SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 000-22097
SPR Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3932665
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2015 Spring Road, Suite 750, Oak Brook, Illinois 60523-1874
(Address of principal executive offices)
(630) 575-6200
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
----------------
(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. Yes [x] No [ ]
As of March 22, 2000, there were 12,825,284 shares of registrant's common
stock outstanding and the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant (based upon the per share
closing price of $5.938 on March 22, 2000, and for the purpose of this
calculation only, the assumption that all of the registrant's directors and
executive officers are affiliates) was approximately $52,866,822.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Registrant's Special
Meeting of Stockholders to be held on May 1, 2000 are incorporated by
reference into Part III hereof. Certain exhibits listed in Part IV of this
Annual Report on Form 10-K are incorporated by reference from prior filings
made by the Registrant under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended.
PART I
ITEM 1. BUSINESS
Company Overview
SPR Inc. has over 26 years of experience in providing information technology
services to clients in a variety of industries, including financial services,
healthcare, insurance, manufacturing, oil and gas, transportation and
utilities. SPR focuses its marketing efforts on Fortune 1000 companies and
other large organizations which have complex IT operations and significant IT
budgets. SPR is refocusing its IT consulting and project based services into
the consulting, development, and integration markets. SPR's core competencies
are in large systems, project management, quality assurance, professional
development and strategic partnerships. SPR believes that this breadth of
service and support fosters long-term client relationships, promotes cross-
selling opportunities and minimizes SPR's dependence upon any particular
service.
SPR's business was founded in 1973 by Eugene Figliulo as Systems &
Programming Resources, Inc. During 1994, Systems and Programming Resources,
Inc. transferred certain assets and liabilities to SPR Chicago, SPR Tulsa, and
SPR Wisconsin, respectively. These entities were organized as S corporations
and owned by the executives primarily responsible for the operations in each
of these locations. SPR Chicago, SPR Tulsa, SPR Wisconsin, Systems and
Programming Resources, Inc. and DataFlex (an affiliated IT services company in
a complementary business) were merged into SPR upon SPR's formation in October
1996.
SPR maintains its principal executive offices at 2015 Spring Road, Suite
750, Oak Brook, Illinois 60523-1874. Its telephone number is (630) 575-6200.
SPR's World Wide Web address is www.sprinc.com. SPR currently has four branch
offices located in Oak Brook, Illinois; Tulsa, Oklahoma; Milwaukee, Wisconsin;
and Dallas, Texas. SPR has made, and intends to continue to make, significant
investments in its systems , recruiting organization, training programs and
marketing initiatives in an effort to sustain growth.
Industry Overview
Dataquest Incorporated forecast total expenditures for the consulting,
development and integration segments of the United States professional IT
services market to be approximately $60 billion in 1999, $70 billion in 2000,
and $82 billion in 2001. Forecast data from 1999 to 2003 shows an 81% increase
for IT consulting, 69% increase for development services, and 118% increase
for integration services. This industry growth is fueled by new technology
developments, heightened customer expectations concerning service and access
to information, a surge in interest in e-business and continued mergers and
acquisitions activity.
GartnerGroup forecasts that by 2005, investments in e-business applications
and infrastructure will drive average IT spending (in North America) beyond
10% of revenue (0.8 probability), and that over the next five years e-business
initiatives will consume between 30% and 50% of enterprise IT spending. During
peak implementation years, e-business will consume 50% of the IS budget. (0.8
probability) and by 2003, external service providers should account for 19% of
the IS budget.
SPR focuses on leveraging the value of client's existing systems in
providing e-business and IT solutions. SPR believes that the demand for its
services remains strong as large institutions seek to protect and maximize the
value of their investments in mainframe systems by bringing them up to date
and making them accessible to today's newer Internet and distributed desktop
systems.
SPR believes that clients will continue to maintain and improve their
mainframe systems for the following reasons:
. mainframe systems represent an enormous investment that may prove too
risky and expensive to completely replace;
. mainframe computing is increasingly being used in new ways as
Internet/intranet technologies develop;
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. existing mainframe systems are critical to the functioning of clients'
businesses as they contain vital business information necessary to build
replacement systems; and
. clients need access to data resident in mainframe computers regardless of
the front-end computing platform being used.
Business and Growth Strategies
In the course of becoming an IT solutions provider, SPR has pursued, and
intends to continue to pursue, the following business and growth strategies:
. Transform SPR's Information Technology Consultant Training Program. SPR
believes that it's entry-level and continuing education training programs
provided SPR with a competitive advantage in attracting, developing and
retaining qualified technical consultants. SPR is now looking at ways to
apply this program in the web development space.
. Continue To Focus On Project Management. SPR will continue to focus on
increasing its mix of project management and strategic planning
engagements. SPR believes that by providing these value-added services,
it gains a competitive advantage in assessing its clients' needs and
anticipating opportunities to provide additional IT solutions.
. Leverage Existing Client Base. SPR intends to continue building long-term
client relationships. Its record of customer satisfaction and expanded
solutions offerings have contributed to its ability to increase the
revenues generated from existing clients. SPR derived more than 71% of
its revenues in 1999 from 39 clients to which it had provided IT
solutions in the prior three consecutive years. SPR intends to further
penetrate its existing client base by providing additional service
offerings.
. Focus On Leading Technologies. SPR maintains and continues to build
expertise not only in mainframe applications but also in other high-
demand technologies, such as Internet/intranet applications, object
oriented analysis and design, open computing systems, data warehousing
and relational database management systems. SPR's expertise in these
areas, together with its relationships with software product developers
and research institutions, allow SPR to remain on the leading edge of
technological development.
Service Offerings
Since its inception, SPR has provided technical personnel to augment its
clients' internal IT departments. Over the past several years, however, SPR
has focused its efforts on providing higher-end service offerings.
SPR's consulting service line provides the IT management to help clients
design and implement solutions to address their tactical and strategic IT
initiatives. Within this service line, SPR offers a wide spectrum of services
including project management (or "project office"), quality assurance, and IT
readiness.
SPR's development service line provides services spanning the entire
application development life cycle. SPR supports new system development and
provides re-development services for transitioning and leveraging existing
systems. SPR modernizes systems through SPR's conversions and migrations
services. In addition, SPR provides maintenance and support for existing
systems through SPR's application management services.
SPR's integration service line provides expertise in integrating
applications and data, whether the applications are new or existing, packaged
or custom-built, and whether they reside on the same system or span disparate
systems. Within this service line, SPR provides enterprise application
integration to enable the exchange of business-level information between
applications. SPR's data warehousing service provides users with the ability
to access the data they need, when they need it and in a form they can easily
understand.
In addition, SPR offers general consulting services, which consists of
providing technical personnel with expertise in a wide variety of skills and
disciplines to augment clients' internal IT departments. Clients' IT
3
departments often require advice and programming skills without the full range
of project management support. General consulting consists of staff
augmentation principally for maintenance and development of client/server and
mainframe environments.
The amount of responsibility assumed by SPR generally depends upon a
client's internal capabilities and desire to outsource IT functions. Based
upon client needs, SPR can provide strategic planning, project management or
implementation either at its clients' facilities or off-site at SPR's Virtual
Insourcing Centers. SPR employs proven proprietary service methodologies and
software analysis tools to deliver these services. SPR bills its clients on
either a time and materials or fixed-fee basis.
Recruiting and Training
SPR employs 13 full time recruiters, including 2 recruiting managers, who
are responsible for recruiting and establishing relationships with qualified
technical personnel. Technical personnel meeting SPR's standards are added to
a computerized database. Recruiting managers maintain regular contact with
technical personnel, monitor their availability and changes in skill levels
and update the database, which has been maintained for over 26 years.
SPR believes that its information technology consultant training program
provided SPR with a competitive advantage in attracting, developing and
retaining qualified technical consultants. SPR is now looking at ways to apply
this program in the web development space.
Marketing and Sales
SPR marketing representatives are assigned to a limited number of accounts
in order to develop an in-depth understanding of each client's individual
needs and to build long-term client relationships. These representatives are
responsible for providing highly responsive service and ensuring that SPR's
service offerings achieve client objectives. In many instances, a portion of
SPR's marketing activity is carried out by senior executives.
SPR has implemented a strategic selling methodology to better understand and
serve its customers by raising its customer contact to the chief information
officer level. SPR has also significantly upgraded its web site
(www.sprinc.com) to reflect changes in service offers.
Client Base
SPR serves clients in a diverse range of industries thereby mitigating
cyclical effects of any one industry or market. SPR derives an additional
level of diversification from certain of its clients. Different operating
divisions of a given client may utilize any one or several services offered by
SPR, which helps mitigate the risk of customer concentration. During 1999,
SPR's largest client accounted for approximately 11% of SPR's revenues.
Employees
As of December 31, 1999, SPR had 355 IT consulting professionals, of whom
335 were employees and 20 were independent contractors. Of these IT consulting
professionals, 61 were project managers. As of such date, SPR had 103 IT
consulting professionals in Chicago, Illinois; 86 in Tulsa, Oklahoma; 108 in
Milwaukee, Wisconsin; and 58 in Dallas, Texas, respectively.
SPR has three categories of IT consultants: salaried employees, associate
employees and independent contractors. Salaried employees are full-time
employees of SPR and are eligible for all benefits offered by SPR. Associate
employees are eligible for the same benefits offered to salaried employees but
are paid on an hourly basis and, as such, are not entitled to paid time off in
the form of sick days, personal days or vacation. Approximately 94% of SPR's
IT consultants are employees. Independent contractors are not employees of
SPR, but are paid on an hourly basis and are not entitled to any benefits
offered to SPR employees. Approximately 6% of SPR's IT consultants are
independent contractors.
4
SPR is not a party to any collective bargaining agreements and considers its
relationships with its employees to be good.
Competition
The market for IT professional services is intensely competitive on local
and national levels, and SPR competes frequently with a variety of companies
for both the same clients and qualified technical consultants. These companies
include: "Big Five" accounting firms, systems consulting and implementation
firms, application software firms, service groups of computer equipment
companies, general management consulting firms and IT staffing companies. SPR
considers large organizations with complex IT needs to be among its primary
clients. Within a given market, there are a limited number of such potential
clients, some of which have designated only certain IT professional services
companies as approved providers of IT professional services. Primary
competitive factors for obtaining and retaining clients include price, quality
of services, technical expertise and responsiveness to client needs. The
primary competitive factors in attracting and retaining qualified candidates
as consultants are competitive compensation arrangements and consistent
exposure to high quality and varied engagements.
Several of SPR's competitors are substantially larger than SPR and have
greater financial and other resources. Many of such competitors have also been
in business longer than SPR and have significantly greater name recognition
throughout the United States, including the geographic areas in which SPR
operates and into which it may expand. In addition, such competitors are able
to meet a broader range of a client's IT consulting needs and serve a broader
geographic range than SPR, which permits such competitors to better serve
national accounts. Although SPR believes that it competes, and will continue
to compete, favorably with existing and future competitors, there can be no
assurance that SPR will continue to do so.
