Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 29, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _________ to __________
Commission file number 0-21682
SPARTA, INC.
------------
(Exact name of Registrant as specified in its charter)
Delaware 63-0775889
--------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
23041 Avenida de la Carlota, Suite 325, Laguna Hills, CA 92653-1595
- -------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 768-8161
--------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of class)
Options to Purchase Common Stock
--------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of the Registrant's common equity held by
non-affiliates of the Registrant (based upon the "Formula Price", as hereinafter
defined) as of the last business day of the Registrants most recently completed
second fiscal quarter was $100,751,689.
As of February 23, 2003, 4,932,111 shares of the Registrant's common stock, $.01
par value, were issued and outstanding.
Portions of Registrant's definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on June 6, 2003 are incorporated by reference in Part
III of this Annual Report on Form 10-K.
SPARTA, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART 1
ITEM 1. BUSINESS ..........................................................1
ITEM 2. PROPERTIES........................................................13
ITEM 3. LEGAL PROCEEDINGS.................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................13
ITEM 6. SELECTED FINANCIAL DATA...........................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................17
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 25
ITEM 11. EXECUTIVE COMPENSATION........................................... 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................... 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 26
ITEM 14. CONTROLS AND PROCEDURES...........................................26
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K......................................................... 27
CAUTIONARY STATEMENT
All statements included or incorporated by reference in this Report, other than
statements or characterizations of historical fact, are forward-looking
statements. Forward-looking statements can often be identified by their use of
words such as "may", "will", "expects", "plans", "estimates", "intends",
"believes" or "anticipates", and variations or negatives of these words. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. Examples of forward-looking
statements include, but are not limited to, statements concerning anticipated
sources of revenue, expected national defense priorities, anticipated levels of
government funding, and our accounting estimates, assumptions and judgments. All
forward-looking statements involve risks and uncertainties that are difficult to
predict. Those risks and uncertainties include, among others, the variability of
government funding, changing priorities of Presidential Administrations and/or
Congress, changing geopolitical conditions, possible changes in government
procurement procedures, and the availability of highly skilled and educated
employees required by the Company. All forward-looking statements speak only as
of the date of this Report, and are based on the information available to us at
this time. Such information is subject to change, and we will not necessarily
inform you of such changes. The forward-looking statements are not guarantees of
future events and, therefore, the Company's performance could differ materially
and adversely from those contemplated by any forward-looking statements as a
result of various factors, some of which are discussed in this Report and the
other filings that we make from time to time with the Securities and Exchange
Commission, which you should carefully review. We undertake no obligation to
publicly revise or update any forward-looking statement for any reason.
PART I
ITEM 1. BUSINESS
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, other
agencies of the U.S. Department of Defense ("DoD"), and various intelligence
agencies. 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 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; 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.
Since the events of September 11, 2001, defense spending has been made a
national priority. Although the events of September 11 have renewed the nation's
defense priority, and created many opportunities in the Company's core business
areas, there will be strong competition for these opportunities and the Company
must compete effectively to capture the work.
Performance of scientific, engineering, technical and other services, under
contracts with DoD and intelligence agencies, either as a prime contractor or
subcontractor, accounted for approximately 93%, 86% and 85% of the Company's
revenues in fiscal year 2002, 2001 and 2000, respectively. Contracts with other
non-DoD government agencies, such as the National Aeronautics and Space
Administration ("NASA"), accounted for an additional 6%, 11% and 12%,
respectively, of the Company's revenues, and 1%, 3% and 2%, respectively of
the Company's revenues were derived from non-government customers.
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 DoD. These services and support are provided both
directly to these agencies and 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
1
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.
BMD programs 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 terrorist events and the
current Administration's concern about the proliferation of biological, chemical
and nuclear weapons to unstable rogue states has stabilized government funding
in this area in recent years. Because of this, BMD has continued to be a
significant part of the Company's business. In 2002, 2001 and 2000, BMD revenues
accounted for 43%, 37% and 38%, respectively, of total sales. Government BMD
appropriations for government fiscal year ("GFY") 2002 were $7.7 billion, an
increase of 45% from $5.3 billion in GFY 2001. The current administration has
made BMD a defense priority. In 2001, the U.S. withdrew from the 1973 ABM treaty
so that different space architectures could be tested.
During 2001, the Department of Defense transformed the Ballistic Missile
Defense Organization into the Missile Defense Agency ("MDA") to prepare for the
near-term deployment of a BMD system to protect the U.S. against the threat of
ballistic missile attack. The MDA is an umbrella agency that funds and
supervises technology and system development for defensive systems that defend
against both nuclear and non-nuclear ballistic missiles. The MDA budget for GFY
2003 is expected to decrease to $7.2 billion, increasing to $7.7 billion in GFY
2004 and $8.7 billion in 2005. Although the GFY 2003 budget is expected to
decrease relative to GFY 2002, the Company believes that this will not have a
material adverse effect on its BMD revenues, as most of the decreases are in BMD
program elements in which the Company does not currently have significant
participation. However, governmental defense weapons priority decisions, budget
decisions, international events, proliferation of nuclear weapons, and
international arms negotiations, over which the Company has no influence, will
affect political support of BMD. As a result, there can be no assurance that the
present commitment of the U.S. Government to BMD will continue, or that funding
for BMD programs in general will not be reduced. However, strategic defense
programs, under the direction of various military and DoD 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, and the current administration's BMD
priority, will result in the continued funding of strategic defense programs by
these agencies in the immediate future.
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.
In 1995, the Company formed a wholly-owned subsidiary, Commercial
Technology, Inc. ("CTI"), to conduct business as SPARTA Marine Instrumentation.
In the last quarter of 1998, all active contracts in CTI were contractually
assigned to and assumed by another entity unaffiliated with the Company. The
Company liquidated CTI in January of 2002. At the end of 2000, the Company
formed a new wholly-owned subsidiary, ST SPARTA, Inc. (which conducts business
as Spiral Technology), to which the Company transferred its Technical Services
Operation. As used in this report on Form 10-K, all references to the Company or
SPARTA include, unless the context indicates otherwise, the Company and its
subsidiaries.
Industry Background
A substantial portion of the U.S. defense budget is devoted to the
development of new weapons and defense systems and system upgrades. However,
development of new weapons and defense systems and upgrades requires
considerable scientific, engineering, and analytical expertise which is often
beyond the resources of the government agencies which are responsible for
development of those systems.
As a result, U.S. Government defense and military agencies have relied, in
part, on outside service firms such as the Company to assist them in the
performance of their responsibilities. Such firms provide analytical, technical
and engineering support services throughout the life cycle of complex weapons
and defense systems. This life cycle typically begins with a requirements
definition phase in which particular strategic or tactical needs, opportunities,
and objectives are identified and the technological requirements and
configuration or design
2
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 SPARTA 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. Such firms are also
relied upon 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. There has been a strong initiative within the government to
out-source 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. In addition, there has been a strong movement in acquisition
reform to consolidate requirements and issue fewer contracts, larger in scope,
and covering multiple years. Although most experts agree that consolidation of
requirements has not been very favorable to small business, it has not adversely
impacted the Company's business to date. Because of the consolidation of
requirements, government contracts in the Company's business areas have seen a
proliferation of large indefinite delivery/indefinite quantity ("ID/IQ") task
order contracts. These contracts have high contract value ceilings, but such
ceilings usually have little relationship to the true contract value. These
contracts often have more than one awardee and merely give the Company the right
to compete for task orders against other companies that have the same contract
vehicle. Due to the nature of these types of contracts, there is uncertainty as
to how much business the Company will ultimately be awarded under such
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 900 employees, of whom 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 ten years, the Company has succeeded in
obtaining larger contracts in more diverse areas, including logistics support
for the U.S. Army, engineering analysis design and development for the U.S. Air
Force, test and evaluation work for the Missile Defense Agency, evaluation of
foreign military systems for the Army, computer security work for the FBI, and
range facility support work for the Air Force.
Due to the size, complexity, and multidisciplinary requirements of many
government contracts, teaming arrangements among defense contractors (where one
contractor serves as the prime contractor and others act as subcontractors) and
joint ventures are common business arrangements. The Company will continue to
follow the
3
practice of working with other government contractors to bid on procurements
which require capabilities in areas outside of the Company's expertise, in order
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 the next two
years. The Company currently qualifies as a small business in most of its
business areas because it has fewer than 1,000 employees, which is typically
the principal requirement of the small business set-aside programs in which the
Company participates.
Given the composition of the Company and its employees' expertise, the
Company believes it is in a strong position to compete for new opportunities in
information operations, homeland security, defenses against weapons of mass
destruction ("WMD"), and counter-terrorism. However, to date, the Company has
not derived significant revenues from these business areas.
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 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 benefiting from available business opportunities.
This occasionally includes the preparation of unsolicited proposals or white
papers responsive to the perceived needs of current and prospective customers,
but more often includes responding to formal solicitations or broad area
announcements from various U.S. Government agencies.
The Company places significant emphasis on client satisfaction, which is
essential to the development of repeat business. Past performance is a
government-mandated factor in determining contract awards. 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 in over 20
locations in proximity to the agencies and other contractors for which the
Company provides services. The Company also has employees on-site at a number of
government and private contractor customer facilities. The Company's managers
have 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 arrangements with other defense contractors to
bid on large, complex, and multidisciplinary contracts. These 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 contractor and as a subcontractor. Corporations which have acted as
subcontractors to the Company include Science Applications International
Corporation, Computer Sciences Corporation, Northrop Grumman, and Camber
Corporation, among others. Companies for which the Company has acted as a
subcontractor include Lockheed-Martin, Boeing, Northrop Grumman, Teledyne Brown,
Honeywell, and Raytheon, among others.
U.S. Government Contracts
Approximately 99% of the Company's fiscal year 2002 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 DoD.
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 provide for the performance of specified tasks or the
delivery of specified reports or analyses under task orders or delivery orders.
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
determined by the customer's
4
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 earned on the
contract.
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 typical fixed price (level of effort) contract provides for the Company to
incur a specified number of hours on the contract. Fixed price (level of effort)
contracts are less risky than firm fixed price contracts. If the Company uses
all of 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 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 the delivery of hardware or software.
Over 85% of the Company's revenues are derived from contracts that are lower
risk fixed price (level of effort); cost reimbursement; and fixed rate, time and
materials contracts. The distribution by contract type of the Company's revenues
in 2002 and 2001 is as follows (amounts in thousands, except percentages):
2002 2001
---------------------- ------------------------
Amount % of total Amount % of total
-------- ---------- -------- ----------
Cost reimbursement $114,204 71% $ 71,868 52%
Time and materials 28,044 17% 51,586 38%
Fixed price (level of 1,486 1% 1,706 1%
effort)
Firm fixed price 17,963 11% 12,065 9%
Other 529 -- 361 --
-------- --- -------- ---
Total $162,227 100% $137,586 100%
======== === ======== ===
All cost reimbursement contracts relating to services or products supplied
to government agencies are subject to audits and adjustments. Such audits
include both an audit of the contractor's indirect contract costs on a fiscal
year basis, as well as an audit of the direct contract costs relating to each
individual contract. The government does not adhere to any firm schedule with
respect to its conduct of these audits. Rather, the scheduling of such audits is
dependent on the resources available to the Defense Contract Audit Agency
("DCAA") from time to time and the existence of higher priority projects. The
Company's indirect contract costs have been audited by and settled with the DCAA
through the fiscal year ended December 31, 2000 (fiscal year 2000). Indirect
contract costs for periods subsequent to fiscal year 2000 have been recorded at
amounts, which the Company expects to realize upon final settlement. The Company
expects that costs incurred in fiscal year 2001 will be audited and settled with
the DCAA in fiscal year 2003, and that costs incurred in fiscal year 2002 will
be audited and settled in fiscal year 2004.
The Company's contracts may be terminated, in whole or in part, at the
convenience of the government (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 and obligations incurred by the Company under the contract plus a fee
based upon work completed. There were no contracts terminated in 2002, and the
Company does not anticipate termination of any programs or contracts in 2003.
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 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
5
years. These appropriations are therefore subject to changes as a result of
increases or decreases in the overall DoD budget. New presidential
administrations, changes in the composition of Congress, and disagreement or
significant delay between Congress and the Administration in reaching a defense
budget accord can all significantly affect the Company's business.
