true and
accurate knowledge of the subject matter thereof.
Before Bank is obligated to make any advance, Bank must receive all of the
following, each of which must be in form and substance satisfactory to Bank:
Borrower shall have delivered to Bank the following:
A personal financial statement completed by each Borrower along with a
signed tax return for the most recent tax year.
The original executed Promissory Note ("Note(s)")
Collateral in the form of Stock certificates in an amount sufficient to
secure any Loan(s).
An original executed Alternative Dispute Resolution.
Original, executed documentation that the Bank otherwise deems
necessary or desirable to support the Loans.
For each Loan, Sparta, Inc. ("Purchaser") shall execute a Put Agreement on
Bank's form whereby Sparta shall agree that in the event of default ("Events of
Default") by any Borrowers, Sparta, Inc. will repurchase the defaulted
indebtedness for the total principal and interest outstanding.
The occurrence of any of the following events ("Events of Default") in relation
to any individual Loans made under the Guideline shall result in a Loan in
default and shall automatically activate the Put Agreement between Bank and
Sparta, Inc. and all defaulted Loans shall be governed by the terms of the Put
Agreement.
Borrowers shall default in the due and punctual payment of the
principal of or the interest on the Notes, or
Borrowers are in default in any of the terms and conditions of any
documentation supporting the Loans; or
Any representation of warranty made by Borrowers herein or in any
certificate of financial or other statement heretofore or hereafter
furnished by Borrowers shall prove to be in any material respect false
and misleading;
Borrowers' failure to pay debts as they come due; or the filing by a
Borrower or Purchaser of any petition under the bankruptcy,
reorganizations, arrangement, insolvency, or other debtor's relief
laws, or the filing against any Borrowers or Purchaser of any such
petition or the appointment of a receiver, trustee or liquidation of
all or a substantial part of Borrower's or Purchaser's assets if the
filing against Borrower or Purchaser is not dismissed within thirty
(30) days thereafter;
Purchaser shall commit or do, or fail to commit or do, any act or thing
which would constitute an event of default under any of the terms of
any other agreement, document or instrument
<PAGE> 13
executed, or to be executed by it and concerning a financial obligation
of Purchaser, and such default shall not have been cured within any
applicable period of grace provided in the agreement, document or
instrument.
All, or such as in the opinion of Bank constitutes substantially all,
of the property of Borrower or Purchaser shall be condemned, seized or
appropriated.
All loans made under the Guideline shall be evidenced by Bank's standard form of
documentation and the terms and conditions of this Agreement are supplemental to
such documentation. However, in the event of any conflict between the terms of
any of the documents and this Agreement, the terms of the documents shall
prevail.
If you agree to accept the terms of this Agreement, please sign the enclosed
acknowledgement copy and return it on or before September 10, 1999.
UNION BANK OF CALIFORNIA, N.A. SPARTA, INC. (Purchaser)
By: /s/ James Heim By: /s/ Wayne Winton
---------------------------- -------------------------------
James Heim
Vice President Title: CEO
----------------------------
By: /s/ Margaret Furbank By: /s/ B. Warren Knudson
---------------------------- -------------------------------
Margaret Furbank
Vice President Title: CFO and VP
----------------------------
<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 19, 2000 appearing on
Page 24 of this Form 10-K.
PricewaterhouseCoopers
Costa Mesa, California
March 27, 2000
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