Intellectual Property Rights
Software developed by SPR in connection with a client engagement typically
becomes the exclusive property of the client. SPR relies upon a combination of
nondisclosure and other contractual arrangements and trade secret, copyright
and trademark laws to protect its proprietary rights, the rights of third
parties from whom SPR licenses intellectual property and the proprietary
rights of its clients. SPR enters into confidentiality agreements with its
consultants in an effort to prevent the distribution of proprietary
information.
SPR holds no patents or registered copyrights, and has no present intention
of registering any copyright or filing any patent applications.
ITEM 2. PROPERTY
SPR leases its principal executive offices, which are located at 2015 Spring
Road, Oak Brook, Illinois 60523-1874, and also leases facilities in Tulsa,
Oklahoma; Dallas, Texas; and Milwaukee, Wisconsin. These leases expire in
October 2004, May 2004, March 2003, and May 2001, respectively. SPR also
leases space in Oak Brook, Illinois; Tulsa, Oklahoma; Dallas, Texas; and
Pewaukee, Wisconsin to house Virtual Insourcing Centers. The leases expire in
October 2002, May 2004, March 2003,and June 2003, respectively. SPR believes
it has adequate space to conduct its current business. SPR anticipates,
however, that additional space will be required as business expands but
believes that it will be able to obtain suitable space as needed. See Note 8
of Notes to SPR's Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
SPR is not involved in legal proceedings which SPR believes are material to
its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the period covered by this report.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) SPR's common stock began trading on October 2, 1997, at a price of
$10.67 per share. SPR's common stock is quoted on The Nasdaq National Market,
under the symbol SPRI. The quarterly range of high and low sales prices, as
reported by The Nasdaq National Market, for the fourth quarter of 1997,
through March 22, 2000, was as follows:
2000 1st Qtr. (through March 22, 2000)...................... $ 7.38 $ 4.94
1999:
1st Qtr................................................... 22.44 3.88
2nd Qtr................................................... 7.06 3.56
3rd Qtr................................................... 6.34 3.44
4th Qtr................................................... 6.25 3.50
1998:
1st Qtr................................................... 23.67 10.67
2nd Qtr................................................... 23.00 17.17
3rd Qtr................................................... 25.67 14.00
4th Qtr................................................... 21.50 12.38
1997 4th Qtr................................................ 13.33 9.17
As of March 22, 2000 there were approximately 79 shareholders of record.
This number does not include stockholders for whom shares were held in a
nominee or street name.
Except for undistributed S corporation income earned prior to the initial
public offering, SPR has not paid any dividends to date and plans to reinvest
its earnings in future growth opportunities. SPR does not anticipate paying
cash dividends in the foreseeable future.
(b) SPR's Registration Statement No. 333-32735 covering an initial public
offering of 4,485,000 shares of SPR's common stock, $.01 par value per share
(the "Offering"), was declared effective on October 1, 1997. Smith Barney Inc.
and Robert W. Baird & Co. Incorporated were the Managing Underwriters of the
Offering. Of the shares so registered, SPR sold 2,400,000 shares and certain
selling stockholders sold an aggregate of 1,500,000 shares on October 3, 1997.
On November 4, 1997, certain selling stockholders sold additional 585,000
shares to the underwriters' exercise of their over-allotment option. All of
the shares in the Offering were sold at a price of $10.67 per share for an
aggregate offering price of $47,840,000.
Net proceeds to SPR from the sale of 2,400,000 shares in the Offering was
approximately $22.5 million, after deducting underwriting discounts and
commissions of $1.8 million and offering expenses of $1.3 million paid by SPR.
SPR did not receive any of the proceeds from the sale of shares by the selling
stockholders.
On May 5, 1998, SPR completed a follow-on public offering of 3,719,250
shares of SPR's Common Stock. SPR sold 1,350,000 shares in the follow-on
public offering and received $23.1 million in net proceeds from the sale of
such shares.
The remaining net proceeds of approximately $7.0 million from the Offering,
together with the $23.1 million from the follow-on public offering, and cash
from operations are being temporarily invested in investment grade securities.
SPR intends to use the remaining net proceeds for general corporate purposes,
including the expansion and transformation of its ITC Training Program,
additional virtual insourcing centers, working capital, branch expansion and
possible acquisitions of related businesses
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from SPR's financial
statements and notes thereto that have been audited by Arthur Andersen LLP,
independent public accountants. This information should be read in
6
conjunction with the financial statements and notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Years Ended December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- -------- --------
Statement of Operations Data:
Revenues........................ $58,104 $85,344 $53,422 $ 32,511 $ 22,908
Cost of services................ 43,242 50,508 32,377 23,287 15,525
------- ------- ------- -------- --------
Gross profit.................. 14,862 34,836 21,045 9,224 7,383
Costs and expenses:
Selling....................... 4,966 5,275 4,855 3,046 2,141
Recruiting.................... 1,205 1,827 1,608 1,323 777
Stock-based compensation(1)... -- -- -- 12,231 27,987
General and administrative
expenses..................... 11,893 12,320 8,438 3,742 1,642
------- ------- ------- -------- --------
Total costs and expenses.... 18,064 19,422 14,901 20,342 32,547
------- ------- ------- -------- --------
Operating income (loss)(1)...... (3,202) 15,414 6,144 (11,118) (25,164)
Other income (expense).......... 2,645 2,083 47 (71) (109)
------- ------- ------- -------- --------
Income (loss) before income
taxes(1)....................... (557) 17,497 6,191 (11,189) (25,273)
Provision (benefit) for income
taxes.......................... (911) 6,999 1,553 9 21
------- ------- ------- -------- --------
Net income (loss), as
reported(1).................... $ 354 $10,498 $ 4,638 $(11,198) $(25,294)
======= ======= ======= ======== ========
Historical diluted net income
(loss) per share............... $ 0.03 $ 0.77 $ 0.43 $ (1.15) $ (2.61)
======= ======= ======= ======== ========
Pro forma diluted net income
(loss) per common share--
includes adjustment to
recognize C corporation
provision for income taxes(2).. $ -- $ -- $ 0.30 $ (1.19) $ (2.72)
======= ======= ======= ======== ========
Balance Sheet Data (at end of
period):
Cash and short-term
investments.................... $50,549 $51,113 $21,177 $ 356 $ 1,109
Working capital................. 54,915 58,650 23,072 1,194 2,370
Total assets.................... 64,160 71,438 31,943 7,131 5,584
Long-term debt, less current
portion........................ -- -- -- 206 704
Total stockholders' equity...... 58,761 62,808 25,530 2,507 2,275
Other Data (unaudited):
Book value per share............ $ 4.35 $ 4.60 $ 2.39 $ 0.25 $ 0.23
- --------
(1) In 1994, Systems and Programming Resources, Inc. transferred certain
assets and liabilities to SPR Chicago and SPR Wisconsin. Inasmuch as such
1994 transactions were among family members within a control group, such
transactions have been recorded in SPR's financial statements as if the
stockholders of SPR Chicago and SPR Wisconsin received non-cash, stock-
based compensation during 1994, 1995 and 1996 in an amount equal to the
increase in the estimated value of such companies since 1994. This expense
is non-recurring subsequent to October 31, 1996. Such compensation expense
is recorded as stock-based compensation with the corresponding credit
included in additional paid-in capital. Upon conversion of SPR to a C
corporation upon closing of the Offering, the retained deficit of SPR,
which includes the aggregate stock-based compensation expense, was
reclassified and netted against additional paid-in capital.
(2) Prior to the Offering, SPR was an S corporation and was not subject to
federal and certain state corporate income taxes. The Statement of
Operations Data reflects a pro forma provision for income taxes as if SPR
had been subject to federal and state corporate income taxes. The pro
forma provision for income taxes is computed by multiplying the effective
tax rate times the income (loss) before income taxes adjusted to eliminate
the stock-based compensation expense and subtracting income taxes
previously recorded.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company Overview
SPR was founded in 1973 and derives its revenues from providing IT
consulting services. SPR principally bills its clients on a time and materials
basis and revenues are recognized as services are provided. SPR has
occasionally entered into fixed-price billing engagements and may enter into
more such engagements in the future. Typically, SPR bills for its services on
a biweekly basis to monitor client satisfaction and to manage its outstanding
accounts receivable balances. SPR's cost of services consists primarily of
consultant compensation and related expenses. Accordingly, SPR's financial
performance is substantially affected by billing margins (billable hourly rate
less consultant hourly cost) and consultant utilization rates (the ratio of
hours billed to total available hours).
SPR has maintained its billing margins by increasing its hourly rates to
offset increases in its consulting staff costs. SPR manages its billing
margins by establishing a target billing rate for each consultant; however,
actual billing rates may be higher or lower than the target billing rates
depending upon competitive pressures and market conditions. Hourly billing
rate increases are generally implemented by SPR based upon market conditions,
consultant skill levels and the terms of its engagements.
Fluctuations in consultant utilization rates result from variations in the
amount of unassigned time, which historically has consisted of training,
vacation, sick and holiday time and time spent on administrative support
activities while between engagements. In order to reduce unassigned time, SPR
actively manages the terms of its engagements and matches available
consultants to client requirements. Additional factors which vary and impact
consultant utilization rate are: the number of entry-level training classes
conducted through SPR's information technology consultant training program,
the amount of time it takes to assign the newly trained consultants, and
general industry conditions.
Results of Operations
The following table sets forth selected statements of operations data as a
percentage of revenues for the periods indicated:
Percentage of
Total Revenues
----------------
Year Ended
December 31,
----------------
1999 1998 1997
---- ---- ----
Statement of Operations Data:
Revenues................................... 100% 100% 100%
Cost of services........................... 74 59 61
--- --- ---
Gross profit............................. 26 41 39
Costs and expenses:
Selling.................................. 8 6 9
Recruiting............................... 2 2 3
General and administrative expenses...... 21 15 16
--- --- ---
Total costs and expenses............... 31 23 28
--- --- ---
Operating income (loss)......................(5). 18 11
Other income (expense)..................... 5 2 -
--- --- ---
Income before income taxes................. -- 20 11
Provision (benefit) for income taxes....... (1) 8 3
--- --- ---
Net income, as reported.................... 1% 12% 8%
=== === ===
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1999 Compared to 1998
Revenues. Revenues decreased 32% to $58.1 million in 1999 from $85.3 million
in 1998. This decrease is primarily the result of earlier than expected
project completions, delays in beginning new client projects, and general
industry conditions related to budget lockdowns in anticipation of the Year
2000. SPR's 1999 average billing rate per hour increased by 6% over the
average rate for 1998.