Backlog
Funded 12-month backlog represents all current contracts on which the
Company expects to perform during the next 12 months for which the Company has
received funding from its customer. Unfunded 12-month backlog includes the
12-month expected value of future incremental funding on existing or negotiated
contracts. As a result of U.S. Government funding practices, most of the
Company's funded backlog at any given date is represented by work that will be
performed within 12 months. The following table shows the Company's 12-month
contract backlog at the dates stated:
December 29, December 30,
2002 2001
------------ ------------
Funded 12-month contract backlog $ 60,500,000 $ 31,700,000
Unfunded 12-month contract backlog 114,100,000 111,600,000
------------ ------------
Total 12-month contract backlog $174,600,000 $143,300,000
============ ============
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. Additionally, a substantial number of contracts are
competitively bid, 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. Under the government's performance-based approach
to service contracting, performance is a key element in developing statements of
work, selecting contractors, determining contract types and incentives, and
performing contract administration.
One of the important roles of the Company and its competitors is to assist
the government in developing requirements for various programs and, on occasion,
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 past
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."
6
Patents and Proprietary Rights
The Company, at present, holds a small number of patents. All of these
patents are related to technology developed by the Company during the course of
performing work on defense programs, 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
science 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.
Many of the Company's contracts require the Company and certain of our
employees to obtain and maintain government security clearances. As of December
29, 2002, approximately 80% of our employees had security clearances.
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 2002
and 2001, the Company experienced a relatively low level of voluntary employee
turnover, as the result of the Company's intensive efforts to reduce voluntary
turnover and due to the economic downturn in the technology sector and in the
global economy. In 2002, the Company was able to attract and hire approximately
300 full-time employees, replacing approximately 210 terminating employees, an
increase of approximately 90 full-time employees. The Company believes that
continued 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 the value of the Company's employee stock ownership
program, and maintain its other incentives at industry comparable levels.
Although the Company continues to focus on improving recruitment and employee
retention, it is uncertain if the Company will be able to continue to minimize
voluntary turnover or achieve its recruitment goals in 2003.
At December 29, 2002, the Company employed approximately 900 equivalent
full-time employees, approximately 80% of whom are based in the Company's
facilities in California, Virginia, and Alabama. None of the Company's employees
are covered by a collective bargaining agreement. The Company believes that its
employee relations are good. The Company has not experienced any labor disputes
or work stoppages during the last five years.
Available Information
The Company's web site address is www.sparta.com. The Company makes available
free of charge on or through its internet web site its Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable
after the Company electronically files such material, or furnishes it to, the
Securities and Exchange Commission.
7
RISK FACTORS
You should carefully consider the risks and uncertainties described below in
your evaluation of the Company and its business. These are not the only risks
and uncertainties that the Company faces. If any of these risks or uncertainties
actually occur, our business, financial condition or operating results could be
adversely affected and the price of our common stock could decline.
RISKS RELATED TO OUR INDUSTRY
Concentration of Revenue with the U.S. Government
The Company derives a substantial portion of its revenue from direct or
indirect contracts with various U.S. Government agencies. During 2002, 99% of
the Company's revenue was derived from such contracts, and 43% of the Company's
revenue was derived from contracts related to BMD. Accordingly, changes in U.S.
Government contracting policies could have a material adverse effect on our
financial position or results of operations. Among the factors that could affect
our business are:
[ ] Changes in budgets, appropriations or administrations affecting U.S.
Government spending generally, or specific agencies with which we do
business, or specific programs (such as BMD) in which we participate;
[ ] Delays in the government's appropriation process;
[ ] Military conflict or international political crises that may result in
funding limitations on the Company's contract vehicles; and
[ ] The impact on U.S. Government tax revenues of possible decline in the
general economy.
Risks Related to Government Contracting
Contracts with the U.S. Government (and most subcontracts with prime
contractors) generally contain provisions and are subject to laws and
regulations that give the U.S. Government rights and remedies not typically
found in commercial contracts. These provisions may impose certain risks to the
Company. Among these provisions are:
[ ] Although many of the programs in which we participate extend for several
years, these programs are normally funded incrementally on an annual basis.
Further, the government may modify, curtail or unilaterally terminate our
contracts at its convenience. Any failure of Congress to approve funding for
any major program or contract, or any modification, curtailment, or
termination of a major program or contract could have a material adverse
effect on the Company's financial condition or results of operations.
[ ] Many of our multi-year contracts provide for the exercise by the government
of unilateral options. There can be no assurance that the government will
exercise such options.
[ ] Government procurement regulations provide competitors the opportunity to
protest or challenge new contract awards made to us pursuant to competitive
bidding procedures. Such protests or challenges may result in the Company
incurring additional costs, such as legal and proposal resubmission costs.
Moreover, in the event a protest is upheld, it could result in
termination, reduction or modification of the awarded contract, which could
have a material adverse effect on the Company's financial condition or
results of operations. During 2002, one of the Company's competitors
protested an award to the Company of a $37 million, five-year contract. As a
result of the protest, the contracting agency placed a stop work order on
the award, pending a U.S. General Accounting Office (GAO) decision on the
protest. Subsequently, the GAO sustained the protest based on a source
selection error in the cost/technical trade-off. The solicitation was
remanded to the contracting agency for re-evaluation of source selection
criteria, and the contracting agency has decided to request new proposals
from both contractors. There can be no assurance that the Company will be
successful in its efforts to win this contract award.
8
[ ] U.S. Government contractors are subject to audits, investigations and
inquiries by the DCAA and other government agencies regarding business
practices and contract costs. The results of such audits, investigations and
inquiries could result in the disallowance of certain costs incurred by the
Company, or the imposition of civil or criminal penalties, up to and
including suspension or permanent disbarment from conducting business with
the government. The Company has negotiated final indirect contract costs
through fiscal year 2000. Indirect contract costs for periods subsequent to
fiscal year 2000 have been recorded at amounts which the Company expects to
realize upon final settlement. Cost disallowances in excess of established
reserves, or civil or criminal penalties resulting from investigations or
inquiries, could have a material adverse effect on the Company's financial
condition or results of operations.
[ ] The Company is subject to regulations regarding potential Organizational
Conflicts of Interest (OCI). These regulations generally attempt to prevent
the existence of conflicting roles that might bias a contractor's judgment.
OCI regulations also attempt to prevent unfair competitive advantage in
situations where a contractor competing for award of a contract possesses
proprietary information as a result of work performed on another contract,
or source selection information that is relevant to the new contract but is
not available to all competitors. In particular, contractors that perform
systems engineering, requirements work, and technical analysis, as the
Company does, may be precluded from being awarded a contract to supply the
system or major components thereof. The Company carefully monitors its
contracts and new business pursuits for potential OCI issues.
[ ] A panoply of laws and regulations exist that affect companies that do
business with the U.S. Government. Among the more significant regulations
are the Federal Acquisition Regulations, which provide comprehensive
regulations for the formation, administration, and performance of U.S.
Government contracts; the Truth in Negotiations Act, which require
certification and disclosure of costs and pricing data in connection with
the negotiation of certain contracts; Cost Principles and Cost Accounting
Standards, which impose rules regarding the allowability and allocability of
costs to U.S. Government contracts; and a variety of laws and regulations
that govern the dissemination of information that is classified for national
security purposes. These laws and regulations impose added costs on our
business, and significantly affect the manner in which we conduct our
business with our customers. Changes in or significant violations of these
laws and regulations could have a material adverse effect on the Company's
financial condition or results of operations.
Changes in Government Procurement Strategies
Over the last few years, many U.S. Government agencies have increasingly
relied upon ID/IQ contracts, General Services Administration (GSA) schedule
contracts, and other similar multiple award contract (MAC) vehicles. These
contracts usually have more than one awardee, and receiving such a contract
award merely gives the Company the right to compete for task orders against
other companies that have the same contract vehicle. These contracts have high
contract value ceilings, but such ceilings usually have little relationship to
the true contract value. Due to the nature of these types of contracts, there is
uncertainty as to how much business the Company will ultimately be awarded under
such contracts, as we may be unable to successfully market tasks or otherwise
increase our revenue under these contract vehicles.
In addition, over the last few years, the government has implemented a
performance-based approach to service contracting. Under the government's
performance-based approach to service contracting, performance is a key element
in developing statements of work, selecting contractors, determining contract
types and incentives, and performing contract administration. If we fail to
perform well on a contract, such performance could adversely affect our ability
to win future contract awards for related work.
Competition in the Industry
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, technology and research and development areas in
which the Company is engaged, many of which are significantly larger, better
capitalized, and have more resources than the Company.
9
Competition among these companies is intense because, among other things,
capital requirements and other barriers to entry are generally minimal. If the
Company is unable to compete effectively in this environment, there could be a
material adverse effect on the Company's financial position or results of
operations.
Government Security Issues
Many of the Company's contracts require the Company and certain of our
employees to obtain and maintain government security clearances. If we lose or
are unable to obtain the required security clearances, our customer may
terminate the related contract, or may decide not to renew it upon its
expiration. Additionally, a breach in security procedures could result in
negative publicity, impair the Company's reputation, and prevent us from further
accessing critically sensitive information. Such events could have a material
adverse effect on the Company's financial position or results of operations.
RISKS RELATED TO OUR BUSINESS
Contract Performance Risks
Performance under the Company's contracts involves a number of risks.
Failure to adequately assess the costs to be incurred on a contract could have a
material adverse effect on the Company's financial position or results of
operations. Under our cost reimbursement contracts, we are generally allowed to
recover approved costs plus a fixed or award fee. However, the total contract
price may be subject to a maximum contract funding. To the extent we incur
unallowable costs, or costs in excess of the funding limitation specified in the
contract, we may not be able to recover such costs. Under our time and material
contracts, we provide services at fixed hourly rates. If we miscalculate the
costs of salaries, employee benefits, or other indirect costs, we are required
to absorb the excess costs. Under our firm fixed price contracts, we assume the
risk of performing the contract at a set price. If we fail to accurately
estimate the ultimate costs under such contracts, or to control costs during
performance of the work, we could incur reduced profit, or losses, from such
contracts. On occasion, the Company will incur costs on a project prior to
formal definitization of the contract. If we are unable to recover such
pre-contract costs, there could be a material adverse effect on the Company's
financial position or results of operations.
Loss of Small-Business Status
The Company estimates that it currently generates approximately 15% of its
revenue from contracts that are small-business set-asides or otherwise related
to the Company's status as a small business. The Company currently qualifies as
a small business in most of its business areas, and expects to remain qualified
for small business programs for the next two years, because the maximum number
of employees allowed for such contracts is typically 1,000 employees. For this
purpose, the number of employees is computed as the average monthly employee
count over the twelve months preceding submittal of the contract proposal, thus
extending the eligibility period beyond that in which the Company first exceeds
1,000 employees. The U.S. Government is expected to continue its policy of
establishing small business procurement objectives for the foreseeable future.
Upon losing its small business status, the Company will no longer be
eligible to propose on small business set-aside programs, except as a
subcontractor to a prime contractor that qualifies as a small business.
Furthermore, procuring agencies and prime contractors will no longer be able to
consider contracts awarded to the Company in determining whether they have met
their small business procurement objectives, although the Company will still be
entitled to compete for such contracts based on technical, performance, cost,
and other factors. If the Company is unable to replace its existing small
business set-aside contracts, or if procuring agencies and prime contractors
decide to award follow-on contracts to other companies that qualify as a small
business, there could be a material adverse effect on the Company's financial
position or results of operations.
Key Personnel
The Company depends on a number of its executive officers and senior
management to identify and pursue new business opportunities, to identify key
growth opportunities, and to establish and maintain relationships with the U.S.
Government agencies and prime contractors with which we do business.
Additionally, much of our
10
continued success is dependent on our ability to recruit and retain key
technical staff necessary to serve our customers effectively. Excessive turnover
among our officers, senior management, or key technical staff could adversely
affect our ability to perform our contractual obligations, to generate new
business to replace expiring contracts, and to identify and penetrate key growth
markets. Although the Company has designed its compensation and other policies
to facilitate recruitment and to minimize attrition, there can be no assurances
that such policies will succeed. In addition, the Company generally has not
entered into long-term employment agreements with its key personnel.
Customer Expectations and Relationships
As a predominantly service-oriented business, much of the Company's ability
to expand our current business and generate future business is dependent upon
meeting our customers' expectations and managing our customer relationships. If
we are unable to meet our customers' expectations, we may lose future contract
opportunities due to receipt of poor past performance evaluations; receive
negative publicity that could adversely impact our reputation; or be subject to
contract terminations for default. Such events could have a material adverse
effect on the Company's financial position or results of operations.
