<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21682
SPARTA, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0775889
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization)
23041 AVENIDA DE LA CARLOTA, SUITE 325, LAGUNA HILLS, CA 92653-1595
(Address of principal executive offices)
(Zip Code)
(714) 768-8161
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 or 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
--- ---
As of May 3, 1996, the registrant had 6,014,502 shares of common stock, $.01 par
value per share, issued and outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
<PAGE> 3
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
- - ----------------------------
THREE MONTHS ENDED MARCH 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
SALES $14,927,000 $15,215,000
----------- -----------
COSTS AND EXPENSES:
Labor costs and related benefits 8,289,000 8,308,000
Subcontractor & other costs 2,907,000 2,831,000
Facility costs 1,682,000 1,924,000
Travel and other 840,000 1,565,000
Interest expense, net 29,000 105,000
----------- -----------
13,747,000 14,733,000
----------- -----------
INCOME BEFORE PROVISION FOR
TAXES ON INCOME 1,180,000 482,000
Provision for taxes on income 496,000 202,000
----------- -----------
NET INCOME $ 684,000 $ 280,000
=========== ===========
EARNINGS PER SHARE (1) $ 0.08 $ 0.04
=========== ===========
</TABLE>
(1) Earnings per shares adjusted for interest and accretion - See Exhibit 11
The accompanying notes are an integral part of the financial statements
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE STATEMENT
(UNAUDITED)
MARCH DECEMBER 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 960,000 $ 222,000
Accounts receivable 18,360,000 19,744,000
Income tax receivable 0 57,000
Prepaid expenses 457,000 357,000
------------ ------------
TOTAL CURRENT ASSETS 19,777,000 20,380,000
Equipment and improvements, net 5,521,000 5,757,000
Other assets 2,334,000 2,525,000
------------ ------------
$ 27,632,000 $ 28,662,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation $ 2,627,000 $ 2,766,000
Accounts payable and other accrued expenses 3,321,000 4,261,000
Current portion of notes payable 11,000 19,000
Current portion of subordinated debt 783,000 1,209,000
Deferred income taxes 3,418,000 2,649,000
------------ ------------
TOTAL CURRENT LIABILITIES 10,160,000 10,904,000
------------ ------------
NOTES PAYABLE 11,000 953,000
------------ ------------
SUBORDINATED NOTES PAYABLE 1,659,000 1,735,000
------------ ------------
DEFERRED INCOME TAXES 3,874,000 4,125,000
------------ ------------
Commitment and contingencies
REDEEMABLE PREFERRED STOCK
Preferred stock, $.01 par value; 2,000,000 shares authorized;
440,851 and 376,474 shares issued and outstanding 2,054,000 1,535,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000 shares authorized;
11,966,362 and 11,754,560 shares issued and outstanding 120,000 118,000
Additional paid-in capital 20,501,000 19,823,000
Retained earnings 18,923,000 18,455,000
Treasury stock (29,630,000) (28,986,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,914,000 9,410,000
------------ ------------
$ 27,632,000 $ 28,662,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 686,000 $ 280,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 390,000 403,000
Loss on sale of equipment 41,000 4,000
Employee compensation paid in stock 653,000 608,000
Decrease in accounts receivable 0 120,000
Changes in assets and liabilities:
Accounts receivable 1,441,000 330,000
Prepaid expenses (100,000) (30,000)
Other assets 192,000 78,000
Accrued compensation (139,000) 141,000
Accounts payable and other accrued expense (940,000) (1,349,000)
Income taxes payable 761,000 (376,000)
Deferred income taxes (283,000) (282,000)
Tax benefit relating to stock plan 0 1,000
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,702,000 (72,000)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (196,000) (214,000)
Cost of acquisition, net of cash acquired 0 (150,000)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (196,000) (364,000)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable preferred stock 300,000 300,000
Proceeds from issuance of stock 27,000 78,000
Cash purchases of treasury stock (643,000) (432,000)
Net (repayments) proceeds line-of-credit agreement (942,000) 1,294,000
Principal payments on debt (510,000) (476,000)
---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (1,768,00) 764,000
---------- -----------
NET INCREASE IN CASH 738,000 328,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 222,000 122,000
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 960,000 $ 450,000
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 29,000 $ 105,000
========== ===========
Income taxes $ 37,000 $ 861,000
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 6
SPARTA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying financial information has been prepared in accordance with the
instructions to Form 10-Q and therefore does not necessarily include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The Company's fiscal year is the 52 or 53 week period ending on the Friday
closest to December 31. The Company's last fiscal year ended on December 29,
1995; and, its first quarter ended March 29, 1996 and corresponding first
quarter last year on March 30, 1995. To aid the reader of the financial
statements, the year end has been presented as December 31, 1995 and the
quarters and nine months ended March 31, 1995 and March 31, 1996.