Gross Profit. Gross profit consists of revenues less cost of services, which
includes consultant salaries and benefits, virtual insourcing center facility
costs, training costs for experienced consultants, and travel expenses. Gross
profit decreased 57% to $14.9 million in 1999 from $34.8 million in 1998.
Gross profit as a percentage of revenues decreased to 25.6% in 1999 from 40.8%
in 1998. The decreases in gross profit were primarily attributed to a decline
in consultant utilization rates. As a result of the decreases in consultant
utilization rates, SPR instituted reductions in force totaling approximately
225 consultants in 1999. The results for 1999 were positively impacted by the
reversal of $2.7 million of deferred income relating to management's estimate
of the services to be performed related to completing SPR's century date
compliance projects.
Selling Expenses. Selling expenses include the salaries, benefits,
commissions, bonuses, travel, entertain-ment and other direct costs associated
with SPR's direct sales force. Selling expenses decreased 6% to $5.0 million
in 1999 from $5.3 million in 1998. The decrease was primarily the result of
lower commissions paid in 1999, partially offset by increased sales executive
compensation due to the increase in the number of sales executives to 24 in
1999 from 20 in 1998.
Recruiting Expenses. Recruiting expenses consist of costs related to hiring
new personnel, which include the salaries, benefits, bonuses and other direct
costs of the in-house recruiters, consultant relocation fees, recruiters'
travel expenses, and advertising costs. Recruiting expenses decreased 34% to
$1.2 million in 1999 from $1.8 million in 1998. Hiring in 1999 consisted only
of consultants with project specific skill sets required on client
engagements.
General and Administrative Expenses. General and administrative expenses
include salaries and benefits of management and support staff, leased
facilities cost, training costs for the entry-level portion of the information
technology consultant training program, travel expenses related to general and
administrative matters, outside professional fees, depreciation and other
corporate costs. General and administrative expenses decreased 4% to $11.9
million in 1999 from $12.3 million in 1998. The decreases in 1999 resulted
from a reversal of an allowance for bad debts for a customer who exited
bankruptcy, a decrease in information technology consultant training program
expenses, and management bonuses. These decreases were partially offset by
increases in costs associated with the merger cancelled in March 1999, office
space, and telephone charges.
Other Income (Expense). Other income increased 27% to $2.6 million in 1999
from $2.1 million in 1998. This increase is primarily attributable to interest
earned on investments.
Provision (Benefit) for Income Taxes. SPR's effective tax rate benefit was
164% for 1999. The benefit for income taxes was favorably impacted by the
passing of the statute of limitations associated with SPR's S corporation
indemnification agreement.
1998 Compared to 1997
Revenues. Revenues increased 60% to $85.3 million in 1998 from $53.4 million
in 1997. This increase was primarily the result of a significant increase in
the number of consultants employed by SPR, many of whom completed the entry-
level training program in 1996, 1997, and 1998, and an increased number of
engagements for both new and existing clients. In 1998, a higher proportion of
these engagements encompassed project-focused engagements, which yield higher
billing rates.
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Gross Profit. Gross profit increased 66% to $34.8 million in 1998 from $21.0
million in 1997. Gross profit as a percentage of revenues increased to 41% in
1998 from 39% in 1997. The increase in gross profit was primarily attributable
to higher billing rates and a higher billing-to-consultant cost ratio (which
is revenues divided by consultant cost), partially offset by management's
estimate of the services to be performed related to completing SPR's projects
recorded in 1998 and Virtual Insourcing Centers facility costs. The higher
billing rates were realized as a result of the increase in project management
engagements and the higher billing ratio was attributable primarily to the
placement of consultants who have completed the information technology
consultant training program.
Selling Expenses. Selling expenses increased 9% to $5.3 million in 1998 from
$4.9 million in 1997. This increase was primarily the result of increased
commissions attributable to the 60% increase in sales over the comparable
period and to the hiring of 6 additional sales executives in 1998. SPR's
selling expenses as a percentage of revenues decreased to 6% in 1998 from 9%
in 1997 as a result of a change in the sales commission plan on January 1,
1998.
Recruiting Expenses. SPR hired 336 consultants in 1998 compared to 384 in
1997. Recruiting expenses increased to $1.8 million in 1998 from $1.6 million
in 1997. Total recruiting costs per hire increased to approximately $5,400 in
1998 from approximately $4,200 in 1997.
General and Administrative Expenses. General and administrative expenses
increased 46% to $12.3 million in 1998 from $8.4 million in 1997. This
increase was primarily attributable to twelve additional employees, general
salary and management bonus increases, expenses related to upgrading and
utilizing SPR's network and telecommunications systems, increased professional
fees for legal, accounting and investor relations, increased travel expenses,
training costs associated with the entry-level portion of the information
technology consultant training program, employee functions, and depreciation.
These increases were partially offset by charges in 1997 for bad debt expense
of approximately $0.8 million relating primarily to a client which filed for
Chapter 11 bankruptcy protection and $0.2 million in expenses relating to
SPR's March 1997, proposed initial public offering that was postponed.
Other Income (Expense). The increase in other income in 1998, as compared to
1997, is primarily attributable to interest earned on investments of available
net proceeds from SPR's initial and follow-on public offerings.
Provision for Income Taxes. SPR's effective tax rate was 40% for 1998. Prior
to the initial public offering, SPR elected to be taxed as an S corporation.
As a result, income of SPR was taxable to the shareholders. On October 1,
1997, SPR's S corporation status was terminated and SPR became a C
corporation.
1997 Compared to 1996
Revenues. Revenues increased 64% to $53.4 million in 1997 from $32.5 million
in 1996. This increase was primarily the result of revenue generated by the
consultants who completed the entry-level training program in 1996 and 1997,
and an increased number of engagements for both new and existing clients. A
higher proportion of these engagements encompassed strategic planning and
project focused engagements, which yield higher billing rates.
Gross Profit. SPR's gross profit of $9.2 million or 28% of revenues in 1996
increased 128% to $21.0 million or 39% of revenues in 1997. The increase in
gross profit was primarily attributable to higher billing rates and a higher
billing-to-consultant cost ratio (which is revenues divided by consultant
cost), which were realized as a result of the increase in project management
engagements and the placement of consultants who completed the entry-level
course of the information technology consultant training program in 1996 and
1997.
Selling Expenses. Selling expenses increased 59% to $4.9 million in 1997
from $3.0 million in 1996. This increase was primarily the result of increased
commissions attributable to the 64% increase in sales over the comparable
period. SPR's selling expenses as a percentage of revenues were 9% in both
1997 and 1996.
10
Recruiting Expenses. SPR hired 384 consultants in 1997 compared to 292 in
1996. Recruiting expenses increased to $1.6 million in 1997 from $1.3 million
in 1996. Total recruiting costs per hire decreased to approximately $4,200 in
1997 from approximately $4,500 in 1996.
Stock-based Compensation Expense. Stock-based compensation expense consists
of non-cash expense resulting from the financial statement treatment of the
1994 transfers by Systems and Programming Resources, Inc. of certain of its
assets and liabilities to SPR Chicago and SPR Wisconsin. The stock-based
compensation expense was allocated to each period based upon the increase in
the estimated fair market value of SPR Chicago and SPR Wisconsin. The increase
in the estimated fair market value of SPR Chicago and SPR Wisconsin for the
periods presented was based primarily upon SPR Chicago's and SPR Wisconsin's
revenue growth over such periods. The expense is non-recurring subsequent to
October 31, 1996. There was no stock-based compensation expense allocated to
1997 compared to $12.2 million in 1996.
General and Administrative Expenses. General and administrative expenses
increased 126% to $8.4 million in 1997 from $3.7 million in 1996. This
increase was primarily attributable to thirteen additional employees, general
salary and management bonus increases, non-cash compensation expense of
approximately $0.5 million related to the grant of options on June 2, 1997,
bad debt expense of approximately $0.8 million relating primarily to a client
which filed for Chapter 11 bankruptcy in 1997 and $0.2 million in expenses
relating to SPR's March 1997 proposed initial public offering that was
postponed until October 1997. Total costs of the March 1997, postponed
offering were approximately $0.8 million, of which $0.2 million was expensed
in the second quarter of 1997 and $0.6 million was charged against the
proceeds of the Offering. Additional factors contributing to this increase
include increased rent relating to new office space in Wisconsin, increased
depreciation, increased professional fees and training costs associated
primarily with outside instructors for the information technology consultants
training program.
Liquidity and Capital Resources
On October 2, 1997, SPR completed the Offering of 4,485,000 shares of its
common stock. SPR sold 2,400,000 of such shares.
Net proceeds to SPR from the sale of 2,400,000 shares in the Offering was
approximately $22.5 million, after deducting underwriting discounts and
commissions of $1.8 million and offering expenses of $1.3 million paid by SPR.
SPR did not receive any of the proceeds from the sale of shares by the selling
stockholders.
On May 5, 1998, SPR completed a follow-on public offering of 3,719,250
shares of its common stock. SPR sold 1,350,000 shares in the follow-on public
offering and received $23.1 million in net proceeds from the sale of such
shares.
The remaining net proceeds of approximately $7.0 million from the Offering,
together with the $23.1 million from the follow-on public offering, and cash
from operations are being temporarily invested in investment grade securities.
SPR intends to use the remaining net proceeds for general corporate purposes,
including the expansion of its information technology consultant training
program, additional virtual insourcing centers, working capital, branch
expansion and possible acquisitions of related businesses
At December 31, 1999 SPR had approximately $50.5 million of cash and
marketable securities. Prior to the Offering in October 1997, SPR financed its
growth through cash flows from operations, periodically supplemented by
borrowings under its line of credit or revolving credit and term loan
facilities. Receivables have increased to 53 days of revenues at December 31,
1999 from 52 days of revenues at December 31, 1998.
Net cash flows provided from operating activities totaled $5.4 million, $7.8
million, and $5.8 million in 1999, 1998, and 1997, respectively. The decrease
from 1998 to 1999 was primarily a result of a decrease in net income,
partially offset by a decrease in accounts receivable. The increase from 1997
to 1998 was primarily a result of increases in net income which was reduced by
management's estimate of the services to be performed
11
related to completing SPR's projects, partially offset by an increase in
accounts receivable and deferred taxes. Net cash used in SPR's investing
activities, primarily to fund capital expenditures and to purchase investment
grade securities totaled $3.7 million, $28.2 million, and $20.1 million for
the years ended 1999, 1998, and 1997, respectively. Net cash provided (used
in) financing activities totaled ($4.6 million), $25.4 million, and $16.0
million in 1999, 1998, and 1997, respectively. Net cash used in financing
activities consisted primarily of payments for the acquisition of treasury
stock in 1999. In 1998 and 1997 net cash was provided by the net proceeds from
the issuance of common stock offset by the payments on a note payable to
Eugene Figliulo and dividend distributions to stockholders in 1997, offset by
the net proceeds from the issuance of common stock in 1998 and 1997.