Reliance on Subcontractors and Prime Contractors
A significant portion of the Company's annual sales are derived from
contracts in which a portion of the work is performed by subcontractors to the
Company. As such, we rely on our subcontractors to perform a substantial portion
of the work we are obligated to deliver to our customers. Additionally, the
Company derives a significant portion of its revenue from work performed by its
subcontractors for other prime contractors. Failure of a subcontractor to
deliver on its commitments to the Company, or of a prime contractor to deliver
on its commitments to the ultimate customer, may significantly affect our
ability to perform our obligations. Such subcontractor or prime contractor
deficiencies could result in the U.S. Government terminating the contract for
default, which could have a material adverse effect on the Company's financial
position or results of operations.
Estimated Contract Backlog
Contract backlog, as reported in this Annual Report on Form 10-K, is
comprised of funded backlog and unfunded backlog. Funded backlog represents all
current contracts on which the customer has appropriated funds. Unfunded backlog
represents management's estimate of the expected value of future incremental
funding on existing contracts (including contract options) or negotiated
contracts. Although the Company's backlog has, in the past, generally been
indicative of its future revenues, there can be no assurance that contracts
included in our estimated backlog will result in actual revenues in any
particular period, or that the actual revenues will equal the estimated contract
value. 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, and are subject to the annual Congressional appropriations
process.
Future Acquisitions
Historically, the Company has relied on internally generated growth for
substantially all of the Company's growth. In the future, however, the Company
may utilize strategic acquisitions to supplement internal growth or to rapidly
establish itself in new markets. Acquisitions may pose additional risks to the
Company, including:
[ ] We may issue shares of the Company's common stock as consideration in an
acquisition, potentially diluting the ownership interests of existing
stockholders;
[ ] We may be unable to accurately assess the financial impact of an acquired
business on the Company's financial position or results of operations;
[ ] We may be unable to novate, assign, or otherwise succeed to the acquired
business' U.S. Government contracts;
[ ] We may be unable to effectively integrate the acquired business into our
existing operations;
11
[ ] We may be unable to retain key employees of the acquired business; and
[ ] We may be required to devote disproportionate management or Company
resources to negotiating, integrating, or financing an acquired business.
These, and other risks, may result in an acquisition having a material adverse
effect on the Company's financial position or results of operations.
RISKS RELATED TO OUR COMMON STOCK AND CAPITAL STRUCTURE
Lack of Public Market; Restrictions on Transfer or Sale of Stock; Voluntary
Repurchase Program
There is no public market for the Company's common stock, and the Company
currently has no intention of registering its common stock on a public exchange
for the foreseeable future. Moreover, the Company's Amended and Restated
Certificate of Incorporation imposes significant restrictions on the ability of
stockholders to transfer or sell shares of the Company's common stock (see
"Market For Registrant's Common Equity And Related Stockholder Matters -
Repurchase Rights Of The Company, Restrictions On Transferability").
The Company maintains a voluntary quarterly repurchase program, at the
discretion of the Board of Directors, in order to provide a level of liquidity
to its stockholders. However, the Company's stockholders have no right to compel
the Company to repurchase any of the stockholders' shares. In addition, the
number of shares that the Company may repurchase is subject to legal
restrictions imposed by applicable corporate law affecting the ability of
corporations to repurchase shares of their capital stock. Finally, 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
liquidity or financial condition. Accordingly, there can be no assurance that
stockholders will be able to sell all of the shares they desire to sell.
Formula Stock Price
The Company's stock price is determined by our Board of Directors, pursuant
to a stock price formula that is evaluated annually by an independent valuation
firm (see "Market For Registrant's Common Equity And Related Stockholder Matters
- - Formula Price"). As such, a trading market of buyers and sellers does not
determine the Company's stock price. The stock price formula may not necessarily
include variables that reflect all financial and valuation criteria that may be
relevant. Moreover, the results of the independent valuation, or other
unanticipated events, may require the Company to modify the stock price formula
in the future, in order to ensure that the stock price formula continues to
produce a price within an appropriate range of fair market value. All stock
repurchases occur at the formula stock price determined by the Board of
Directors. The Board of Directors believes that the formula stock price
represents a fair market value, however, there can be no assurance that the
stock price represents the value that would be obtained if our stock were
publicly traded.
Future Returns on Common Stock
There can be no assurance that the future returns on the Company's common
stock will be comparable to those achieved historically, nor can there be any
assurance that the stock price will not decline. In addition, the Board of
Directors has substantial discretion to modify the stock price formula. The
mechanical application of the current stock price formula tends to reduce the
impact of quarterly fluctuations in our operating results on the stock price
(because the formula takes into account our earnings for the eight preceding
quarters). However, the stock price could be subject to greater volatility in
the future in the event of a significant change in the stock price formula.
Possible Retirement Plan Legislation
Approximately 57% of the Company's outstanding common stock is held by the
Company's retirement plan. Congress is currently considering legislation that
may, among other things, impose limitations on the amount of Company common
stock held by the retirement plan, the amount of Company common stock that the
Company can contribute to the plan, and the tax deductibility of contributions
of Company common stock
12
contributed to the plan. Such legislation also may require the Company to
repurchase certain shares currently held by the retirement plan, regardless of
the Company's self-imposed repurchase limitations. Enactment of such legislation
may have a significant adverse effect on the Company's liquidity.
Leverage; Restrictive Debt Covenants
As of December 29, 2002, the Company had long-term debt totaling $10.4
million. Our level of indebtedness may require us to use a substantial portion
of our cash flow to pay interest and principal on the debt; limit our ability to
obtain additional funding for working capital, acquisitions, or other necessary
expenditures; result in higher interest expense if interest rates increase on
our floating rate borrowings; or increase our vulnerability in the event of a
downturn in our business.
In addition, the Company is subject to restrictive covenants under our
bank line of credit agreement. These restrictions generally limit our ability to
incur additional debt, make investments, or acquire or sell businesses; preclude
the payment of cash dividends on our common stock; create a lien on
substantially all of the Company's assets; and require us to maintain certain
minimum financial ratios. Failure to comply with these covenants could result in
acceleration of any borrowings under the agreement (although, as of December 29,
2002, there were no borrowings outstanding under the agreement). Alternatively,
failure to comply with the loan covenants could result in termination of the
line of credit agreement.
ITEM 2. PROPERTIES
The Company's corporate office, comprised of approximately 12,300 square
feet of office space leased through May 2003, is located in Laguna Hills,
California. The Company has entered into a lease for a new corporate office,
commencing May 2003 and comprising approximately 15,900 square feet of office
space in Lake Forest, California.
All of the Company's other offices are also leased, and aggregate
approximately 328,000 square feet. Major offices are located in Huntsville,
Alabama; San Diego, Lancaster, El Segundo, and La Jolla, California; Colorado
Springs, Colorado; Orlando, Florida; Columbia, Maryland; Billerica,
Massachusetts; and Rosslyn and Centreville, Virginia. Leases on these and other
Company facilities expire at various times through 2010. The aggregate annual
rent paid by the Company for all of its offices and facilities, during the
fiscal year ended December 29, 2002, was approximately $5,345,000. 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, the Company's current employees and directors own
substantially all of the outstanding common shares of the Company and it is the
Company's policy to restrict ownership of the Company's stock to its then
current employees and directors, to the extent possible. Accordingly, the
Company's 1997 Stock Plan (the "Stock Plan") and the Company's Amended and
Restated Certificate of Incorporation place restrictions on the transferability
of
13
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 the shares they own for sale to the Company on February 21,
May 21, August 21 or November 21, or at such other interim dates as the Board of
Directors of the Company may designate from time to time (each a "Stock
Repurchase Date"), 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 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 liquidity or
financial condition. The Board of Directors may approve waivers to the
self-imposed quarterly repurchase limitation.
The Company's policy generally is to repurchase the stockholdings of all
individuals terminating their association with the Company, so as to retain all
stockholdings among active employees and directors. However, the 40% reduction
in the Company's staff level during 1993 and 1994 resulted in the termination of
employees who held, in the aggregate, approximately 30% of the Company's total
common stock then outstanding. Consequently, in April 1994, the Company
temporarily suspended the policy of repurchasing all of the stock held by
terminating employees so as not to deplete stockholders' equity. The policy of
repurchasing all stockholdings of terminated employees was reinstated in 1997.
In support of this policy, the Board of Directors authorized the Company's stock
plan administrator to issue, at his discretion, promissory notes to repurchase
stock held by certain terminating employees. In accordance with this policy,
during 2002, the Company issued new promissory notes totaling $3.5 million. As
of December 29, 2002, the percentage of the Company's outstanding common stock
held by former employees totaled approximately 3.9%.
In November 1994, the Company entered into a Stock Purchase Agreement (the
"Agreement") with Science Applications International Corporation ("SAIC"). Under
the terms of the Agreement, between November 1994 and August 1996, SAIC
purchased a total of 569,000 shares of the Company's redeemable preferred stock,
at an aggregate price of $2.4 million. Beginning in May 1999, in connection with
the quarterly stock repurchase program, the Company repurchased shares of the
redeemable Preferred Stock held by SAIC. As of December 29, 2002, the Company
had repurchased all such shares of redeemable preferred stock.
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
subordinated promissory notes at the end of such fiscal quarter ("SN"), and the
aggregate exercise price of all stock options which were exercisable as of the
end of such fiscal quarter ("CX"), and the denominator of which is the sum of
the number of issued and outstanding shares of common stock and preferred stock
of the Company ("SI") and the number of shares of common stock issuable upon the
exercise of stock options which are exercisable ("SV") at the end of that fiscal
quarter, and (ii) the product of 7 multiplied by the "future growth factor"
("FG"), multiplied by the average annual "earnings per share" of the Company for
the eight fiscal quarters immediately preceding the price revision ("A"). (For
this purpose, "earnings" include both net income and the tax benefits to the
Company from option exercises, and "shares" include both outstanding shares and
shares subject to vested stock options.) The "future growth factor", or "FG", is
the lesser of 1.5 or the number obtained by dividing (a) the sum of the
Company's contract gross profits for the four fiscal quarters immediately
preceding the date on which the price revision occurs, and the
14
projected contract gross profits for the four fiscal quarters immediately
following the end of such prior period by (b) the Company's contract gross
profits during the eight fiscal quarters immediately preceding the price
revision, and squaring the quotient so obtained. The Formula Price, expressed as
an equation, is as follows:
Formula Price = SE + SN + CX + (7FG x A)
------------
SI + SV
Where:
SE = Stockholders' equity which includes all common and preferred Stock
SN = Aggregate principal amount of subordinated notes (long term portion)
CX = Aggregate exercise price of vested stock options
SI = Number of shares of common and preferred Stock issued and outstanding
SV = Number of shares subject to vested stock options
FG = The lesser of 1.5 or contract gross profits over the past four fiscal
quarters plus projected contract gross profits over the next four
fiscal quarters divided by contract gross profits over the past
eight fiscal quarters, the quotient of which is squared
A = Average annual "earnings per share" (as defined) for the preceding
eight quarters
For purposes of the Formula, projected contract gross profits are
determined by the Company's Chief Executive Officer based on information
provided monthly by the Company's management concerning existing contracts in
progress and contract proposals which have been sent to customers for evaluation
and source selection. This information includes expected contract value, period
of performance, funding profile, expected fee/profit, probable award date, and
"probability of win" assessments. This information is 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 change the Formula Price
to factor in the lack of liquidity. The Formula Price is reviewed periodically
by an independent outside appraisal firm to determine if the Formula continues
to produce a price within an appropriate range of fair market value. The results
of the most recent review, conducted in April 2002, determined that, at that
time, the Formula was producing a price within an appropriate range of fair
market value.
The Formula Price is calculated not less than once each fiscal quarter, in
January, April, July and October of each year. Such calculations are based on
unaudited financial information as of the end of the last full fiscal quarter
immediately preceding the date on which the Formula Price is recalculated. 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, retroactive
adjustment of the Formula Price has not been required.
Immediately following each recalculation of the Formula Price, each of the
Company's stockholders is provided 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 repurchased at a price which is
equal to the Formula Price then in effect. The following table sets forth
information regarding the Formula Price of the common stock for the periods
beginning on the dates indicated:
Formula Price per Share of
Common Stock
-----------------------------
2002 2001
------ ------
January 21 $19.20 $15.71
April 21 20.56 16.49
July 21 20.50 17.41
October 21 20.43 18.12
15
Dividend Policy
The Company's present policy is to retain earnings for the operation and
expansion of its business. The Company has not paid cash dividends on its common
stock or preferred stock and does not anticipate that it will do so in the
foreseeable future. The Company's bank loan agreement prohibits the payment of
dividends by the Company without the bank's prior consent.