In the opinion of management, the unaudited financial information for the
three-month periods ended March 31, 1996 and March 31, 1995 reflects all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof.
NOTE B - RECEIVABLES
Unbilled accounts receivable include $2,106,000 of costs incurred on projects
for which the Company has been requested by the customer to begin work under a
new contract or extend work under a present contract, but for which final
contract negotiations or formal contracts or contract modifications have not
been executed at March 31, 1996.
NOTE C - INCOME TAXES
Income taxes for interim periods are computed using the estimated annual
effective rate method.
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management Discussion and Analysis of Financial Condition and Results of
Operation contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from
projections contained in forward-looking statements. For a more complete
discussion of the factors which could cause such a difference, the Company's
Form 10-K for the year ended December 31, 1995 should be consulted.
The following table sets forth, for the periods indicated, selected financial
results from the Company's continuing operations and audited Financial
Statements.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1996 1995
------------ ---------------
<S> <C> <C>
Sales 14,927,000 15,215,000
Gross profit (1) 1,347,000 869,000
Gross profit as a % of costs 9.93% 6.06%
Net income (2) 684,000 280,000
Number of staff 443 448
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT
---------------------------------------------------
March 31, 1996 Dec. 31, 1995 March 31, 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Funded 12 month backlog 17,500,000 12,000,000 17,100,000
Total 12 mo. contract backlog 62,700,000 67,300,000 56,400,000
Stockholders equity 9,914,000 9,410,000 10,136,000
Equity per common share 1.53 1.47 1.54
Stock repurchase notes 2,442,000 2,944,000 3,792,000
Line of credit 0 942,000 3,567,000
Number of days sales in receivables 106 110 128
Current ratio 1.9 1.7 2.1
</TABLE>
(1) The company defines gross profits as sales less costs and expenses
excluding interest costs and certain expenses which cannot be billed to its
government customers.
(2) Prior to adjustments for interest and accretion on stock - See Exhibit I
REVENUES
The Company's contract revenues for the first quarter were down 1.9% from the
corresponding three month period in 1995. Profitability for the three month
period ended March 31, 1996, was up 59.2% when compared to the corresponding
period in 1995. The quarterly profitability increase represented primarily a
return to historic profit rates as the depression on profitability of the
Company's former commercial accounting subsidiary, ACT, and reduced profit
recognition rates from the winding down of the Company's offshore oil platform
instrumentation contracts which impacted the first quarter profitability in 1995
no longer exist. There were no borrowings against the Company's line of credit
as of the end of the first quarter as compared to a borrowing level of
$3,567,000 at the end of the corresponding period in 1995. The Company believes
the reduction in borrowing requirements will continue through the second quarter
and will contribute to improved net profitability.
<PAGE> 8
ANNUALIZED BACKLOG
During the first quarter, the Company had one major competitive win and one
major competitive loss, both as prime contractor. The major win was a
competitive recompete of its Air Force Phillips Laboratory ("AFPL") SETA
contract at Edwards Air Force Base, California. The contract value is for
$20,300,000 over a period of 5 years at an expected uniform rate of expenditure.
The Company believes that the contract will be fully funded. The major loss was
also an AFPL contract for Integration Support Services worth approximately
$50,000,000 over 5 years. There were also a number of small contract value wins
and losses during the first quarter.
Annualized contract backlog decreased 6.7% in the first quarter, from
$67,300,000 to $62,700,000. Significant reduction in annualized backlog came as
a result of (1) reduced future funding for the Company's Terminal Missile
Defense COEA effort, (2) delay in future funding on the Test Bed/FMP and ISA
contracts, (3) a stretchout of the THAAD program where the Company is a
subcontractor to Lockheed., and (4) reduction in future funding on the SSDC
Logistics contract. These reductions in backlog totaled approximately
$8,000,000. These reductions were, in part, offset by backlog increases in
several operations. The current annualized backlog is approximately $62,700,000.