SPR, subsequent to the Offering, has no outstanding debt. SPR believes the
net proceeds from such offerings, together with existing sources of liquidity
and funds generated from operations, will provide adequate cash to fund its
anticipated cash needs, including funding SPR's growth strategy.
Year 2000
SPR established a Year 2000 project team that completed its review and
corrected any Year 2000 related issues in 1999. As an additional safeguard,
information technology staff were available over the January 1, 2000, weekend
to address any issues which may have arisen at that time. The cost of the Year
2000 remediation effort amounted to less than $200,000.
Recent Events
On January 28, 2000, SPR and Leapnet, Inc. announced a merger of Brassie
Corporation, a wholly owned subsidiary of Leapnet, with and into SPR, under a
definitive merger agreement. The board of directors of each company has
approved the merger and has recommended that their shareholders vote in favor
of the merger. The transaction will be structured as a tax-free purchase by
Leapnet. Each of SPR's common shares will be exchanged for 1.085 shares of
Leapnet's common stock
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The statements contained in the section captioned Management's Discussion
and Analysis of Financial Condition and Results of Operations which are not
historical are "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent
SPR's present expectations or beliefs concerning future events. SPR cautions
that such statements are qualified by important factors that could cause
actual results to differ materially from those in the forward looking
statements including statements pertaining to: (i) the expected continued
success of SPR's information technology consultants training program, (ii)
SPR's future ability to effectively manage its consultant utilization rates
and its hourly consultant billing rates, (iii) SPR's ability to leverage its
Century Date Compliance expertise into providing other mass change and project
management services to its clients, (iv) successful management of engagement
and contract risks, and (v) SPR's ability to expand and develop additional
branch offices and Virtual Insourcing Centers. Results actually achieved thus
may differ materially from expected results included in these statements.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly operating
information for each of the periods shown. This data has been prepared on the
same basis as the audited financial statements, and in management's opinion,
including all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the information for the periods
presented. Results for any previous fiscal quarter are not necessarily
indicative of results for the full year or for any future quarter.
12
1999 1998 1997
----------------------------------- ----------------------------------- -----------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Revenue......... $ 16.5 $16.7 $ 14.3 $10.6 $19.0 $21.4 $22.4 $22.5 $10.5 $12.2 $14.2 $16.5
Gross profit.... 3.3 4.0 2.7 4.9 7.7 8.8 9.3 9.0 3.8 4.9 5.9 6.4
Operating income
(loss)......... (1.4) (0.4) (1.7) 0.3 3.1 3.7 4.2 4.4 1.0 0.9 2.1 2.1
Net income
(loss)......... (0.5) 0.1 (0.3) 1.1 2.0 2.5 3.0 3.0 0.9 0.8 2.0 0.9
Net income per
share--assuming
dilution....... $(0.04) $0.01 $(0.03) $0.08 $0.16 $0.19 $0.21 $0.21 $0.08 $0.08 $0.20 $0.07
Operating results fluctuate based upon the timing of service offering
expansion activities, the hiring and training of consultants, the initiation
and completion of engagements, the timing of corporate expenditures, and the
number of billing days in the respective quarter.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SPR maintains investments in marketable securities. As of December 31, 1999,
the aggregate fair value of SPR's marketable securities was $45.9 million. SPR
currently does not invest excess funds in derivative financial instruments.
ITEM 8. FINANCIAL STATEMENT AND SUBSEQUENT DATA
The information in response to this item is included in the financial
statements and notes thereto, and the related Report of Independent Public
Accountants, appearing on pages F-1 to F-16 of this Form 10-K, and in Item 7
of this Form 10-K under the caption "Quarterly Results of Operations."
ITEM 9. CHANGE IN ACCOUNTANTS
No change in independent public accountants during the two years ended
December 31, 1999.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
A board of six (6) directors was elected at the 1999 annual meeting of
stockholders. The following sets forth the name, age and the positions held of
each director currently holding office.
Robert M. Figliulo (age: 45) has served as Chief Executive Officer and
Chairman of SPR since June 1997 and previously served as President and
Chairman of SPR Chicago. Since joining SPR in May 1976, Mr. Figliulo has held
numerous positions, including Programmer, Analyst, Account Manager, General
Manager of both the Tulsa and Chicago offices and Vice President of Marketing.
Mr. Figliulo received a Masters in Business Administration from the University
of Chicago in 1987. Mr. Figliulo is the brother of David Figliulo.
Stephen J. Tober (age: 35) has served as SPR's Chief Operating Officer since
June1998 and as Executive Vice President--Finance and Business Development
since June 1997. Prior to joining SPR, Mr. Tober worked in the investment
banking division of Salomon Smith Barney from 1995 through 1997. From 1991
through 1995 Mr. Tober worked in corporate finance group of the law firm
Latham & Watkins. Mr. Tober received a J.D. degree from the University of
Virginia School of Law in 1991 and a B.A. degree from Amherst College in 1987.
David A. Figliulo (age: 39) has served as Executive Vice President and
Director of SPR since June 1997, and previously served as Vice President of
SPR Chicago. Since joining SPR in July 1989, Mr. Figliulo has served as an
Account Manager and as the Vice President of Sales in SPR's Chicago office.
Prior to joining SPR, Mr. Figliulo worked as an Account Manager for Baxter
Healthcare, an international pharmaceutical company, in the
13
Oxygen Systems Division and was recognized as the division's top salesman in
the United States in 1987, 1988 and 1989. Mr. Figliulo is the brother of
Robert Figliulo.
Ronald L. Taylor (age: 56) has served since 1987 as a Director, President
and Chief Operating Officer of DeVry, Inc., one of the largest publicly-owned,
degree-granting, higher education companies in North America. Mr. Taylor co-
founded Keller Graduate School of Management and was, from 1973 to 1987, its
President and Chief Operating Officer. Mr. Taylor received a Masters in
Business Administration degree from Stanford University in 1971 and a B.A.
degree from Harvard University in 1966.
Sydnor W. Thrift, Jr. (age: 71) has served as Vice President of Baseball
Operations for the Baltimore Orioles professional baseball team since November
1999, having spent the earlier part of 1999 as Director of Player Personnel.
From November 1994 through 1998, Mr. Thrift was the Orioles Director of Player
Development. His baseball career prior to the Baltimore Orioles includes the
Chicago Cubs where he was Assistant General Manager from November 1991 through
October 1994. During 1991, he served as a consultant to three professional
baseball teams (San Francisco Giants, Los Angeles Dodgers and the New York
Mets). Mr. Thrift was the General Manager of the Pittsburgh Priates from
November 1985 through October 1988.
David P. Yeager (age: 47) has served as Vice Chairman of the Board of
Directors of Hub Group, Inc., the largest intermodal marketing company in the
United States, since January 1992. Mr. Yeager has also served as Chief
Executive Officer of Hub Group, Inc. since March 1995 and was President of Hub
City Terminals-Chicago from October 1985 through December 1991. Mr. Yeager
received a Masters in Business Administration degree from the University of
Chicago in 1987.
Executive Officers
Executive officers of the Company are appointed by, and serve at the
direction of, the Board of Directors. The following sets forth the executive
officers of SPR, their ages and positions as of December 31, 1999.
Robert M. Figliulo. See the description under "Directors."
Stephen J. Tober. See the description under "Directors."
David A. Figliulo. See the description under "Directors."
Stephen T. Gambill (age: 49) has served as Vice President and Chief
Financial Officer since July 1996. From 1982 through July 1996, Mr. Gambill, a
certified public accountant, held various financial management positions
within Natural Gas Pipeline Company of America, a large natural gas pipeline,
and most recently served as its Director of Accounting. Prior to 1982, Mr.
Gambill held various auditing positions with the public accounting firms of
Coopers and Lybrand and Deloitte, Haskins & Sells. Mr. Gambill received a
Masters in Business Administration degree from the University of Chicago in
1987.
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated herein by reference
from the section of the Proxy Statement captioned "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated herein by reference
from the section of the Proxy Statement captioned "Security Ownership of
Management and Certain Beneficial Owners."
The following graph shows a comparison of cumulative total returns for the
Company, the Nasdaq Stock Market--U.S. & Foreign Index and the Nasdaq Computer
& Data Processing Services Index during the period commencing on October 2,
1997, the date of the Company's initial public offering, and ending
December 31,
14
1999. The comparison assumes $100 was invested on October 2, 1997 in the
Company's Common Stock, the Nasdaq Stock Market--U.S. & Foreign Index and the
Nasdaq Computer & Data Processing Services Index and assumes the reinvestment
of all dividends, if any.
[GRAPH]
10/2/97 12/31/97 12/31/98 12/31/99
------- -------- -------- --------
SPR Inc. $100.00 $90.70 $138.00 $ 49.00
Nasdaq Stock Market--U.S. & Foreign Index $100.00 $92.10 $127.60 $239.40
Nasdaq Computer & Data Processing Services
Index $100.00 $94.20 $168.10 $369.10
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the closing date of the Offering in October 1997, SPR entered into a
tax indemnity agreement with each of its then current stockholders which
provides, among other things, that SPR will indemnify such stockholders against
additional income taxes resulting from adjustments made (as a result of a final
determination made by a competent tax authority) to the taxable income reported
by SPR as an S corporation for periods prior to the initial public offering,
but only to the extent those adjustments result in a decrease in income taxes
otherwise payable by SPR as a C corporation for periods after the initial
public offering.
SPR paid approximately $324,000, $340,000, and $480,000 during 1999, 1998,
and 1997 respectively, in fees to a law firm having a partner whom is a
stockholder of SPR and who is a brother of certain executive officers of SPR. A
portion of the fees paid in 1998 and 1997 related to services performed by such
firm in connection with the 1996 mergers and the 1997 and 1998 offerings. In
1999, $159,000 of the $324,000 was attributed to a failed merger. In addition,
fees of $128,000 were paid to another law firm having a partner whom is a
stockholder of SPR and a brother of certain executive officers of SPR in 1999.
During 1999 and 1998, SPR paid approximately $196,000 and $314,000,
respectively, to a higher education company having a president and chief
operating officer who is a director of SPR.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements.
The following financial statements and notes thereto, and the related
Independent Auditors' Report, are filed as part of this form 10-K on pages F-1
to F-17:
Report of Independent Public Accountants
Balance Sheets at December 31, 1999 and 1998
Statements of Operations for the years ended December 31, 1999, 1998, and
1997
Statements of Stockholders' Equity for the years ended December 31, 1999,
1998, and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998, and
1997 Notes to Financial Statements
(2) Financial Statement Schedules.
All financial statement schedules have been omitted because such schedules
are not required or the information required has been presented in the
aforementioned financial statements.
(3) Exhibits
The following exhibits are filed with this report or incorporated by
reference as set forth below.