Record Holders
As of February 23, 2003, there were approximately 941 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 to a third party, 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 tables set forth certain selected financial data of the
Company for each of the five fiscal years in the period ended December 29, 2002.
These tables should be read in conjunction with the Company's consolidated
financial statements and the related notes thereto appearing elsewhere in this
report on Form 10-K.
Operating Data for the Years Ended December 31(1)
(amounts in thousands except EPS and share data)
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Sales $ 162,227 $ 137,586 $ 126,766 $ 115,143 $ 97,695
Costs and expenses $ 153,324 $ 129,184 $ 113,266 $ 108,988 $ 89,585
Net income (2) $ 8,903 $ 8,402 $ 10,699 $ 6,155 $ 4,704
Basic earnings per share $ 1.76 $ 1.54 $ 1.65 $ 0.85 $ 0.62
Diluted earnings per share $ 1.60 $ 1.42 $ 1.52 $ 0.76 $ 0.56
Weighted average common
shares outstanding 5,341,079 5,450,455 5,995,223 6,204,923 6,150,996
Balance Sheet Data as of December 31(1)
(amounts in thousands)
-----------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Total assets $59,364 $57,152 $51,542 $43,185 $37,770
Working capital $24,676 $25,331 $21,738 $13,827 $11,830
Long term liabilities, including
redeemable preferred stock $ 8,761 $12,230 $ 7,192 $ 7,189 $ 7,373
Stockholders' equity $25,002 $23,678 $25,608 $18,549 $15,838
- -----------------
(1) The Company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to December 31. The last five fiscal years have ended on December
29, 2002; December 30, 2001; December 31, 2000; January 2, 2000; and January
3, 1999. For ease of presentation of summary financial data, the year-ends
have been presented as December 31.
(2) Net income in 2000 includes the non-recurring gain of $4.3 million ($2.6
million after income taxes) from the sale of the Company's Raleigh Division.
16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of the Company and the related notes
thereto appearing elsewhere in this Form 10-K.
Results of Operations
The following tables present certain key operating data for the periods
indicated:
Operating Results
(amounts in thousands, except percentages)
------------------------------------------
2002 2001 2000
-------- -------- --------
Sales $162,227 $137,586 $126,766
Sales by business area, as a
percentage of total sales
BMD 43% 37% 38%
Other DoD 50% 49% 46%
Non-DoD 7% 14% 16%
Gross profit (1) $ 15,289 $ 14,372 $ 13,705
Gross profit as a percentage of
costs (1) 10.4% 11.7% 12.1%
Income from operations $ 14,790 $ 13,776 $ 13,218
Net income (2) $ 8,903 $ 8,402 $ 10,699
- -----------
(1) The Company defines gross profit as sales less all costs that are allowable
for and allocable to contracts under government procurement regulations. As
such, gross profit excludes certain unallowable expenses. Management considers
gross profit, and gross profit as a percentage of costs, to be key measures of
the Company's contract performance. It should also be considered in conjunction
with income from operations, net income, and other measures of financial
performance. The following presents a reconciliation of gross profit to income
from operations (amounts in thousands):
2002 2001 2000
------- ------- -------
Gross profit $15,289 $14,372 $13,705
Less unallowable expenses (499) (596) (487)
------- ------- -------
Income from operations $14,790 $13,776 $13,218
======= ======= =======
- -----------
(2) Net income from operations in 2000 includes the non-recurring gain of $4.3
million ($2.6 million after income taxes) from the sale of the Company's Raleigh
Division.
Income Statement Components
(Expressed as a Percentage of Sales)
------------------------------------
2002 2001 2000
------ ------ ------
SALES 100.0% 100.0% 100.0%
Costs and expenses:
Labor costs and related
benefits 52.6% 52.0% 52.0%
Subcontractor costs 27.5% 27.3% 26.6%
Facility costs 6.8% 6.8% 7.3%
Travel and other 3.9% 3.9% 3.7%
------ ------ ------
Total costs and expenses 90.8% 90.0% 89.6%
------ ------ ------
Income from operations 9.2% 10.0% 10.4%
Interest expense (income), net -- (0.2%) (0.2%)
Gain on sale of Raleigh division -- -- 3.4%
------ ------ ------
Income before income taxes 9.2% 10.2% 14.0%
Provision for income taxes 3.7% 4.1% 5.6%
------ ------ ------
Net income 5.5% 6.1% 8.4%
====== ====== ======
17
2002 compared to 2001
Revenue increased 18%, from $137.6 million in 2001 to $162.2 million in
2002.
Revenue on BMD programs increased 38%, from $50.6 million in 2001 to $69.6
million in 2002. BMD continues to be a major focus of the current
administration; in GFY 2002, BMD funding increased approximately 45%. In
addition to continuing its work on BMD systems engineering and technical
analysis, the Company generated growth in its BMD business base through
penetration of other BMD program elements. For example, revenue on our contract
to provide support services to the MDA Advanced Systems Program increased from
$0.4 million in 2001 to $10.6 million in 2002.
Revenue on other DoD programs increased 20%, from $67.2 million in 2001 to
$80.8 million in 2002. During 2002, the Company commenced work on a new
subcontract to provide electronic warfare systems testing services at the U.S.
Air Force Flight Test Center, generating $6.7 million in revenue. Additionally,
the Company increased revenue on programs for a variety of intelligence agencies
by $3.8 million, largely as a result of the government's increased focus on
intelligence in response to the terrorist attacks of September 11.
Revenue on non-DoD programs decreased 40%, from $19.8 million in 2001 to
$11.8 million in 2002. During 2002, the Company lost the re-compete of its
contract to provide a variety of engineering and other range support services to
the NASA Dryden Flight Research Center. Revenue on this program fell from $12.9
million in 2001 to $7.0 million in 2002. Additionally, early in 2002, the
Company completed its contract to develop a laser interferometer device for a
semiconductor equipment manufacturer. Revenue on this program fell from $1.7
million in 2001 to $0.1 million in 2002.
The Company defines gross profit as sales less all costs that are allowable
for and allocable to contracts under government procurement regulations. As
such, gross profit excludes certain unallowable expenses, as well as interest
income and interest expense. Management considers gross profit, and the gross
profit rate (gross profit as a percentage of contract costs), to be key measures
of the Company's contract performance. It should also be considered in
conjunction with income from operations, net income, and other measures of
financial performance.
The gross profit rate (gross profit as a percentage of contract costs)
decreased from 11.7% in 2001 to 10.4% in 2002. The decline in the gross profit
rate is primarily attributable to contract mix. Revenue on BMD programs
increased from 37% of total sales in 2001 to 43% in 2002. The gross profit rate
on many of the Company's BMD programs tends to be lower than on other programs,
and subcontractor costs (on which the Company typically receives lower fees)
comprise a significant portion of the work effort on many BMD programs. In
addition, the Company generally earns a higher profit rate on firm fixed price
composite production contracts, due to the greater risk associated with such
contracts. However, due to faster growth rates in other business areas, such
contracts comprised a lower percentage of total revenue in 2002, falling from
5.3% of total revenue in 2001 to 4.2% in 2002.
As a percentage of total revenue, labor and benefits costs increased from
52.0% in 2001 to 52.6% in 2002, and subcontractor costs increased from 27.3% in
2001 to 27.5% in 2002, primarily due to the decrease in the gross profit rate
discussed in the preceding paragraph. Facility costs did not reflect a
commensurate increase in cost as a percentage of total revenue, primarily
because the number of staff working off-site at customer facilities increased
faster than the number of staff working at Company facilities. As of December
2002, 29% of the Company's equivalent full-time staff worked off-site, compared
to 24% as of December 2001. The Company generally does not incur significant
facility costs (such as rent for leased facilities) for staff working off-site.
Net interest income decreased in 2002, primarily due to the increase in
long-term debt from $9.0 million in December 2001 to $10.4 million in December
2002. Both the Company's investments in cash equivalents and marketable
securities and the Company's long-term debt are floating rate. Accordingly, the
reduction in average interest rates from 2001 to 2002 had a minimal effect on
net interest.
The Company's effective income tax rate was 40% in both 2002 and in 2001.
18
2001 compared to 2000
Revenue increased 9%, from $126.8 million in 2000 to $137.6 million in
2001.
Revenue on BMD programs increased 5%, from $48.4 million in 2000 to $50.6
million in 2001. The increase in BMD revenue was primarily attributable to an
increase in labor costs due to merit pay increases, as the Company's work effort
on BMD programs remained relatively consistent between 2000 and 2001. In 2001,
most of the significant BMD contracts were cost-type contracts, where such labor
cost increases are generally passed on to the customer.
Revenue on other DoD programs increased 14%, from $58.6 million in 2000 to
$67.2 million in 2001. The most significant components of this increase were:
$3.6 million in increased revenue on a multi-task program to provide a variety
of engineering support services to the Air Force; $2.1 million in increased
revenue related to development of a laser-based mobile system for disposing of
unexploded ordnance; and $1.0 million in increased revenue on a composite
production program.
Revenue on non-DoD programs did not vary significantly from 2000 to 2001,
totaling $19.8 million in each year. Approximately 70% of the non-DoD revenue in
both 2000 and 2001 was derived from a contract to provide a variety of
engineering and other range support services to the NASA Dryden Flight Research
Center. The nature of this contract is such that the work effort does not vary
significantly from year to year; revenue on this program was $13.1 million in
2000 and $12.9 million in 2001.
The gross profit rate (gross profit as a percentage of contract costs)
decreased from 12.1% in 2001 to 11.7% in 2001. The decline in the gross profit
rate is primarily attributable to efficiencies realized in 2000 on a fixed price
composite production program.
As a percentage of total revenue, the increase in labor and benefits costs
was insignificant, rising slightly from 51.9% in 2000 to 52.0% in 2001.
Subcontractor costs increased from 26.5% of total revenue in 2000 to 27.3% in
2001, primarily due to a change in the mix of Company and subcontractor labor on
certain intelligence and range support service contracts. Facility costs as a
percentage of total revenue fell from 7.3% in 2000 to 6.8% in 2001, as the
number of staff working off-site at customer facilities increased faster than
the number of staff working at Company facilities. As of December 2001, 24% of
the Company's equivalent full-time staff worked off-site, compared to 23% as of
December 2000. The Company generally does not incur significant facility costs
(such as rent for leased facilities) for staff working off-site. In addition,
facility costs include $0.6 million for the write-off of estimated salvage value
on assets disposed of in 2000, as compared with $0.2 million for assets disposed
of in 2001.
Net interest income decreased slightly from 2000 to 2001. Investments in
cash equivalents and marketable securities increased from $7.1 million in
December 2000 to $19.0 million in December 2001, resulting in an increase in
interest income. However, this increase was offset by an increase in interest
expense attributable to the increase in long-term debt from $1.1 million in
December 2000 to $9.0 million in December 2001. Both the Company's investments
in cash equivalents and marketable securities and the Company's long-term debt
are floating rate. Accordingly, the change in interest rates between 2000 and
2001 had a minimal effect on net interest.
In 2000, the Company realized a $4.3 million gain ($2.6 million after
income taxes) on the sale of the Raleigh division. The Company's effective
income tax rate was 40% in both 2001 and in 2000.
Backlog
Although the Company's backlog has historically 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. Moreover, U.S. Government contracts are conditioned upon the
continuing availability of congressional appropriations. New presidential
administrations, changes in the composition of Congress, and disagreement or
significant delay between Congress and the Administration in
19
reaching a defense budget accord can all significantly affect the timing of
funding on the Company's contract backlog. Delays in contract funding resulting
from these factors may have a significant adverse effect on the Company's
financial position and results of operations. The following table shows the
Company's 12-month contract backlog as of the dates indicated:
12-Month Contract Backlog
(amounts in thousands)
------------------------------------------
2002 2001 2000
-------- -------- --------
Funded $ 60,500 $ 31,700 $ 57,300
Unfunded 114,100 111,600 74,600
-------- -------- --------
Total contract backlog $174,600 $143,300 $131,900
======== ======== ========
By business area:
BMD $ 78,600 $ 57,500 $ 55,300
Other DoD 89,000 71,900 61,100
Non-DoD 7,000 13,900 15,500
-------- -------- --------
Total contract backlog $174,600 $143,300 $131,900
======== ======== ========
The end of the year 12-month contract backlog, representing expected sales
for the coming year on existing contracts and certain proposals, increased from
$143.3 million in 2001 to $174.6 million in 2002, an increase of 22%. BMD
contract backlog increased $21.1 million, or 37%, from 2001 to 2002, as the
Company has continued to generate growth in its BMD business base through
penetration of other BMD program elements. Other DoD contract backlog increased
$17.1 million, or 24%, from 2001 to 2002. A portion of the increase in other DoD
contract backlog is attributable to contract or task order awards on a variety
of training, logistics, engineering and planning programs for the U.S. Army.