As a result of these reductions in backlog, the Company estimates the projected
sales in 1996 at $66,000,000.
FACILITIES
The downsizing experienced in 1993 and 1994 required from reductions in the BMDO
budget has stabilized. The reduced staff levels from prior years had caused a
temporary period of unused or excess leased facilities. Management has made a
concerted effort to reduce facility costs by lease buyouts, subletting excess
space and re-negotiating existing leases and consolidating as leases terms
expire. These efforts have been successful and excess capacity has been to a
large extent eliminated.
LIQUIDITY AND CAPITAL RESOURCES
SPARTA's primary sources of liquidity are funds provided by operations and the
bank line of credit. The line of credit provides for borrowings up to
$10,000,000 with all borrowing due December 1, 1997. There were no borrowings
under the line of credit at March 31, 1996.
STOCKHOLDER EQUITY
The major staff reduction starting in mid 1993 and continuing through much of
1994 and having stabilized in 1995 resulted in a financial strain on the
Company's capital resources. The Company's past policy has been to buy back the
stockholdings of all individuals leaving the Company, so as to retain all
stockholdings among active employees. The 40% reduction in the Company's staff
level during the period resulted in the termination of employees who held, in
the aggregate, approximately 30% of the Company's total Common Stock then
outstanding. Consequently, the Company suspended the policy of repurchasing
stock with promissory notes from terminating employees in April of 1994 and also
significantly cut-back cash repurchases of stock from terminating employees as a
result of the limitations of the stock plan. This action was taken to restore
stockholders' equity. The Company has increased stockholder's equity from
$9,202,000 at the end of 1994 to $9,410,000 at the end of 1995. Stockholder
equity on March 31, 1996 was $9,912,000. This included a one time repurchase of
$1,000,000 of stock from shareholders in July of 1995. This one time repurchase
was authorized by the Board of Directors to provide additional stock liquidity
to any stockholder who wanted to participate in the repurchase.
STOCK PURCHASE AGREEMENT
In November 1994, the Company entered into a Stock Purchase Agreement (the
"Agreement") with Science Applications International Corporation ("SAIC"), under
which SAIC was obligated to buy, during the first year of the Agreement, shares
of the Company's Preferred Stock with an aggregate price of $1,200,000. Under
the Agreement, SAIC also has the option, but not the obligation, to buy
additional shares of Preferred Stock, provided that SAIC's total purchases
during any quarter may not exceed $600,000 and provided further, that the total
number of shares of Preferred Stock purchases during any quarter may not exceed
the total number of shares of Common Stock offered to the Company for repurchase
by the Company's existing stockholders. The purchase price for all shares
purchased under the Agreement by SAIC is equal to the then current Formula Price
applicable to the Company's Common Stock. The Agreement provides that SAIC's
rights to purchase Preferred Stock will be suspended if and to the extent that
any purchase would cause the aggregate number of shares of the Preferred Stock
held by SAIC to exceed 19.9% of the total capital stock of the Company then
<PAGE> 9
outstanding. In any event, SAIC's rights to purchase shares of the Company's
Preferred Stock under the Agreement will terminate on the tenth anniversary of
the Agreement, or earlier upon the occurrence of certain specified events. Under
the Agreement, if SAIC's ownership of shares of the Company's Preferred Stock
causes the Company to cease to be considered a "small business" for purposes of
any governmental program or award, the Company will have the option to
repurchase the Preferred Stock then held by SAIC at a price equal to the current
Formula Price. The Agreement also grants SAIC the right, exercisable after the
second anniversary of the Agreement, to require the Company to repurchase all of
the Preferred Stock then held by SAIC at the then current Formula Price. In the
event the option is exercised, the Company may issue SAIC a subordinated note
bearing an interest rate equal to the lesser of prime or 10%. The Company
intends to use the proceeds of sales of Preferred Shares under the Agreement to
improve the liquidity of the holders of the Company's Common Stock. SAIC
purchased an additional $300,000 worth of SPARTA preferred stock in the first
quarter of 1995, bringing its total purchase to $1,800,000 which represents 6.8%
of the outstanding stock.