2.1 Agreement of Merger dated October 30, 1996 between the Registrant and
SPR Chicago Inc.*
2.2 Agreement of Merger dated October 31, 1996 among the Registrant,
Consulting Acquisition, Inc. and Systems and Programming Resources,
Inc.*
2.3 Agreement of Merger dated October 31, 1996 between the Registrant and
Systems and Programming Resources of Tulsa, Inc.*
2.4 Agreement of Merger dated October 31, 1996 between the Registrant and
SPR Wisconsin, Inc.*
3.1 Certificate of Incorporation of the Registrant.*
3.1.1 Certificate of Amendment of Certificate of Incorporation.*
3.2 By-laws of the Registrant.*
4.1 Description of specimen stock certificate representing Common Stock.*
10.1.1 Management Employment Agreement dated as of June 2, 1997 between the
Registrant and Robert M. Figliulo.*
10.1.2 Management Employment Agreement dated as of June 2, 1997 between the
Registrant and David A. Figliulo.*
10.1.3 Management Employment Agreement dated as of June 2, 1997 between the
Registrant and Stephen J. Tober.*
10.1.4 Management Employment Agreement dated as of June 2, 1997 between the
Registrant and Stephen T. Gambill.*
10.1.5 Management Employment Agreement dated as of June 2, 1997 between the
Registrant and Michael J. Fletcher.*
10.4 Amended and Restated Combined Incentive and Non-statutory Stock Option
Plan.*
10.5 Revised form of employee Stock Purchase Plan.*
10.6 Lease for 2015 Spring Road, Oak Brook, Illinois.*
10.6.1 First Amendment to Lease for 2015 Spring Road, Oak Brook, Illinois.
16
10.6.2 Third Amendment to Lease for 2015 Spring Road, Oak Brook, Illinois.
10.6.3 Fourth Amendment to Lease for 2015 Spring Road, Oak Brook, Illinois.
10.7 Lease for 400 Mid-Continent Tower, Tulsa, Oklahoma.*
10.7.1 Third Amendment to Lease for 400 Mid-Continent Tower, Tulsa, Oklahoma.*
10.7.2 Fourth Amendment to Lease for 400 Mid-Continental Tower, Tulsa, Oklahoma.#
10.7.3 Fifth Amendment to Lease for 400 Mid-Continental Tower, Tulsa, Oklahoma.
10.8 Lease for 100 East Wisconsin Avenue, Milwaukee, Wisconsin.*
10.8.1 Second Amendment to Lease for 100 East Wisconsin Avenue, Milwaukee, Wisconsin.
10.9 Sublease for 815 Commerce Drive, Oak Brook, Illinois.*
10.10 Lease for Tower Executive Office Building, N14 W24200 Tower Place, Pewaukee, Wisconsin.
10.11 Lease for 800 West Airport Freeway, Irving, Texas.
10.11.1 First Amendment to Lease for 800 West Airport Freeway, Irving, Texas.
10.12 Form of Tax Indemnity Agreement.*
27.1 Financial Data Schedule.
- --------
* Incorporated by reference to SPR Inc.'s Registration Statement on Form S-1
(No. 333-32735), which was declared effective by the Securities and Exchange
Commission on October 1, 1997.
# Incorporated by reference to SPR Inc.'s Form 10-K (No. 000-22097) for the
year ending December 31, 1997.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by SPR during the period covered by
this report.
17
INDEX TO FINANCIAL STATEMENTS
Report of Arthur Andersen LLP, Independent Public Accountants............. F-2
Balance Sheets as of December 31, 1999 and 1998........................... F-3
Statements of Operations for the Fiscal Years Ended December 31, 1999,
1998, and 1997........................................................... F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1999,
1998 and 1997............................................................ F-5
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and
1997..................................................................... F-6
Notes to Financial Statements............................................. F-7
F-1
Report of Independent Public Accountants
To the Stockholders of SPR Inc.:
We have audited the accompanying balance sheets of SPR Inc. (a Delaware
corporation) as of December 31, 1999 and 1998 and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SPR Inc. as of December
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 18, 2000
F-2
SPR INC.
BALANCE SHEETS
Years Ended December
31,
------------------------
1999 1998
----------- -----------
Assets
Current assets:
Cash and cash equivalents.......................... $ 4,322,192 $ 7,207,273
Accounts receivable, net:
Trade............................................ 6,068,025 12,779,270
Income taxes and other........................... 2,427,111 893,752
Marketable securities.............................. 46,226,804 43,905,707
Prepaid expenses and other......................... 474,085 523,041
Deferred taxes..................................... 795,500 1,971,394
----------- -----------
Total current assets............................... 60,313,717 67,280,437
----------- -----------
Property and equipment, at cost:
Leasehold improvements............................. 686,631 403,025
Computer equipment and software.................... 3,730,819 3,086,179
Office furniture and equipment..................... 2,922,975 2,502,443
----------- -----------
7,340,425 5,991,647
Less--accumulated depreciation and amortization.. (3,598,480) (2,005,065)
----------- -----------
Property and equipment, net.................... 3,741,945 3,986,582
Deferred taxes....................................... 104,637 171,225
----------- -----------
Total assets................................. $64,160,299 $71,438,244
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................... $ 2,004,660 $ 1,466,669
Accrued expenses:
Payroll and payroll related...................... 2,773,086 3,700,970
Other............................................ 321,349 488,033
Deferred income.................................... 300,000 2,975,000
----------- -----------
Total current liabilities........................ 5,399,095 8,630,672
----------- -----------
Commitments and contingencies
Stockholders' equity
Common stock $.01 par, 25,000,000 shares
authorized, 13,975,976 and 13,843,442 shares
issued and outstanding at December 31, 1999 and
1998, respectively ............................... 139,760 138,434
Preferred stock, $.01 par, 3,000,000 shares
authorized, no shares issued and outstanding...... -- --
Treasury stock, 1,150,692 shares, at cost.......... (5,205,273) --
Additional paid in capital......................... 52,073,090 51,269,440
Retained earnings.................................. 11,753,627 11,399,698
----------- -----------
Total stockholders' equity....................... 58,761,204 62,807,572
----------- -----------
Total liabilities and stockholders' equity..... $64,160,299 $71,438,244
=========== ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
SPR INC.
STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues................................ $58,104,283 $85,343,514 $53,421,924
Cost of services........................ 43,242,570 50,507,854 32,376,687
----------- ----------- -----------
Gross profit.......................... 14,861,713 34,835,660 21,045,237
Costs and expenses:
Selling............................... 4,965,754 5,275,048 4,855,567
Recruiting............................ 1,205,092 1,827,376 1,608,059
General and administrative expenses... 11,893,035 12,319,835 8,437,804
----------- ----------- -----------
Total costs and expenses............ 18,063,881 19,422,259 14,901,430
----------- ----------- -----------
Operating income (loss)................. (3,202,168) 15,413,401 6,143,807
Other income (expense):
Interest expense...................... (379) (4,203) (178,783)
Interest income....................... 2,642,197 2,080,420 266,851
Other, net............................ 3,017 6,938 (41,257)
----------- ----------- -----------
Total other income.................. 2,644,835 2,083,155 46,811
----------- ----------- -----------
Income (loss) before income taxes....... (557,333) 17,496,556 6,190,618
Provision (benefit) for income taxes.... (911,262) 6,998,623 1,552,422
----------- ----------- -----------
Net income.............................. $ 353,929 $10,497,933 $ 4,638,196
=========== =========== ===========
Historical net income per share:
Basic................................. $ 0.03 $ 0.80 $ 0.45
=========== =========== ===========
Diluted............................... $ 0.03 $ 0.77 $ 0.43
=========== =========== ===========
Pro forma income data:
Net income as reported................ $ 4,638,196
Pro forma adjustment to recognize C
corporation provision for income
taxes................................ 1,469,071
-----------
Pro forma net income.................. $ 3,169,125
===========
Pro forma net income per share:
Basic................................. $ 0.31
===========
Diluted............................... $ 0.30
===========
Weighted average number of shares
outstanding:
Basic................................. 13,375,569 13,144,412 10,306,032
Diluted............................... 13,512,759 13,641,558 10,669,072
The accompanying notes to financial statements are an integral part of these
statements.