Additionally, the Company experienced an increase in other DoD contract backlog
on a variety of intelligence programs, as a result of the government's increased
focus on intelligence stemming from the terrorist attacks of September 11. Non-
DoD contract backlog decreased $6.9 million, or 50%, from 2001 to 2002,
primarily due to the completion in 2002 of a range support services contract at
NASA's Dryden Flight Research Center. Historically, the Company's end-of-year
12-month contract backlog has generally been indicative of its revenues in the
following year. For example, year-end 12-month contract backlog as a percentage
of the following year's sales was 88%, 96%, and 92%, in 2002, 2001, and 2000,
respectively.
Liquidity and Capital Resources
Overview
The Company's principal sources of capital for funding its operations are
funds generated by ongoing business activities and proceeds from exercise of
stock options and the issuance of common stock. These sources are augmented, as
necessary, by borrowings under the Company's bank line of credit. The principal
uses of capital are for the repurchase of preferred and common stock, repayments
of amounts borrowed under the bank line of credit, principal payments on
subordinated promissory notes, and capital expenditures.
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 budget. New presidential administrations, change in
the composition of Congress, and disagreement or significant delay between
Congress and the Administration in reaching a defense budget accord can all
significantly affect the timing of funding on the Company's contract backlog.
Delays in contract funding resulting from these factors may have a significant
adverse effect on the Company's liquidity and days sales outstanding (DSO).
20
The Company's bank line of credit provides for borrowings of up to $6.0
million, and matures July 1, 2004. Borrowings under the line of credit agreement
are secured by accounts receivable and certain equipment and improvements, and
bear interest at the prime rate. 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 29, 2002. The Company believes
that, as in the past, it will be able to renew its banking agreement under
similar terms. There were no amounts outstanding under the bank line of credit
at December 29, 2002.
Generally, the Company limits its stockholders to current employees and
directors of the Company. Accordingly, the Company's Amended and Restated
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.
Generally, the Company's policy is to repurchase the stockholdings of all
individuals terminating their association with the Company, so as to retain all
stockholdings among active employees and directors. However, during 1993 and
1994, the 40% reduction in the Company's staff level resulted in the termination
of employees who held, in the aggregate, approximately 30% of the Company's
total common stock then outstanding. Consequently, in April 1994, the Company
temporarily suspended the policy of repurchasing all of the stock held by
terminating employees so as not to deplete stockholders' equity. As of December
29, 2002, the percentage of the Company's outstanding common stock held by
former employees totaled approximately 3.9%.
The policy of repurchasing all stockholdings of terminated employees was
reinstated in 1997. In support of this policy the Board of Directors authorized
the Company's Chief Executive Officer to issue, at his discretion, promissory
notes to repurchase stock held by certain terminating employees. Such promissory
notes are subordinated to borrowings under the bank line of credit. In addition
to repurchasing the stockholdings of terminated employees, the Company has
established and maintains a program that periodically permits the Company's
stockholders to offer shares for sale to the Company. The Company's repurchase
program, which is conducted on a quarterly basis, 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. There can be
no assurance that the Company will continue its voluntary repurchase program.
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 does not materially impair the Company's
liquidity or financial condition. The Board of Directors may approve waivers to
the self-imposed quarterly repurchase limitation.
Cash Flow Information
During 2002, 2001, and 2000, the Company generated $16.5 million, $23.7
million, and $12.5 million, respectively, in cash from operations. The Company
had non-cash compensation and benefit expenses of $4.4 million, $3.9 million,
and $3.2 million, respectively, related to the Company's practice of issuing
shares of common stock in connection with certain compensation and benefit plans
(see Note 8 of the Consolidated Financial Statements). The Company expects to
continue to follow this practice for the foreseeable future.
During 2002, the Company used $1.6 million in cash for working capital,
principally to fund an increase in accounts receivable. Although sales increased
18% from 2001 to 2002, accounts receivable did not increase at a commensurate
rate, increasing only 17% from $27.2 million at December 30, 2001 to $31.9
million at December 29, 2002. During 2001, the Company generated $8.3 million in
cash from working capital, principally due to the 17% decrease in accounts
receivable. During 2000, the Company used $1.1 million in cash for working
capital. The favorable working capital performance (relative to sales growth) is
primarily a result of the reduction in average DSO from 76 days in 2000, to 69
days in 2001 and 64 days in 2002. The Company continues to emphasize rapid
billing and collection of its receivables, however, there can be no assurance
that the Company will be able to further reduce, or maintain, its average DSO.
Proceeds from the issuance of common stock totaled $4.7 million, $4.0
million and $2.4 million in 2002, 2001 and 2000, respectively. In addition, in
2000, the Company received non-recurring pre-tax proceeds of $4.8 million from
the sale of its Raleigh Division.
21
In connection with the aforementioned stock repurchase policies, the
Company repurchased a total of approximately 924,000, 1,277,000, and 693,000
common shares in 2002, 2001, and 2000, respectively, totaling $18.1 million,
$19.4 million, and $8.9 million in 2002, 2001, and 2000, respectively. Of these
totals, $3.5 million, $9.3 million, and $1.0 million were repurchased in
exchange for promissory notes during 2002, 2001 and 2000, respectively. The
promissory notes provide for monthly payments over periods ranging up to seven
years. Principal payments on these promissory notes totaled $2.1 million, $1.4
million, and $1.1 million in 2002, 2001 and 2000, respectively. The remaining
balances were repurchased for cash.
In November 1994, the Company entered into a Stock Purchase Agreement with
SAIC. Under the terms of the Agreement, between November 1994 and August 1996,
SAIC purchased a total of 569,000 shares of the Company's redeemable preferred
stock, at an aggregate price of $2.4 million. Beginning in May 1999, in
connection with the quarterly stock repurchase program, the Company repurchased
shares of the redeemable preferred stock held by SAIC. The Company repurchased
approximately 224,000, 144,000, and 80,000 shares of preferred stock in 2002,
2001, and 2000, respectively, at a cost of $4.4 million, $2.4 million, and $1.0
million, respectively. As of December 29, 2002, the Company had repurchased all
such outstanding shares of redeemable preferred stock.
Approximately 57% of the Company's outstanding common stock is held by the
Company's retirement plan. Congress is currently considering legislation that
may, among other things, impose limitations on the amount of Company common
stock held by the retirement plan, the amount of Company common stock that the
Company can contribute to the plan, and the tax deductibility of contributions
of Company common stock contributed to the plan. Enactment of such legislation
may have a significant adverse effect on the Company's liquidity.
Capital expenditures totaled $1.3 million, $1.9 million and $2.1 million in
2002, 2001 and 2000, respectively. The Company currently does not expect a
significant change in its levels of capital expenditures.
The Company had cash balances of $17.8 million as of December 29, 2002. Of
this total, approximately $3.6 million is for funding of the Company's 2002
profit sharing and 401(k) matching contributions to the Company's retirement
plan. This funding occurred in the first quarter of 2003. During 2002, the
Company did not borrow on its line of credit. The Company anticipates that its
existing capital resources and access to its line of credit will be sufficient
to fund planned operations for the next year and for the foreseeable future.
The Company's significant contractual obligations relate to subordinated
promissory notes and operating lease commitments. As of December 29, 2002, the
Company has no significant commercial commitments, nor significant commitments
for capital expenditures. As of December 29, 2002, contractual obligations are
payable as follows:
Payments Due by Period
(amounts in thousands)
-------------------------------------------------------------
Total Current 1-3 years 4-5 years After 5 years
------- ------- --------- --------- -------------
Subordinated Promissory Notes $10,353 $2,258 $ 6,370 $1,656 $ 69
Operating Leases 20,919 5,114 10,468 4,230 1,107
------- ------ ------- ------ ------
Total Contractual Obligations $31,272 $7,372 $16,838 $5,886 $1,176
======= ====== ======= ====== ======
Critical Accounting Policies
The preceding discussion and analysis of the Company's financial condition
and results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to revenue recognition
and the valuation of long-lived assets. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments
22
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.
Management believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of the Company's
consolidated financial statements.
Revenue recognition - Revenue on cost-type contracts is recognized to the
extent of reimbursable costs incurred, plus a proportionate amount of the
estimated fee earned. Revenue on time and material and fixed price (level of
effort) contracts is recognized to the extent of billable rates for hours
expended, plus reimbursable costs. Revenue on firm fixed price contracts is
recognized using the percentage of completion method, and is based on contract
costs incurred to date compared with total estimated costs at completion. The
Company follows these methods because reasonably dependable estimates of the
revenue, costs and profits applicable to various stages of a contract can be
made. Recognized revenues and profit are subject to revisions as the contract
progresses to completion. If the Company does not accurately estimate the
resources required or the scope of work to be performed, or does not manage its
projects properly within the planned periods of time, or satisfy its obligations
under the contracts, then profit may be significantly and negatively affected or
losses on existing contracts may need to be recognized. In addition, the Company
recognizes revenue based on estimates of allowable contract costs, including
indirect costs. Such costs are subject to regulation and audit by the
government. The Company's costs have been audited and settled with the
government through the fiscal year ended December 31, 2000. For years in which
the Company's costs have not yet been audited and settled, contract revenue and
profits have been recorded based on the estimated amounts of expected allowable
costs. Although cost disallowances have not historically been significant, the
Company may be exposed to variations in profitability, including potential
losses, if actual cost disallowances differ materially from these estimates.
Revisions to revenue and profit estimates are reflected in income in the period
in which the facts that give rise to the revision become known.
Valuation of long-lived assets - The Company assesses the impairment of
identifiable long-lived assets when events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors considered important
that could trigger an impairment review include significant under-performance of
the asset relative to historical or projected future operating results, as well
as significant changes in operating conditions, the manner of use of the
acquired asset, or the Company's overall business strategy. The Company records
an impairment charge when the carrying value of a long-lived asset exceeds the
fair value of the asset.
Effects of Inflation
The majority of the Company's contracts are cost reimbursement type
contracts or are completed within one year. As a result, the Company has been
able to anticipate increases in costs when pricing its contracts. Bids for
longer-term fixed-price and time-and-materials type contracts typically include
provisions for 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.
Recent Accounting Pronouncements
The Company adopted the following Statements of Financial Accounting
Standards (SFAS) as of January 1, 2002: SFAS 141, which addresses accounting for
acquired business using the purchase method of accounting; SFAS 142, which
addressees accounting for acquired goodwill and other intangible assets; SFAS
143, which addresses accounting for obligations associated with the retirement
of tangible long-lived assets and the associated retirement costs; and SFAS 144,
which addresses the impairment or disposal of long-lived assets. Adoption of
these standards did not have a material effect on the Company's financial
position or results of operations.
During December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS 148, which provides alternative transition methods for companies
adopting a voluntary change to the fair value method of accounting for
stock-based compensation. SFAS 148 also requires enhanced disclosure regarding
the method of accounting and the effect of the method used on reported results
of operations. SFAS is effective for fiscal years ending after December 15, 2002
and interim periods beginning after December 15, 2002. The Company adopted the
disclosure provisions of SFAS 148 in December 2002, and has elected to continue
to account for its stock-based compensation under the intrinsic value method.
23
In November 2002, the FASB issued FASB Interpretation (FIN) 45, which
requires disclosures about obligations under certain guarantees issued by the
Company, and which requires recognition of a liability for the fair value of the
obligation undertaken in issuing the guarantee. The liability recognition
provisions of FIN 45 are applicable to guarantees issued or modified after
December 31, 2002, and the disclosure provisions are effective for interim or
annual fiscal periods ending after December 15, 2002. The Company is currently
evaluating the liability recognition provisions of FIN 45 and has not yet
determined the potential impact on its financial position or results of
operations.
In January 2003, the Company adopted SFAS 146, which addresses accounting
for costs associated with exit or disposal activities. In addition, the FASB
issued FIN 46, which requires that certain variable interest entities be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have a controlling financial interest or do not have
sufficient equity at risk. FIN 46 is effective immediately for all variable
interest entities created after January 31, 2003. For all such entities created
prior to February 1, 2003, FIN 46 is effective for interim or annual fiscal
periods ending after June 15, 2003. The Company does not expect the adoption of
these statements to have a material effect on the Company's financial position
or results of operations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks which are inherent in our
financial instruments and which arise from transactions entered into in the
normal course of business. The Company's current market risk exposure is
primarily interest rate risk. The Company currently does not transact business
in foreign currencies, does not purchase or sell commodities, and does not
invest in equity instruments. Therefore, management believes that the Company
does not have significant foreign currency exchange rate risk, commodity price
risk, or equity price risk.