STOCK REPURCHASE PROGRAM
The Company continues to conduct its repurchase program, under which the Company
repurchases shares of the Company's stock desired to be sold by the Company's
existing stockholders. All such stock repurchases (whether from terminating
employees or others) are subject to quarterly restrictions which are designed to
insure that the Company's liquidity and equity are not materially impaired. The
Company's stock price is determined by a formula. Under the current Formula
Price for pricing stock, liquidity is not a factor in the equation. However, it
should be noted that any extended period of non-liquidity may require the Board
of Directors to make a change in the stock price formula to factor in the lack
of liquidity. The Formula Price is reviewed annually by an independent stock
appraiser to assure the Board of Directors that the stock price formula is
calculating a price within a reasonable fair market price range.
RECEIVABLES TURN-AROUND
Days sales outstanding decreased to 106 days at March 31, 1996, from 110 days at
December 31, 1995, and from 128 days at March 31, 1995. The decrease was caused
by an active program to turn around receivables, the billing of retentions for
DCAA audited years 1990 through 1993, and the completion of the large Heidrun
off-shore oil platform instrumentation program. The Company continues to
actively monitor receivables with emphasis placed on collection activities.
DEBT-TO-EQUITY
The Company's debt-to-equity ratio, as defined by the bank, was 0.9 at March 31,
1996 versus 1.0 at December 31, 1995 and 1.1 at March 31, 1995. The decline was
caused by reductions in debt. All capital expenditures were financed through
operating funds and the revolving line of credit. The Company anticipates that
its existing capital resources will be adequate for its planned operations for
the foreseeable future.
EFFECTS OF INFLATION
The majority of the Company's contracts are cost reimbursement type contracts or
are completed within one year. As a result, the Company has been able to
anticipate increases in costs when pricing its contracts. Bids for longer term
fixed-price and time-and-materials type contracts typically include labor and
other cost escalations in amounts expected to be sufficient to cover cost
increases over the period of performance. Consequently, while costs and revenues
include an inflationary increase commensurate with the general economy, net
income as a percentage of revenues has not been significantly impacted by the
effects of inflation.
<PAGE> 10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPARTA, INC.
/s/ B. WARREN KNUDSON
------------------------------
Date: May 6, 1996 B. Warren Knudson
Vice President and Chief
Financial Officer
(Principal financial and chief
accounting officer)
<PAGE> 11
EXHIBIT INDEX
SPARTA, INC.
QUARTER ENDED MARCH 31, 1996
Exhibit
No. Description of Exhibits
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
<TABLE>
<CAPTION>
SPARTA, INC.
EXHIBIT TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------
COMPUTATION OF PER SHARE EARNINGS
---------------------------------
THREE MONTHS ENDED MARCH 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
PRIMARY
Net income from Operations $ 684,000 $ 280,000
Interest and accretion (219,000) -
----------- -----------
Net income (Note 1) $ 465,000 $ 280,000
=========== ===========
Average shares outstanding 5,980,247 6,407,000
Dilutive stock options - based on the treasury stock
method using the average established price ----------- -----------
Total 5,980,247 6,407,000
----------- -----------
Per share amounts $ 0.08 $ 0.04
=========== ===========
FULLY DILUTED
Net income from Operations $ 684,000 $ 280,000
Interest and accretion (219,000) -
----------- -----------
Net income (Note 1) $ 465,000 $ 280,000
=========== ===========
Average shares outstanding 5,980,247 6,407,000
Dilutive stock options - based on the treasury stock
method using the quarter end or exercise date
established price if higher than the average
established price ----------- -----------
Total 5,980,247 6,407,000
----------- -----------
Per share amounts $ 0.08 $ 0.04
=========== ===========
</TABLE>
Note 1 - Net income has been adjusted for interest expense (net of tax)
resulting from the assumption that a portion of the proceeds received under
option exercise has been used to retire debt and accretion on Preferred Stock.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 960
<SECURITIES> 0
<RECEIVABLES> 19101
<ALLOWANCES> 741
<INVENTORY> 0
<CURRENT-ASSETS> 19777
<PP&E> 16245
<DEPRECIATION> 10724
<TOTAL-ASSETS> 27632
<CURRENT-LIABILITIES> 10160
<BONDS> 0
2054
0
<COMMON> 20621
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27632
<SALES> 14927
<TOTAL-REVENUES> 14927
<CGS> 13580
<TOTAL-COSTS> 13580
<OTHER-EXPENSES> 167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> 1180
<INCOME-TAX> 496
<INCOME-CONTINUING> 684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 684
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