F-4
SPR INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock Additional Retained Total
-------------------- ----------------------- Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
---------- -------- ---------- ----------- ----------- ------------ -------------
Balance at December 31,
1996................... 9,701,100 $ 97,011 -- $ -- $46,702,525 $(44,292,188) $ 2,507,348
Net income............. -- -- -- -- -- 4,638,196 4,638,196
Employee stock purchase
plan.................. 35,957 360 -- -- 324,222 -- 324,582
Capitalization of
undistributed S
Corporation earnings
in conjunction with
termination of S
Corporation election
on October 1, 1997.... -- -- -- -- (45,444,263) 45,444,263 --
S Corporation
distributions......... -- -- -- -- -- (4,885,771) (4,885,771)
Employee stock option
plan and related tax
benefits.............. -- -- -- -- 458,886 -- 458,886
Sale of stock in
initial public
offering, net of
issuance costs........ 2,400,000 24,000 -- -- 22,462,431 -- 22,486,431
---------- -------- ---------- ----------- ----------- ------------ -----------
Balance at December 31,
1997................... 12,137,057 121,371 -- -- 24,503,801 904,500 25,529,672
Net income............. 10,497,933 10,497,933
Employee stock purchase
plan.................. 94,646 946 -- -- 1,141,285 1,142,231
Treasury stock
retired............... (2,250) (23) -- -- (21,243) (2,735) (24,001)
Employee stock option
plan and related tax
benefits.............. 232,499 2,325 -- -- 2,557,795 -- 2,560,120
Sale of stock in
secondary public
offering, net of
issuance costs........ 1,350,000 13,500 -- -- 23,087,750 -- 23,101,250
Other.................. 31,490 315 -- -- 52 -- 367
---------- -------- ---------- ----------- ----------- ------------ -----------
Balance at December 31,
1998................... 13,843,442 138,434 -- -- 51,269,440 11,399,698 62,807,572
Net income............. 353,929 353,929
Employee stock purchase
plan.................. 128,654 1,287 -- -- 583,978 585,265
Treasury stock
acquired.............. (1,150,692) (5,205,273) (5,205,273)
Employee stock option
plan and related tax
benefits.............. 3,880 39 -- -- 219,672 -- 219,711
---------- -------- ---------- ----------- ----------- ------------ -----------
Balance at December 31,
1999................... 13,975,976 $139,760 (1,150,692) $(5,205,273) $52,073,090 $ 11,753,627 $58,761,204
========== ======== ========== =========== =========== ============ ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-5
SPR INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -------------
Cash flows from operating
activities:
Net income for the period......... $ 353,929 $ 10,497,933 $ 4,638,196
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization... 1,593,415 1,364,784 435,151
Deferred taxes.................. 1,242,482 (2,331,465) 188,846
Expense related to employee
stock option plan.............. 150,984 150,984 458,886
Loss on sale of property and
equipment...................... -- 239,977 41,257
(Increase) decrease in accounts
receivable, net................ 5,222,567 (4,378,855) (3,712,391)
(Increase) decrease in prepaid
expenses and other............. 48,956 (286,320) 466,784
Increase in accounts payable.... 537,991 174,718 332,459
Increase (decrease) in accrued
expenses....................... (1,094,568) (559,953) 2,991,658
Increase (decrease) in deferred
income......................... (2,675,000) 2,975,000 --
------------ ------------ -------------
Net cash provided by operating
activities................... 5,380,756 7,846,803 5,840,846
------------ ------------ -------------
Cash flows from investing
activities:
Purchases of property and
equipment, net of sales.......... (1,348,778) (3,317,508) (1,231,084)
Purchases of marketable
securities....................... (36,267,097) (72,880,518) (182,122,189)
Sales/maturity of marketable
securities....................... 33,946,000 48,018,000 163,079,000
Decrease in notes receivable--
other............................ -- -- 10,879
Decrease in notes receivable--
related parties.................. -- -- 181,245
------------ ------------ -------------
Net cash used in investing
activities................... (3,669,875) (28,180,026) (20,082,149)
------------ ------------ -------------
Cash flows from financing
activities:
Proceeds from the sale of common
stock, net of issuance costs of
approximately $3,114,000 in 1997
and $1,705,000 in 1998,
respectively..................... -- 23,101,250 22,486,431
Treasury stock acquired........... (5,205,273)
Payments on note payable--related
party............................ -- -- (641,266)
Proceeds from employee stock
purchase plan.................... 585,265 1,142,231 324,582
Proceeds from employee stock
option plan...................... 24,046 1,187,292 --
Distributions..................... -- -- (4,635,261)
Payments on term note payable..... -- -- (216,005)
Net borrowings on line of credit
and term note.................... -- -- (1,300,000)
Other cash flows from financing
activities....................... -- (23,634) --
------------ ------------ -------------
Net cash provided by (used in)
financing activities......... (4,595,962) 25,407,139 16,018,481
------------ ------------ -------------
Net increase (decrease) in cash..... (2,885,081) 5,073,916 1,777,178
Cash and cash equivalents, beginning
of period.......................... 7,207,273 2,133,357 356,179
------------ ------------ -------------
Cash and cash equivalents, end of
period............................. $ 4,322,192 $ 7,207,273 $ 2,133,357
============ ============ =============
Supplemental disclosure of cash
payments made for:
Interest.......................... $ 379 $ 4,203 $ 178,783
Income taxes...................... 589,852 9,526,096 40,550
============ ============ =============
The accompanying notes to financial statements are an integral part of these
statements.
F-6
Notes to Financial Statements
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Business--Founded in 1973 and headquartered in the Chicago area, SPR
Inc. (the "Company") provides information technology services to Fortune 1000
companies in a variety of industry groups including transportation,
manufacturing, insurance, retail, financial services, healthcare, and energy.
These services include General Consulting as well as five outsourcing
services: software modernization, mass change, application management,
information delivery, and software quality services. The outsourcing services
help clients with comprehensive solutions for maintaining, improving and
transitioning legacy systems. SPR has offices in Oak Brook, IL, Dallas,
Milwaukee, and Tulsa.
(b) Basis of Presentation--SPR Inc. was formed on October 29, 1996. During
October 1996, Systems and Programming Resources, Inc., Systems & Programming
Resources of Tulsa, Inc., SPR Wisconsin, Inc., SPR Chicago Inc., and
Consulting Acquisition, Inc. (d.b.a. DataFlex) merged into SPR Inc. at which
time the stockholders of such companies received an aggregate of 9,700,786
shares of common stock of SPR Inc. Systems and Programming Resources, Inc.,
SPR Wisconsin, Inc., SPR Chicago Inc., Consulting Acquisition, Inc. and SPR
Inc. are under common ownership and control and were accounted for at
historical cost as a reorganization of entities under common control (similar
to the pooling of interests method of accounting). The merger of Systems &
Programming Resources of Tulsa, Inc. into SPR Inc. was accounted for using the
pooling of interests method of accounting. The accompanying financial
statements of the Company have been prepared to give retroactive effect to the
merger.
(c) Cash and Cash Equivalents--Cash equivalents are comprised of certain
highly liquid investments with maturities of three months or less.
(d) Accounts Receivable--Accounts receivable include fees and expenses for
services rendered prior to year end which were billed subsequent to year end.
Amounts relating to such fees and expenses included in accounts receivable are
$1,990,675 and $2,320,189 at December 31, 1999 and 1998, respectively. A
summary of the activity in allowance for doubtful accounts for the years ended
December 31, 1999, 1998, and 1997 is as follows:
Balance at Charged to Balance at
Beginning Costs and End of
of Year Expenses Write-Offs Year
---------- ---------- ---------- ----------
1999 Allowance for Doubtful
Accounts.................... $843,695 $(400,000) $96,984 $346,711
1998 Allowance for Doubtful
Accounts.................... $843,695 $ -- $ -- $843,695
1997 Allowance for Doubtful
Accounts.................... $ 74,399 $ 852,747 $83,451 $843,695
(e) Marketable securities--The Company invests in investment-grade
marketable securities with varying maturities. These securities include
municipal bonds and corporate bonds. The Company accounts for its investments
using Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115").
Management determines the classification of investments under SFAS No. 115 at
the time of purchase and reevaluates such classifications as of each balance
sheet date.
F-7
The carrying amounts and fair values of the Company's marketable securities
are as follows:
Years Ended December 31,
-----------------------------------------------
1999 1998
----------------------- -----------------------
Amortized Aggregate Amortized Aggregate
Cost Basis Fair Value Cost Basis Fair Value
----------- ----------- ----------- -----------
Held-to-maturity:
U.S. corporate notes maturing
within
10 years.................... $21,842,680 $21,519,123 $17,655,707 $17,640,942
----------- ----------- ----------- -----------
Available-for-sale:
U.S. corporate notes maturing
after
10 years.................... 10,084,124 10,084,124 12,700,000 12,700,000
Municipal obligations
maturing after
10 years.................... 14,300,000 14,300,000 13,550,000 13,550,000
----------- ----------- ----------- -----------
Total available-for-sale... 24,384,124 24,384,124 26,250,000 26,250,000
----------- ----------- ----------- -----------
Total short-term investments... $46,226,804 $45,903,247 $43,905,707 $43,890,942
=========== =========== =========== ===========
The following schedule shows the components of investment income at December
31, 1999, 1998 and 1997:
December 31,
------------------------------
1999 1998 1997
---------- ---------- --------
Interest Income................................. $2,453,747 $1,918,893 $244,506
Dividend Income................................. 10,967 13,696 8,997
---------- ---------- --------
Total Investment Income......................... $2,464,714 $1,932,589 $253,503
========== ========== ========
(f) Revenue Recognition--Revenues are recognized as the related services are
performed. Clients are generally billed on a time and materials basis. The
Company accounts for its fixed fee engagements under the percentage-of-
completion method, using costs incurred to date in relation to estimated total
costs of the contract to measure the stage of completion. The cumulative
effects of revisions of estimated total contract costs and revenues are
recorded in the period in which the facts requiring the revision become known.
Less than 1% and approximately 4% of revenues were generated from fixed-price
engagements during 1999 and 1998, respectively.
(g) Property and Equipment--Property and equipment are stated at cost.
Expenditures for repair and maintenance are charged to expense as incurred.
Depreciation and amortization are computed using the straight-line method. The
estimated useful lives used in computing depreciation and amortization are as
follows:
Asset Description Asset Life
----------------- ----------
Leasehold improvements........................... Shorter of lease term or
estimated useful life of
the asset
Computer equipment and software.................. 3 years
Office furniture and equipment................... 5 years
(h) Deferred Income--The determination of deferred income is based on
management's estimate of the services to be performed related to completing
the Company's century date compliance projects, and is adjusted as additional
or new information becomes available.
(i) Distributions--Distributions are recorded when declared by the board of
directors.
(j) Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-8
(k) Income Taxes--Prior to the consummation of the initial public offering
on October 1, 1997, the Company elected to be taxed as an S corporation. As a
result, income of the Company was taxable to the shareholders. On October 1,
1997, the Company's S corporation status was terminated and the Company became
a C corporation. At this time, the retained deficit of the Company was
reclassified and netted against additional paid-in capital.
(l) Pro forma net income and net income per share--The pro forma net income
and net income per share include a provision for federal and state income
taxes as if the Company had been a C corporation for all periods presented.
(m) Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year's presentation.
NOTE 2--BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The Company has no
separately reportable segments in accordance with this standard. Under the
enterprise-wide disclosure requirements of SFAS No. 131, the Company reports
net revenues by service offering. Amounts for the years ended December 31,
1999, 1998, and 1997 are shown in the table below.
December 31,
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Revenues % Revenues % Revenues %
----------- ----- ----------- ----- ----------- -----
General consulting...... $21,821,105 37.6% $30,443,400 35.7% $27,630,770 51.7%
Century date
compliance............. 13,463,779 23.2% 33,824,961 39.6% 17,215,227 32.2%
Application management.. 9,412,643 16.2% 6,033,476 7.1% 5,318,936 10.0%
Software quality........ 8,482,777 14.6% 4,221,395 4.9% -- --
All other service
offerings.............. 4,923,979 8.4% 10,820,282 12.7% 3,256,991 6.1%
----------- ----------- -----------
Total revenues........ $58,104,283 $85,343,514 $53,421,924
=========== =========== ===========
NOTE 3--CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist of accounts receivable and investments. The Company places
its investments with high quality financial institutions. The Company reviews
a customer's credit history before extending credit. In addition, the Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its accounts receivable credit risk is limited.
During 1997, the Company began performing services for a client that filed
for Chapter 11 bankruptcy protection during the third quarter of 1997. The
Company has received payments for all amounts related to the bankruptcy
period, and in 1999, the customer emerged from bankruptcy. This customer
accounted for approximately 1%, 7%, and 8% of revenues for the years ended
December 31, 1999, 1998, and 1997, respectively. The Company is continuing to
perform services for this customer.
The Company's customers are predominantly in the Midwest, with the majority
of customers located in Chicago, Tulsa, Milwaukee, and Dallas. One customer in
the telecommunication and energy industries accounted for approximately 11%,
4%, and 1% of revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. A customer in the insurance industry accounted for 6%, 7%, and
12% of revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. A transportation industry customer accounted for 6%, 11%, and 5%
of revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. The Company has no off balance sheet credit risk.