The Company's exposure to interest rate risk relates primarily to the
valuation of our investment portfolio, accounts receivable, and debt
obligations, and to the computation of "facilities capital cost of money"
(FCCM). FCCM is an imputed cost allocable to U.S. Government contracts, and is
determined by applying a cost-of-money rate to facilities capital employed in
contract performance.
The Company has established investment policies designed to protect the
safety, liquidity and yield of our invested capital resources. These policies
establish guidelines on acceptable instruments in which to invest, require
diversification in the investment portfolio, and provide for maximum maturity
dates. In addition, the Company does not invest in derivative financial
instruments. As a result of these policies, the Company generally invests in
financial instruments that mature in six months or less. Management believes
that the short maturity periods limit the risk of principal loss due to changing
interest rates.
During 2002 the Company maintained an average DSO of 64 days. Moreover, at
December 29, 2002, long-term accounts receivable (contract retentions) comprised
approximately $1.4 million, or 5% of total accounts receivable. As a result,
management does not believe there is significant interest rate risk with respect
to valuation of its accounts receivable.
The Company did not borrow on its bank line of credit during 2002, and does
not anticipate the need to borrow on this line in the foreseeable future. The
Company's only debt obligations as of December 29, 2002 are subordinated
promissory notes issued in connection with the repurchase of common stock from
certain shareholders. The principal balance of these subordinated promissory
notes was $10.4 million at December 29, 2002. Because these notes bear variable
interest rates, the fair value of the notes is not materially different.
FCCM is an imputed cost allocable to U.S. Government contracts, and is
determined by applying a cost-of-money rate to facilities capital employed in
contract performance. The Company generally is entitled to include this imputed
cost in its billings to the U.S. Government under cost reimbursement contracts
and in its cost estimates under time and materials and fixed price contracts.
Although cost of money is not a form of interest on borrowings, the level of
prevailing interest rates is one element of the computation of FCCM factors.
24
Accordingly, in periods of declining interest rates, the Company's FCCM rates
generally decline, resulting in lower imputed cost of money and correspondingly
lower revenues.
The Company does not believe that there is significant interest rate risk
related to its investments, subordinated promissory notes and cost of money.
Based on the principal balances as of December 29, 2002, an increase of three
percentage points (300 basis points) in the interest rates on which interest
payments are based would result in increased interest expense to the Company of
approximately $310,000. However, interest income earned by the Company on its
investments would likely also increase, as would the Company's FCCM rates,
thereby mitigating the impact of the increased interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a)(1).
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
(a) Information Regarding Directors. The information under the caption
"Election of Directors" appearing in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held June 6, 2003 (the "Proxy Statement")
is incorporated herein by reference.
(b) Information Regarding Executive Officers. The information under the
caption "Management" appearing in the Proxy Statement is incorporated herein by
reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance"
appearing in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Compensation of Executive Officers",
"Director Compensation" and "Compensation Committee Interlocks and Insider
Participation" appearing in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" appearing in the Proxy Statement is incorporated herein
by reference.
25
Equity Compensation Plan Information
December 29, 2002
---------------------------------------------------------------------
Number of securities
remaining available
for future issuance
Number of securities under equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in column
warrants and rights warrants and rights (a))
Plan category (a) (b) (c)
------------- -------------------- -------------------- ---------------------
Equity compensation
plans approved by
security holders 2,521,950 $16.16 6,583,388
Equity compensation
plans not approved
by security holders(1) -- -- 376,266
--------- ------ ---------
Total 2,521,950 $16.16 6,959,654
========= ====== =========
- ------------
(1) The Company has a restricted stock compensation plan, designed to provide
long-term incentives to key employees, under which it may issue up to 500,000
shares of common stock. Shares awarded under the plan are held in a trust
(commonly referred to as a "rabbi" trust) until distributed to the participant.
Shares awarded under the plan vest over a period of five years; unvested shares
are forfeited if the participant terminates employment with the Company prior to
vesting. As of December 29, 2002, the Company had issued an aggregate of 123,734
shares under the plan, of which 48,128 were unvested.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management has evaluated the Company's disclosure controls and procedures as of
March 25, 2003 (a date within 90 days of the filing of this Annual Report on
Form 10-K). Based on the results of this evaluation, management believes that
such controls and procedures are operating effectively.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the aforementioned controls and
procedures subsequent to March 25, 2003 (the date of their evaluation)
26
ITEM 15. 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 ..........................................................28
FINANCIAL STATEMENTS
Consolidated Balance Sheet at December 31, 2002 and 2001....................................29
Consolidated Statement of Income for the three years in the period ended
December 31, 2002........................................................................30
Consolidated Statement of Stockholders' Equity for the three
years in the period ended December 31, 2002..............................................31
Consolidated Statement of Cash Flows for the three years in the period ended
December 31, 2002........................................................................32
Notes to Consolidated Financial Statements..................................................33
(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 pages 42-43 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.
27
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 15(a)(1) on page 27, present fairly, in all material
respects, the financial position of SPARTA, Inc. and its subsidiary at December
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Orange County, California
March 21, 2003
28
CONSOLIDATED BALANCE SHEET
at December 31
ASSETS 2002 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 17,780,000 $ 10,303,000
Short-term investments 8,727,000
Receivables, net 31,883,000 27,150,000
Prepaid expenses 614,000 395,000
------------ ------------
TOTAL CURRENT ASSETS 50,277,000 46,575,000
EQUIPMENT AND IMPROVEMENTS, NET 7,054,000 8,606,000
OTHER ASSETS 2,033,000 1,971,000
------------ ------------
TOTAL ASSETS $ 59,364,000 $ 57,152,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation $ 12,805,000 $ 10,596,000
Accounts payable and other accrued expenses 7,757,000 5,977,000
Current portion of subordinated notes payable 2,258,000 1,609,000
Income taxes payable 1,454,000 2,049,000
Deferred income taxes 1,327,000 1,013,000
------------ ------------
TOTAL CURRENT LIABILITIES 25,601,000 21,244,000
SUBORDINATED NOTES PAYABLE 8,095,000 7,365,000
DEFERRED INCOME TAXES 666,000 812,000
COMMITMENTS AND CONTINGENCIES (NOTE 7)
REDEEMABLE PREFERRED STOCK, $.01 par value;
2,000,000 shares authorized; 0 and
223,682 shares issued;
liquidation preference of $0 and $872,000 4,053,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 25,000,000 shares
authorized; 5,719,162 and 5,071,546 shares issued;
4,795,213 and 5,071,546 shares outstanding 57,000 50,000
Additional paid-in capital 35,559,000 24,655,000
Retained earnings (accumulated deficit) 7,534,000 (1,027,000)
Treasury stock, at cost (18,148,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 25,002,000 23,678,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 59,364,000 $ 57,152,000
============ ============
The accompanying notes are an integral part
of these consolidated financial statements
29
CONSOLIDATED STATEMENT OF INCOME
for the three years in the period ended December 31
2002 2001 2000
------------- ------------- -------------
SALES $ 162,227,000 $ 137,586,000 $ 126,766,000
------------- ------------- -------------
COSTS AND EXPENSES:
Labor costs and related benefits 85,336,000 71,496,000 65,840,000
Subcontractor costs 44,670,000 37,594,000 33,743,000
Facility costs 11,094,000 9,400,000 9,284,000
Travel and other 6,337,000 5,320,000 4,681,000
------------- ------------- -------------
TOTAL COSTS AND EXPENSES 147,437,000 123,810,000 113,548,000
------------- ------------- -------------
INCOME FROM OPERATIONS 14,790,000 13,776,000 13,218,000
INTEREST EXPENSE (INCOME), NET (49,000) (228,000) (275,000)
GAIN ON SALE OF RALEIGH DIVISION 4,339,000
------------- ------------- -------------
INCOME BEFORE PROVISION FOR TAXES ON INCOME 14,839,000 14,004,000 17,832,000
PROVISION FOR TAXES ON INCOME 5,936,000 5,602,000 7,133,000
------------- ------------- -------------
NET INCOME $ 8,903,000 $ 8,402,000 $ 10,699,000
============= ============= =============
BASIC EARNINGS PER SHARE $ 1.76 $ 1.54 $ 1.65
============= ============= =============
DILUTED EARNINGS PER SHARE $ 1.60 $ 1.42 $ 1.52
============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements
30
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the three years in the period ended December 31
Retained
Common Stock Additional Earnings
---------------------------- Paid-in (Accumulated Treasury
Shares Amount Capital Deficit) Stock Total
----------- ------------ ------------ ------------ ------------ -----------
BALANCE AT DECEMBER 31, 1999 5,610,805 $ 56,000 $ 18,439,000 $ 54,000 $ 0 $18,549,000
Issuance of common stock 622,542 6,000 5,704,000 5,710,000
Acquisition of treasury stock (8,910,000) (8,910,000)
Retirement of treasury stock (693,269) (7,000) (3,941,000) (4,962,000) 8,910,000
Accretion of redeemable
preferred stock (1,567,000) (1,567,000)
Tax benefit relating to
stock plan 1,127,000 1,127,000
Net income 10,699,000 10,699,000
----------- ------------ ------------ ------------ ------------ -----------
BALANCE AT DECEMBER 31, 2000 5,540,078 55,000 21,329,000 4,224,000 0 25,608,000
Issuance of common stock 808,075 8,000 7,938,000 7,946,000
Acquisition of treasury stock (19,415,000) (19,415,000)
Retirement of treasury stock (1,276,589) (13,000) (6,307,000) (13,095,000) 19,415,000
Accretion of redeemable
preferred stock (558,000) (558,000)
Tax benefit relating to
stock plan 1,695,000 1,695,000
Net income 8,402,000 8,402,000
----------- ------------ ------------ ------------ ------------ -----------
BALANCE AT DECEMBER 31, 2001 5,071,564 50,000 24,655,000 (1,027,000) 0 23,678,000
Issuance of common stock 647,598 7,000 9,129,000 9,136,000
Acquisition of treasury stock (18,148,000) (18,148,000)
Accretion of redeemable
preferred stock (342,000) (342,000)
Tax benefit relating to
stock plan 1,775,000 1,775,000
Net income 8,903,000 8,903,000
----------- ------------ ------------ ------------ ------------ -----------
BALANCE AT DECEMBER 31, 2002 5,719,162 $ 57,000 $ 35,559,000 $ 7,534,000 $(18,148,000) $25,002,000
=========== ============ ============ ============ ============ ===========
The accompanying notes are an integral part
of these consolidated financial statements
31
CONSOLIDATED STATEMENT OF CASH FLOWS
for the three years in the period ended December 31
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,903,000 $ 8,402,000 $ 10,699,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,107,000 2,099,000 2,011,000
Loss on disposition of equipment 744,000 175,000 596,000
Stock-based compensation and benefits 4,419,000 3,910,000 3,163,000
Tax benefit relating to stock plan 1,775,000 1,695,000 1,127,000
Deferred income taxes 168,000 (848,000) 286,000
Gain on sale of Raleigh Division (4,339,000)
Change in assets and liabilities:
Receivables, net (4,733,000) 5,549,000 (2,289,000)
Prepaid expenses (219,000) 304,000 (154,000)
Other assets (62,000) 92,000 (159,000)
Accrued compensation 2,209,000 2,955,000 1,155,000
Accounts payable and other accrued expenses 1,780,000 (1,524,000) (245,000)
Income taxes payable (595,000) 938,000 641,000
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,496,000 23,747,000 12,492,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of short-term investments 8,727,000 (8,727,000)
Proceeds from sale of Raleigh Division 4,800,000
Purchases of equipment and improvements (1,299,000) (1,881,000) (2,060,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,428,000 (10,608,000) 2,740,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of preferred stock (4,395,000) (2,412,000) (1,024,000)
Proceeds from issuance of common stock 4,717,000 4,037,000 2,411,000
Purchases of treasury stock (14,698,000) (10,121,000) (7,824,000)
Repayments under credit agreement (951,000)
Principal payments on subordinated notes payable (2,071,000) (1,422,000) (1,081,000)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (16,447,000) (9,918,000) (8,469,000)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,477,000 3,221,000 6,763,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,303,000 7,082,000 319,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,780,000 $ 10,303,000 $ 7,082,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 246,000 $ 338,000 $ 115,000
============ ============ ============
Income taxes $ 4,623,000 $ 3,885,000 $ 5,383,000
============ ============ ============
Non-cash investing and financing activities:
Issuance of subordinated notes payable in connection
with purchases of treasury stock $ 3,450,000 $ 9,295,000 $ 950,000
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements
32
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. The Company operates as a single reportable segment.
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 judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates its estimates, including those related to
revenue recognition and the valuation of long-lived assets. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
REVENUE RECOGNITION - Revenue on cost-type contracts is recognized to the
extent of reimbursable costs incurred, plus a proportionate amount of the
estimated fee earned. Revenue on time and material and fixed price (level
of effort) contracts is recognized to the extent of billable rates for
hours expended, plus reimbursable costs. Revenue on firm fixed price
contracts is recognized using the percentage of completion method, and is
based on contract costs incurred to date compared with total estimated
costs at completion. The Company follows these methods because reasonably
dependable estimates of the revenue, costs and profits applicable to
various stages of a contract can be made. Recognized revenues and profit
are subject to revisions as the contract progresses to completion. If the
Company does not accurately estimate the resources required or the scope of
work to be performed, or does not manage its projects properly within the
planned periods of time, or satisfy its obligations under the contracts,
then profit may be significantly and negatively affected or losses on
existing contracts may need to be recognized. In addition, the Company
recognizes revenue based on estimates of allowable contract costs,
including indirect costs. Such costs are subject to regulation and audit by
the government. The Company's costs have been audited and settled with the
government through the fiscal year ended December 31, 2000. For years in
which the Company's costs have not yet been audited and settled, contract
revenue and profits have been recorded based on the estimated amounts of
expected allowable costs. Although cost disallowances have not historically
been significant, the Company may be exposed to variations in
profitability, including potential losses, if actual cost disallowances
differ materially from these estimates. Revisions to profit estimates are
reflected in income in the period in which the facts that give rise to the
revision become known.
VALUATION OF LONG-LIVED ASSETS - The Company assesses the impairment of
identifiable long-lived assets when events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered
important that could trigger an impairment review include significant
under-performance of the asset relative to historical or projected future
operating results, as well as significant changes in operating conditions,
the manner of use of the acquired asset, or the Company's overall business
strategy. The Company records an impairment charge when the carrying cost
of the long-lived asset exceeds the fair value of the asset.
D) FISCAL YEAR - The Company's fiscal year is the 52 or 53 week period ending
on the Sunday closest to December 31. The Company's last three fiscal years
ended on December 29, 2002, December 30, 2001, and December 31, 2000,
however, for ease of presentation of the financial statements, the year
ends have been presented as December 31, 2002, 2001 and 2000.
E) EQUIPMENT AND IMPROVEMENTS - Equipment and improvements are recorded at
cost. Major renewals and betterments are capitalized; maintenance, repairs
and minor renewals and betterments are charged to expense. Equipment is
depreciated using the straight-line method over the estimated useful lives,
which range from 5 to 10 years. Leasehold improvements are amortized using
the straight-line method over the shorter of the estimated useful lives or
remaining lease terms.
F) INCOME TAXES - The Company recognizes deferred tax liabilities and assets
for expected future tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities at the
applicable enacted tax rates.
G) CASH AND CASH EQUIVALENTS - For the purpose of the statement of cash flows,
the Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H) SHORT-TERM INVESTMENTS - Short-term investments include highly liquid debt
instruments purchased with an original maturity of more than three months
and less than one year. It is the Company's intention to hold such
investments until maturity; as such, they are accounted for at amortized
cost, which approximates fair value, in the consolidated balance sheet.
I) REDEEMABLE PREFERRED STOCK - Redeemable preferred stock activity for the
periods indicated is as follows:
Shares Amount
---------- -----------
Balance, December 31, 1999 447,378 $ 5,364,000
Redemption (79,598) (1,024,000)
Accretion 1,567,000
---------- -----------
Balance, December 31, 2000 367,780 5,907,000
Redemption (144,098) (2,412,000)
Accretion 558,000
---------- -----------
Balance, December 31, 2001 223,682 4,053,000
Redemption (223,682) (4,395,000)
Accretion 342,000
---------- -----------
Balance, December 31, 2002 0 $ 0
========== ===========
During 2002, the Company repurchased all of the remaining outstanding
shares of redeemable preferred stock. Prior to the redemption of the
remaining shares of redeemable preferred stock, the Company was required to
repurchase such shares at the holder's option, based on the Company's
common stock price. Accordingly, shares of redeemable preferred stock are
recorded in the consolidated balance sheet at accreted value. Shares of
redeemable preferred stock are automatically converted to shares of the
Company's common stock under certain conditions. Holders of redeemable
preferred stock do not have voting rights or dividend preference rights.
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 $8,023,000, $7,993,0000 and $10,910,000 for the years ended
2002, 2001 and 2000 respectively. The amounts received under such
agreements were $825,000, $486,000 and $392,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. The Company's accounts
payable to and accounts receivable balances from the preferred stockholder
were $473,000 and $346,000, respectively, at December 31, 2002, and
$756,000 and $142,000, respectively, at December 31, 2001.
J) TREASURY STOCK - Treasury stock is shown at cost, and at December 31, 2002
consists of 923,949 shares of common stock. All treasury stock acquired in
2001 and 2000 were retired as of the end of the respective year.
Repurchases of outstanding stock by the Company in exercise of its right of
repurchase upon termination of employment (as defined) are made at
estimated fair value. The stock price is calculated quarterly by the
Company using a formula approved by the Board of Directors (which the
Company believes estimates fair value), and is evaluated annually by an
independent valuation firm. The stock prices and valuation dates were as
follows:
2002 2001 2000
------ ------ ------
January 21 $19.20 $15.71 $12.55
April 21 20.56 16.49 12.97
July 21 20.50 17.41 14.76
October 21 20.43 18.12 16.06
K) EARNINGS PER SHARE (EPS) - 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 of redeemable preferred stock is deducted from net income
available to common stockholders in computing both basic and diluted
earnings per share. A reconciliation of the numerators and denominators for
the basic and diluted earnings per share computations are as follows:
2002 Income Shares EPS
---- ------------ --------- -----
Net income $ 8,903,000
Less accretion (342,000)
------------
Basic EPS 8,561,000 4,863,209 $1.76
=====
Dilutive effect:
Stock options 387,846
Restricted stock 90,024
------------ ---------
Diluted EPS $ 8,561,000 5,341,079 $1.60
============ ========= =====
2001 Income Shares EPS
---- ------------ --------- -----
Net income $ 8,402,000
Less accretion (682,000)
------------
Basic EPS 7,720,000 4,997,912 $1.54
=====
Dilutive effect:
Stock options 357,393
Restricted stock 95,150
------------ ---------
Diluted EPS $ 7,720,000 5,450,455 $1.42
============ ========= =====
2000 Income Shares EPS
---- ------------ --------- -----
Net income $ 10,699,000
Less accretion (1,567,000)
------------
Basic EPS 9,132,000 5,518,521 $1.65
=====
Dilutive effect:
Stock options 368,534
Restricted stock 108,168
------------ ---------
Diluted EPS $ 9,132,000 5,995,223 $1.52
============ ========= =====
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying
amounts of cash and cash equivalents, short-term investments, 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 subordinated notes payable approximates fair value
based upon current rates offered to the Company for obligations with
similar remaining maturities.
M) ACCOUNTING FOR STOCK-BASED COMPENSATION - The Company accounts for employee
stock-based compensation in accordance with the intrinsic value method
described in Accounting Principles Board Opinion No. 25 ("APB 25") and
related interpretations. Had compensation expense for these plans been
determined in accordance with the fair value method described in Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("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.
2002 2001 2000
----------- ----------- ------------
Net income
As reported $ 8,903,000 $ 8,402,000 $10,699,000
Add after-tax stock-based
compensation expense
included in determining net
income 743,000 645,000 619,000
Deduct after-tax stock-based
compensation expense as if
the fair value method had been
used (1,640,000) (1,285,000) (2,666,000)
----------- ----------- -----------
Pro forma net income $ 8,006,000 $ 7,762,000 $ 8,652,000
=========== =========== ===========
Basic EPS
As reported $ 1.76 $ 1.54 $ 1.65
Pro forma 1.65 1.42 1.57
Diluted EPS
As reported 1.60 1.42 1.52
Pro forma 1.50 1.30 1.44
N) NEW ACCOUNTING STANDARDS - The Company adopted the following Statements of
Financial Accounting Standards (SFAS) as of January 1, 2002: SFAS 141,
which addresses accounting for acquired business using the purchase method
of accounting; SFAS 142, which addressees accounting for acquired goodwill
and other intangible assets; SFAS 143, which addresses accounting for
obligations associated with the retirement of tangible long-lived assets
and the associated retirement costs; and SFAS 144, which addresses the
impairment or disposal of long-lived assets. Adoption of these standards
did not have a material effect on the Company's financial position or
results of operations.
During December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS 148, which provides alternative transition methods for
companies adopting a voluntary change to the fair value method of
accounting for stock-based compensation. SFAS 148 also requires enhanced
disclosure regarding the method of accounting and the effect of the method
used on reported results of operations. SFAS is effective for fiscal years
ending after December 15, 2002 and interim periods beginning after December
15, 2002. The Company adopted the disclosure provisions of SFAS 148 in
December 2002, and has elected to continue to account for its stock-based
compensation under the intrinsic value method.
In November 2002, the FASB issued FASB Interpretation (FIN) 45, which
requires disclosures about obligations under certain guarantees issued by
the Company, and which requires recognition of a liability for the fair
value of the obligation undertaken in issuing the guarantee. The liability
recognition provisions of FIN 45 are applicable to guarantees issued or
modified after December 31, 2002, and the disclosure provisions are
effective for interim or annual fiscal periods ending after December 15,
2002. The Company is currently evaluating the liability recognition
provisions of FIN 45 and has not yet determined the potential impact on its
financial position or results of operations.
In January 2003, the Company adopted SFAS 146, which addresses accounting
for costs associated with exit or disposal activities. In addition, the
FASB issued FIN 46, which requires that certain variable interest entities
be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have a controlling financial interest or do
not have sufficient equity at risk. FIN 46 is effective immediately for all
variable interest entities created after January 31, 2003. For all such
entities created prior to February 1, 2003, FIN 46 is effective for interim
or annual fiscal periods ending after June 15, 2003. The Company does not
expect the adoption of these statements to have a material effect on the
Company's financial position or results of operations.
- ------------------------
NOTE 2 - RECEIVABLES
Receivables are comprised as follows:
2002 2001
----------- -----------
Billed $18,089,000 $ 9,938,000
Unbilled 13,794,000 17,212,000
----------- -----------
$31,883,000 $27,150,000
=========== ===========
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 receivables,
amounted to $3,284,000 and $3,283,000 at December 31, 2002 and 2001,
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.
Contract retentions of $1,443,000 and $1,415,000 in 2002 and 2001, respectively,
are included in other assets.
- -----------------------------
NOTE 3 - EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are comprised as follows:
2002 2001
----------- -----------
Computer equipment
including purchased
software $ 9,243,000 $ 9,115,000
Office furniture and
equipment 5,500,000 5,802,000
Leasehold improvements 2,284,000 2,276,000
----------- -----------
17,027,000 17,193,000
Less accumulated
depreciation and
amortization (9,973,000) (8,587,000)
----------- -----------
$ 7,054,000 $ 8,606,000
=========== ===========
- -----------------------------
NOTE 4 - ACCRUED COMPENSATION
Accrued compensation is comprised as follows:
2002 2001
----------- -----------
Accrued bonus payable $ 3,653,000 $ 3,135,000
Accrued profit sharing 3,635,000 2,956,000
Accrued payroll 5,517,000 4,505,000
----------- -----------
$12,805,000 $10,596,000
=========== ===========
- -----------------------------
NOTE 5 - NOTES PAYABLE
At December 31, 2002, the Company had a bank line of credit providing for
borrowings of up to $6.0 million and maturing July 1, 2004. Borrowings under the
line of credit agreement are collateralized by accounts receivable and certain
equipment and improvements, and bear interest at the prime rate (4.25% at
December 31, 2002). 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, 2002. There were no outstanding borrowings
under the line of credit as of December 31, 2002 or 2001.
At December 31, 2002 and 2001, the Company had outstanding unsecured notes
payable arising from repurchases of the Company's stock from terminated
employees. The notes were issued with original terms ranging from three to seven
years, and mature in varying amounts through 2009. Such notes are subordinated
to borrowings under the bank line of credit. The subordinated notes payable
accrue interest at the lesser of the prime rate, the Federal Reserve discount
rate (0.75% at December 31, 2002) or 10%.