F-9
NOTE 4--INCOME TAXES
Prior to the initial public offering of the Company's Common Stock completed
on October 1, 1997 (the "Offering"), the Company included its income and
expenses with those of its stockholders for Federal and certain state income
tax purposes (an S corporation election). By this election, income of the
Company is taxable to the stockholders. In connection with the Offering, the
Company terminated its S corporation election and converted to a C
corporation. The Company recorded a deferred income tax liability and
corresponding income tax expense of $712,000, arising from the change in the
Company's tax status and a change from the cash basis to the accrual basis of
accounting for tax purposes. Beginning October 1, 1997, the Company provides
for deferred income taxes under the asset and liability method of accounting
for income taxes. This method requires the recognition of deferred income
taxes based upon the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities.
Prior to consummation of the Offering, the Company made a distribution to
its existing stockholders of part of the Company's undistributed S corporation
earnings.
The unaudited pro forma provision for income taxes presented on the
statement of operations for 1997 represents the estimated taxes that would
have been recorded had the Company been a C corporation for income tax
purposes for the entirety of this period. The pro forma provision for income
taxes is as follows:
December 31,
1997
------------
Federal......................................................... $2,736,725
State........................................................... 284,768
----------
Total income tax expense...................................... $3,021,493
==========
During 1999, 1998, and the fourth quarter of 1997, the Company was a C
corporation for income tax purposes. The provision for income taxes for 1999,
1998, and the portion of 1997 that the Company was a C corporation includes
federal and state income taxes currently payable and those deferred because of
temporary differences between the financial statement and tax bases of assets
and liabilities. The provision for income taxes consists of the following:
December 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
Current:
Federal............................. $(1,767,739) $7,627,347 $1,202,361
State............................... (386,005) 1,702,741 161,215
----------- ---------- ----------
Total current provision
(benefit)........................ (2,153,744) 9,330,088 1,363,576
Deferred:
Federal............................. 1,019,798 (1,905,973) (445,264)
State............................... 222,684 (425,492) (77,890)
----------- ---------- ----------
Total deferred provision
(benefit)........................ 1,242,482 (2,331,465) (523,154)
Initial recognition of deferred income
taxes resulting from change in tax
status............................... -- -- 712,000
----------- ---------- ----------
Total income tax provision
(benefit)........................ $ (911,262) $6,998,623 $1,552,422
=========== ========== ==========
F-10
Reconciliations of the statutory federal tax rates to the pro forma and
actual effective income tax rates are as follows:
December 31,
--------------------------
1997
------------
1999 1998 Pro
Actual Actual forma Actual
------ ------ ----- ------
Statutory rate................................ (34)% 34% 34% 34%
State taxes, net of federal benefit........... (5)% 5% 5% 1%
S Corporation income taxed to its
shareholders................................. -- % -- % -- % (24)%
Income taxes (benefited) recognized as a
result of a change in tax status............. (18)% -- % -- % 11%
Increase in valuation allowance .............. -- % -- % 6% 2%
S corporation liability associated with
indemnefication.............................. (107)%
Other......................................... -- % 1% 4% 1%
------ ---- ---- -----
Effective rate.............................. (164)% 40% 49% 25%
====== ==== ==== =====
The significant components of the Company's deferred income tax assets and
liabilities as of December 31, 1999, 1998 and 1997, are as follows:
December 31,
-----------------------------------
1999 1998 1997
---------- ---------- -----------
Deferred income tax assets:
Payroll and related............... $ 395,459 $ 443,916 $ 311,196
Allowance for doubtful accounts... 138,685 337,478 75,501
Deferred income................... 120,000 1,190,000 --
Stock options..................... 220,733 161,458 153,360
Intangibles....................... 672,464 852,998 965,064
Depreciation...................... 25,260 9,767 --
---------- ---------- -----------
Total deferred income tax assets.. 1,572,601 2,995,617 1,505,121
Valuation allowance............... (672,464) (852,998) (1,321,567)
---------- ---------- -----------
Net deferred tax income assets...... $ 900,137 $2,142,619 $ 183,554
========== ========== ===========
Deferred income tax liabilities:
Change in tax accounting method
(cash to accrual).................. $ -- $ -- $ 356,400
Depreciation........................ -- -- 16,000
---------- ---------- -----------
Total deferred income tax
liabilities...................... $ -- $ -- $ 372,400
========== ========== ===========
The Company establishes valuation allowances in accordance with the
provisions of Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS No. 109"). The Company continually reviews the
adequacy of the valuation allowance and is recognizing these benefits only as
reassessment indicates that it is more likely than not that the benefits will
be realized.
In connection with the Offering, the Company entered into a tax indemnity
agreement with each of its current stockholders which provides, among other
things, that the Company will indemnify such stockholders against additional
income taxes resulting from adjustments made (as a result of a final
determination made by a competent tax authority) to the taxable income
reported by the Company as an S corporation for periods prior to the Offering,
but only to the extent those adjustments result in a decrease in income taxes
otherwise payable by the Company as a C corporation for periods after the
Offering.
F-11
NOTE 5--CHANGE IN DEFERRED INCOME
In the fourth quarter of 1999, the Company changed its estimate of the
services to be performed related to completing the Company's century date
compliance projects. This non-cash change in estimate decreased 1999 cost of
services by approximately $2.7 million ($1.6 million net of tax). or
approximately $0.12 per diluted common share.
NOTE 6--STOCK REPURCHASE PROGRAM
On March 17, 1999 the Company announced a plan to purchase up to 1.5 million
of its shares of common stock under a stock repurchase program. The quantity
to be purchased and the targeted price was determined daily, based upon
management's discretion. As of December 31, 1999, the Company has purchased
1,150,692 shares at an average price per share of $4.52.
NOTE 7--LINES OF CREDIT AND LONG-TERM DEBT
In June 1997, the Company entered into a loan agreement that provided for a
revolving loan facility and a term loan facility. The revolving loan facility
allowed for maximum borrowings of the lesser of (a) $2,000,000 less the
undrawn face amount of letters of credit or (b) the borrowing base, as
defined, less the undrawn face amount of letters of credit. Interest on
revolving loans was at the bank's prime rate (8.5% at December 31, 1997). The
revolving loan facility matured in March 1998. The term loan facility provided
for maximum borrowings of $2,000,000 for use for certain purposes and was
cancelled upon consummation of the initial public offering in October 1997.
Interest was payable quarterly at the prime rate plus 1% (9.5% at December 31,
1997). The Company paid off borrowings under these facilities using proceeds
from the offering. As of December 31, 1999, 1998 and 1997, there were no loans
outstanding.
Substantially all assets of the Company were collateral for borrowings under
the loan agreement. The agreement contained certain restrictions, prohibiting,
among other things, additional indebtedness without the lender's consent. The
term loan agreement contained certain covenants including, among others, a
requirement of a cash flow coverage ratio of not less than 1.1 to 1.0. The
Company was in compliance with all loan covenants at the date the borrowings
were repaid.
NOTE 8--LEASE AGREEMENTS
The Company leases its office facilities under operating lease agreements
that expire at various times through 2004. In addition, the Company leases
certain equipment under operating lease agreements.
In addition to the minimum future rental payments, the Company is obligated
to pay certain operating expenses relating to its leased properties and
equipment. Total expense under operating leases was approximately $1,591,000,
$990,000, and $684,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The following is a schedule of minimum future rental payments
required under the operating leases:
Year Ended December 31,
-----------------------
2000............................................................. 1,318,141
2001............................................................. 1,213,913
2002............................................................. 1,080,212
2003............................................................. 818,527
2004............................................................. 493,259
----------
Total minimum payments required................................ $4,924,052
==========
F-12
NOTE 9--401(K) PROFIT-SHARING PLAN
The Company has a contributory 401(k) profit-sharing plan (the "Plan")
covering substantially all full-time employees. The Plan allows participants
to contribute up to 22% of their total compensation on a pretax basis, up to a
specified amount. Beginning in 1999, the Company is required to contribute
annually one-half of the first 6% of the participants' contributions, up to a
maximum of $2,000 per participant. The total Company contribution for the year
ended December 31, 1999 was approximately $640,000. Through 1998, the Company
was required to contribute annually one-fourth of the first $2,000 of the
participants' contributions, up to a maximum of $500 per participant. The
total Company contribution was approximately $224,000 and $126,000 for the
years ended December 31, 1998 and 1997, respectively.
NOTE 10--COMMITMENTS AND CONTINGENCIES
Letter of Credit--The Company had letters of credit of $55,000 and $78,700
at December 31, 1999 and 1998 as security for a lease agreement. The letter of
credit is renewable each year.
Litigation--In the ordinary course of conducting its business the Company
becomes involved in various lawsuits related to its business. The Company does
not believe that the ultimate resolution of these matters will be material to
its business, financial position or results of operations.
Employment Contracts--During 1998, the Company entered into employment
contracts with certain employees. The employment contracts provide that in the
event of a change in control the employee is entitled to a sum equal to (i)
one year of the employee's effective annual base compensation immediately
prior to the termination date, plus (ii) an amount equal to the prior year's
cash bonus, plus (iii) cash value in the health plan. If a change in control
occurred, as defined, at December 31, 1999, the Company's total commitment
under the employment contracts would be approximately $2.1 million.
NOTE 11--STOCK PLANS
Description
In June 1999, the Company's shareholders approved the 1999 Combined
Incentive and Non-statutory Stock Option Plan. The 1999 plan provides for the
granting of options to purchase a maximum of 1,250,000 shares of common stock.
In November 1996, the Company adopted a Combined Incentive and Non-statutory
Stock Option Plan and an Employee Stock Purchase Plan. 1,566,378 shares of
common stock are reserved for issuance under the 1996 Combined Incentive and
Non-statutory Stock Option Plan and 750,000 shares of common stock are
reserved for issuance under the Employee Stock Purchase Plan.
The 1999 Combined Incentive and Non-statutory Stock Option Plan provides
that awards may be granted to employees, officers, and directors of the
Company. Awards may consist of non-statutory stock options and incentive stock
options to purchase shares of common stock and restricted stock purchase
rights. Options granted under the plan generally vest over a five-year period
at the rate of 20% per year. The exercise price per share of common stock may
not be less than 85% (100% in the case of an ISO) of the fair market value of
the common stock on the date the option is granted. Options and restricted
stock purchase rights granted under the option plan must generally be
exercised within ten years from the date of grant. In the case of any eligible
employee who owns stock possessing more than 10% of the voting power of stock,
the exercise price of any options granted may not be less than 110% of the
fair market value of the common stock on the date of grant and the exercise
period may not exceed five years from the date of grant. If the Company is
acquired by another entity, outstanding awards may be assumed or substituted
by the successor corporation, if any. If a successor corporation does not
assume or substitute the awards, the vesting of the awards will be
accelerated.