2002 2001
------------ -----------
Subordinated notes payable $ 10,353,000 $ 8,974,000
Less: Current portion (2,258,000) (1,609,000)
------------ -----------
$ 8,095,000 $ 7,365,000
============ ===========
The maturities of subordinated notes payable during each fiscal year are as
follows: 2003 - $2,258,000, 2004 - $2,302,000, 2005 - $2,250,000, 2006 -
$1,819,000, 2007 - 1,219,000 and thereafter - $505,000.
- -----------------------------
NOTE 6 - INCOME TAXES
The provision (benefit) for taxes on income is as follows:
2002 2001 2000
----------- ----------- ----------
Current:
Federal $ 3,162,000 $ 3,844,000 $4,675,000
State 831,000 911,000 1,045,000
----------- ----------- ----------
3,993,000 4,755,000 5,720,000
----------- ----------- ----------
Deferred:
Federal 145,000 (718,000) 236,000
State 23,000 (130,000) 50,000
----------- ----------- ----------
168,000 (848,000) 286,000
----------- ----------- ----------
Exercise of stock options
not treated as a reduction of
income tax expense 1,775,000 1,695,000 1,127,000
----------- ----------- ----------
$ 5,936,000 $ 5,602,000 $7,133,000
=========== =========== ==========
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax (liabilities) assets are comprised of the following:
2002 2001
----------- -----------
Accelerated depreciation $ (773,000) $(1,006,000)
Unbilled accounts receivable (2,260,000) (1,806,000)
Reserves 268,000 248,000
Accrued compensation and benefits 561,000 428,000
Other 211,000 311,000
----------- -----------
$(1,993,000) $(1,825,000)
=========== ===========
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
2002 2001 2000
---------- ---------- ----------
Provision for income taxes at
statutory rate $5,045,000 $4,878,000 $6,241,000
State income taxes, net of
federal benefit 705,000 612,000 837,000
Other 186,000 112,000 55,000
---------- ---------- ----------
$5,936,000 $5,602,000 $7,133,000
========== ========== ==========
The exercise of stock options results in 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, but are
included in additional paid in capital.
- -----------------------------
NOTE 7 - 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
operating leases was $5,606,000, $5,060,000 and $4,494,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
Future minimum lease commitments under non-cancelable operating leases at
December 31, 2002 are as follows:
Fiscal Lease
Year Ending Commitment
----------- -----------
2003 $ 5,114,000
2004 3,864,000
2005 3,413,000
2006 3,191,000
2007 2,719,000
Thereafter 2,618,000
-----------
$20,919,000
===========
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 purchased. 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, 2002 and 2001, there were no
such loans 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, the ultimate
outcome of such matters will not have a material impact on the Company's
financial position, results of operations, or cash flows.
- -----------------------------
NOTE 8 - 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.
Activity during the years ended December 31, 2002, 2001 and 2000 under the plan
was as follows:
Weighted
Average
Exercise
Price Total
Number per Option
of Shares Share Value
---------- -------- ------------
December 31, 1999 1,860,769 $ 8.09 $ 15,061,000
Granted 770,443 14.23 10,961,000
Forfeited or expired (151,407) 10.98 (1,663,000)
Exercised (373,290) 5.84 (2,180,000)
---------- ------ ------------
December 31, 2000 2,106,515 10.53 22,179,000
Granted 900,487 16.91 15,230,000
Forfeited or expired (125,320) 12.92 (1,619,000)
Exercised (564,282) 6.96 (3,928,000)
---------- ------ ------------
December 31, 2001 2,317,400 13.75 31,862,000
Granted 826,659 20.01 16,543,000
Forfeited or expired (207,682) 15.03 (3,121,000)
Exercised (412,694) 10.87 (4,487,000)
---------- ------ ------------
December 31, 2002 2,523,683 $16.16 $ 40,797,000
========== ====== ============
Options for 612,576, 384,707 and 622,001 shares were exercisable at December 31,
2002, 2001 and 2000, respectively.
37
The following information applies to options outstanding at December 31, 2002:
Options outstanding at December 31, 2002
- --------------------------------------------------------
Weighted-
Weighted- Average
Range Average Remaining
Of Exercise Number Exercise Contractual
Prices Outstanding Price Life
----------- ----------- --------- -----------
$ 8.54-$12.67 615,346 $11.21 1 Years
$14.46-$17.54 1,166,360 $16.31 3 Years
$19.00-$20.52 740,244 $20.05 4 Years
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.
In order to compute the pro forma disclosures of the impact on net income of
accounting for stock options in accordance with SFAS 123 (see Note 1(m)), the
fair value of each option is estimated at the time of grant as its minimum
value. The minimum value 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 4.0%, 5.0% and 7.3% for 2002, 2001 and 2000 respectively, and
a weighted-average expected life of 4 years. The weighted-average fair value of
options granted during 2002, 2001 and 2000 was $2.91, $3.00 and $3.01,
respectively.
As of December 31, 2002, 2001 and 2000, 6,583,388, 7,410,047, and 8,310,534
shares, respectively, were reserved for future issuance under the stock option
plan.
The Company also sponsors a restricted stock compensation plan designed to
provide long-term incentive to key employees by making deferred awards of common
stock which become fully vested over five years. Shares are forfeited if the
participant leaves the Company prior to vesting. During 2002, 7,292 shares of
restricted stock were granted at a price of $19.20 per share. During 2001, 8,274
shares of restricted stock were granted at a price of $15.71 per share. During
2000, 11,952 shares of restricted stock were granted at a price of $12.55 per
share. The Company recognized compensation expense of $142,000, $144,000, and
$124,000 in 2002, 2001 and 2000, respectively.
The Company pays a portion of its annual bonuses in the form of common stock.
For the years ended December 31, 2002, 2001 and 2000, stock bonuses of
$1,096,000, $931,000, and $908,000 were earned and charged to expense. Annual
bonuses are generally paid in the first quarter of the subsequent year. For the
years ended December 31, 2002, 2001 and 2000, 48,474, 57,766, and 54,974 shares,
totaling $931,000, $908,000, and $690,000, respectively, were issued under the
bonus plan.
The Company has a defined contribution profit sharing plan for certain eligible
employees. The Company's discretionary contributions to this plan for the years
ended December 31, 2002, 2001 and 2000 were $6,443,000, $5,401,000, and
$4,739,000, respectively. A portion of the contributions to the plan was in the
form of common stock. For the years ended December 31, 2002, 2001 and 2000,
161,163, 163,787, and 169,789 shares, totaling $3,219,000, $2,738,000, and
$2,333,000, respectively, were contributed to the plan.
The Company also offers certain eligible employees the option to contribute to a
deferred compensation 401(k) plan. The Company makes a discretionary matching
contribution of Company stock. For the years ended December 31, 2002, 2001 and
2000, 13,068, 13,966, and 9,745 shares, totaling $265,000, $237,000, and
$173,000 respectively, were contributed to the plan.
- -----------------------------
NOTE 9 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(amounts in thousands, except per share amounts)
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Sales $35,928 $40,746 $42,911 $42,642
Costs and expenses 32,515 36,791 39,411 38,671
Income tax 1,365 1,582 1,400 1,589
------- ------- ------- -------
Net income $ 2,048 $ 2,373 $ 2,100 $ 2,382
------- ------- ------- -------
Basic earnings per share $ 0.38 $ 0.45 $ 0.43 $ 0.49
------- ------- ------- -------
Diluted earnings per share $ 0.35 $ 0.41 $ 0.39 $ 0.45
------- ------- ------- -------
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Sales $31,394 $33,793 $34,819 $37,580
Costs and expenses 28,119 30,524 30,982 33,957
Income tax 1,310 1,308 1,534 1,450
------- ------- ------- -------
Net income $ 1,965 $ 1,961 $ 2,303 $ 2,173
------- ------- ------- -------
Basic earnings per share $ 0.37 $ 0.32 $ 0.39 $ 0.41
------- ------- ------- -------
Diluted earnings per share $ 0.34 $ 0.30 $ 0.36 $ 0.37
------- ------- ------- -------
38
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/ Robert C. Sepucha
--------------------------
Robert C. Sepucha, 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.
Signature Title Date
--------- ----- ----
/s/ Wayne R. Winton Chairman of the Board and Director March 28, 2003
- -----------------------------
Wayne R. Winton
/s/ Robert C. Sepucha Director March 28, 2003
- -----------------------------
Robert C. Sepucha
/s/ R. Steve McCarter Director March 28, 2003
- -----------------------------
R. Steve McCarter
/s/ Carl T. Case Director March 28, 2003
- -----------------------------
Carl T. Case
/s/ John O. Carroll Director March 28, 2003
- -----------------------------
John O. Carroll
/s/ William E. Cook Director March 28, 2003
- -----------------------------
William E. Cook
/s/ Rockell N. Hankin Director March 28, 2003
- -----------------------------
Rockell N. Hankin
/s/ Roy J. Nichols Director March 28, 2003
- -----------------------------
Roy J. Nichols
/s/ John L. Piotrowski Director March 28, 2003
- -----------------------------
John L. Piotrowski
/s/ Gerald A. Zionic Director March 28, 2003
- -----------------------------
Gerald A. Zionic
/s/ David E. Schreiman Chief Financial Officer March 28, 2003
- ----------------------------- (Principal Accounting Officer)
David E. Schreiman
39
CERTIFICATION
I, Robert C. Sepucha, certify that:
1. I have reviewed this annual report on Form 10-K of SPARTA, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
March 28, 2003
/s/ Robert C. Sepucha
- ---------------------------
Robert C. Sepucha
Chief Executive Officer
40
CERTIFICATION
I, David E. Schreiman, certify that:
1. I have reviewed this annual report on Form 10-K of SPARTA, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
March 28, 2003
/s/ David E. Schreiman
- ---------------------------
David E. Schreiman
Chief Financial Officer
41
INDEX TO EXHIBITS
Number Description
- ------ -----------
3.1(8) Amended and Restated Certificate of Incorporation of the Company
3.2(1) Bylaws of the Company, as currently in effect
3.3(1) Form of Certificate for Common Stock
10.1(2) Forms of Nonqualified Stock Option Agreement, Stock Bonus Agreement
and Stock Purchase Agreement for use under 1987 SPARTA, Inc.
Nonqualified Stock Option Plan
10.2(2) SPARTA, Inc. Profit Sharing Plan - 1994 Restatement
10.3(1) Trust Agreement for the SPARTA, Inc. Profit Sharing Plan
10.4(1) Special Trust Agreement for SPARTA, Inc. Profit Sharing Plan
10.13(2) Agreement dated June 25, 1992 between the Company and Union Bank, as
amended
10.14(3) Stock Purchase Agreement dated November 18, 1994 between the Company
and Science Applications International Corporation
10.15(4) 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
10.20(8) Asset Transfer Agreement dated May 5, 2000 between the Company and
Signalscape, Inc.
10.21(8) Advisory Services Agreement dated May 5, 2000 between the Company and
Signalscape, Inc.
10.22(8) Security Agreement dated May 5, 2000 between the Company and
Signalscape, Inc.
10.23(8) Software License Agreement dated May 5, 2000 between the Company and
Signalscape, Inc.
10.24(8) Trademark Assignment Agreement dated May 5, 2000 between the Company
and Signalscape, Inc.
10.25(9) SPARTA, Inc. Stock Compensation Plan
10.26(9) SPARTA, Inc. Stock Compensation Plan Trust
10.27(10) First Amended and Restated Loan Agreement dated June 14, 2002,
between the Company and Union Bank of California, N.A.
10.28(10) Commercial Promissory Note dated June 14, 2002, between the Company
and Union Bank of California, N.A
10.29(10) Security Agreement dated June 14, 2002, between the Company and Union
Bank of California, N.A.
22. The Company's only subsidiary is ST SPARTA, Inc., a California
corporation that is wholly-owned by the Company.
23. Consent of PricewaterhouseCoopers LLP
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------
(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 Annual 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 Annual 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 Annual 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 Annual 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 Annual Report on Form 10-K for the year ended
January 2, 1998.
(7) Incorporated herein by reference to Exhibit 4.2 contained in the Company's
Registration Statement on Form S-8 (Commission File No. 333-72541).
(8) Incorporated herein by reference to the exhibit of the same number
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
(9) Incorporated herein by reference to the exhibit of the same number
contained in the Company's Annual Report on Form 10-K for the year ended
December 30, 2001.
(10) Incorporated herein by reference to the exhibit of the same number
contained in the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.