The 1996 Combined Incentive and Non-statutory Stock Option Plan provides
that awards may be granted to employees, officers, and directors of the
Company. Awards may consist of non-statutory stock options and incentive stock
options to purchase shares of common stock and stock appreciation rights
("SARs"). Incentive
F-13
stock options ("ISOs") generally vest over a five-year period at the rate of
20% per year. The exercise price per share of common stock may not be less
than 85% (100% in the case of an ISO) of the fair market value of the common
stock on the date the option is granted. Options and SARs granted under the
option plan must generally be exercised within ten years from the date of
grant. In the case of any eligible employee who owns stock possessing more
than 10% of the voting power of stock, the exercise price of any ISOs granted
may not be less than 110% of the fair market value of the common stock on the
date of grant and the exercise period may not exceed five years from the date
of grant. In the event of a change in control, as defined, options vest
immediately.
The Employee Stock Purchase Plan permits eligible employees, who customarily
work more than 20 hours per week and more than five months in any calendar
year, to purchase common stock through payroll deductions of up to 20% of
their total cash compensation, provided that no employee may purchase more
than $25,000 worth of stock in any calendar year. The purchase price is the
lesser of 85% of the market value of the common stock on the first or last day
of the offering period, as defined.
Activity
Stock option activity for the Company's Combined Incentive and Non-statutory
Stock Option Plan for the years ended December 31, 1997, 1998, and 1999 is as
follows:
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- -------- --------
Outstanding @12/31/96................ 645,348 $ 8.94 46,991 $8.94
Granted.............................. 1,431,709 $ 6.26 489,479 $5.35
Exercised............................ -- -- -- --
Cancelled/Expired.................... (1,297,745) $ 8.28 (93,982) $8.28
---------- ------ -------- -----
Outstanding @12/31/97.............. 779,312 $ 5.11 442,488 $5.11
Granted.............................. 221,175 $18.55 -- --
Exercised............................ (111,663) $ 5.11 (120,836) $5.11
Cancelled/Expired.................... (68,501) $ 9.36 -- --
---------- ------ -------- -----
Outstanding @12/31/98.............. 820,323 $ 8.38 321,652 $5.11
Granted.............................. 221,000 $ 3.83 26,000 4
Exercised............................ (3,880) $ 6.20 -- --
Cancelled/Expired.................... (279,157) $ 8.37 -- --
---------- ------ -------- -----
Outstanding @12/31/99................ 758,286 $ 7.06 347,652 $5.01
========== ====== ======== =====
The number of options exercisable and the number of options available for
grant at December 31, 1999, 1998, and 1997 are shown below:
December 31,
-------------------------
1999 1998 1997
--------- ------- -------
Options exercisable at year-end.................... 487,607 342,655 415,088
Options available for grant at year-end............ 1,474,061 191,904 344,578
F-14
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------
Weighted Average
Remaining Weighted Average
Number of Contractual Life Exercise Weighted Average
Exercise Price Options (in Years) Price Options Price Number of Exercise
-------------- ------------------ ---------------- ---------------- --------- ----------------
$3.75................... 186,500 9.3 $ 3.75 15,000 $ 3.75
$4.13................... 50,000 9.3 $ 4.13 -- --
$5.11................... 733,088 7.4 $ 5.11 443,897 $ 5.11
$10.75.................. 40,350 8.0 $10.75 8,310 $10.75
$21.00.................. 96,000 8.5 $21.00 20,400 $21.00
--------- -------
$3.75-$21.00............ 1,105,938 7.9 $ 6.42 487,607 $ 5.83
========= =======
Accounting
The Company currently utilizes Accounting Principles Board Opinion No. 25 in
its accounting for stock plans. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123"). The accounting
method as provided in the pronouncement is not required to be adopted;
however, it is encouraged. The Company is not adopting the accounting
provisions of SFAS No. 123. Had the Company accounted for its stock plans in
accordance with SFAS No. 123, the Company's net income (loss) and earnings
(loss) per share for the years ended December 31, 1999, 1998, and 1997, would
have been shown as the pro forma amounts indicated below:
1999 1998 1997
----------- ----------- -----------
Net income (a)...................... $ 353,929 $10,497,933 $ 3,169,125
SFAS No. 123 adjustment (net of
tax)............................... $ (597,420) $ (593,100) $ (721,168)
Proforma net income (loss).......... $ (243,491) $ 9,904,833 $ 2,447,957
Basic Shares........................ 13,375,569 13,144,412 10,306,032
Diluted Shares...................... 13,375,569 13,641,558 10,669,071
Pro forma basic EPS................. $ (0.02) $ 0.75 $ 0.24
Pro forma diluted EPS............... $ (0.02) $ 0.73 $ 0.23
- --------
(a) The amounts shown in 1997 are pro forma net income amounts adjusted to
recognize the tax impacts of the Company's conversion to a C corporation.
The pro forma disclosure is not likely to be indicative of pro forma
results, which may be expected in future years because of the fact that
options vest over several years. Compensation expense is recognized as the
options vest and additional awards may also be granted.
For purposes of determining the pro forma effect of stock options, the fair
value of each option is estimated on the date of grant based on the Black-
Scholes option pricing model, assuming:
Options
Granted
During:
-----------------
1999 1998 1997
---- ---- ----
Volatility................................................ 70.0% 55.0% 41.0%
Dividend Yield............................................ 0.0% 0.0% 0.0%
Risk-free interest rate................................... 4.9% 5.4% 6.5%
Expected life in years.................................... 5 5 5
The weighted average fair values of options granted under the Company's
Combined Incentive and Non-Statutory Stock Option Plan for the years ended
December 31, 1999, 1998, and 1997, were $2.30, $9.87, and $3.06, respectively.
F-15
For purposes of determining the pro forma effect of the Employee Stock
Purchase Plan purchase rights, the fair value of each purchase right is
estimated on the date of grant based on the Black-Scholes option pricing
model, assuming:
Employee Stock Purchase
Plan
Purchase Rights Issued
During:
-------------------------
1999 1998 1997
--------- -------- ----
Volatility........................................... 70.0% 55.0% 41.0%
Dividend yield....................................... 0.0% 0.0% 0.0%
Risk-free interest rate.............................. 4.6%-5.0% 5.2%-5.4% 5.3%
Expected life in months.............................. 6 6 3
The weighted average fair values of purchase rights issued under the
Company's Employee Stock Purchase Plan for the years ended December 31, 1999,
1998, and 1997 were $3.59, $4.71, and $2.50, respectively.
NOTE 12--EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 changed the methodology of calculating earnings per share
and renamed the two calculations to basic earnings per share and diluted
earnings per share. The Company adopted SFAS No. 128 in December 1997, and has
retroactively restated all periods presented. Basic earnings per common share
are based on the average quarterly weighted average number of shares of common
stock outstanding. Diluted earnings per common share are adjusted for the
assumed exercise of dilutive stock options.
Under the requirements of SFAS No. 128, the Company's basic and diluted per
share amounts for the years ending December 31, 1999, 1998, and 1997 would be
as follows:
Year Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
------- ------- --------- ------- ------- --------- ------- ------- ---------
(000's) (000's) (000's) (000's) (000's) (000's)
Basic EPS (a): $354 13,376 $0.03 $10,498 13,144 $0.80 $3,169 10,306 $0.31
Income available to
Common Stockholders
Effect of Dilutive
Securities:
Employee Compensation
Plans.................. -- 137 -- -- 497 (0.03) -- 363 (0.01)
---- ------ ----- ------- ------ ----- ------ ------ -----
Dilutive EPS:
Income available to
Common Stockholders
plus assumed
exercises............. $354 13,513 $0.03 $10,498 13,641 $0.77 $3,169 10,669 $0.30
==== ====== ===== ======= ====== ===== ====== ====== =====
- --------
(a) The amounts shown in 1997 are pro forma net income amounts adjusted to
recognize the tax impacts of the Company's conversion to a "C"
Corporation.
NOTE 13--RELATED PARTY TRANSACTIONS
The Company paid approximately $324,000, $340,000, and $480,000 during 1999,
1998, and 1997, respectively, in fees to a law firm having a partner whom is a
stockholder of the Company and who is a brother of certain executive officers
of the Company. A portion of the fees paid in 1998 and 1997 related to
services performed by such firm in connection with the 1996 mergers and the
1997 and 1998 offerings. In 1999, $159,000 of the $324,000 was attributed to a
failed merger. In addition, fees of $128,000 were paid to another law firm
having a partner whom is a stockholder of the Company and a brother of certain
executive officers of the Company in 1999.
F-16
During 1999 and 1998, the Company paid approximately $196,000 and $314,000,
respectively, for SPR's consulting professionals to attend training classes at
a higher education company having a president and chief operating officer who
is a director of the Company.
NOTE 14--FOLLOW-ON PUBLIC OFFERING
On May 5, 1998, the Company completed a follow-on public offering of
3,719,250 shares of the Company's common Stock. The company sold 1,350,000
shares in the follow-on public offering and received $23.1 million in net
proceeds from the sales of such shares.
NOTE 15--STOCK SPLITS
On September 26, 1997, the Company's board of directors approved a 1.044-to-
1 split of the Company's common stock in the form of a stock dividend. All
common stock and per share amounts have been adjusted retroactively to give
effect to this stock split.
On August 3, 1998, the Company's board of directors approved a three-for-two
share common stock split. Shareholders received one additional share for every
two shares held on the record date of August 14, 1998. Distribution of the
additional shares began on August 28, 1998. Cash was paid in lieu of
fractional shares. All shares and per share amounts reported in this filing
have been restated to reflect the three-for-two share common stock split.
NOTE 16--SUBSEQUENT EVENT
On January 28, 2000, SPR and Leapnet, Inc. announced a merger of Brassie
Corporation, a wholly owned subsidiary of Leapnet, with and into SPR, under a
definitive merger agreement. The board of directors of each company has
approved the merger and has recommended that their shareholders vote in favor
of the merger. The transaction will be structured as a tax-free purchase by
Leapnet. Each of SPR's common shares will be exchanged for 1.085 shares of
Leapnet's common stock.
F-17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on March 30, 1999 on its behalf by the
undersigned, thereunto duly authorized.
SPR Inc.
/s/ Robert M. Figliulo
By: _________________________________
Robert M. Figliulo
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ Robert M. Figliulo Chief Executive Officer and Chairman
______________________________________ of the Board of Directors
Robert M. Figliulo (Principal Executive Officer)
/s/ Stephen J. Tober Chief Operating Officer and Director
______________________________________
Stephen J. Tober
/s/ Stephen T. Gambill Vice President and Chief Financial
______________________________________ Officer (Principal Financial
Stephen T. Gambill Officer)
/s/ David A. Figliulo Executive Vice President and
______________________________________ Director
David A. Figliulo
/s/ Ronald L. Taylor Director
______________________________________
Ronald L. Taylor
/s/ Sydnor W. Thrift, Jr. Director
______________________________________
Sydnor W. Thrift, Jr.
/s/ David P. Yeager Director
______________________________________
David P. Yeager