<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 June 30, 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 June 28, 1996, the registrant had 6,084,039 shares of common stock, $.01
par value per share, issued and outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
<PAGE> 3
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- -------------------------
1996 1995 1996 1995
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $18,237,000 $16,073,000 $33,164,000 $31,288,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Labor costs and related benefits 8,346,000 7,743,000 16,635,000 16,051,000
Subcontractor & other costs 5,365,000 4,063,000 8,272,000 6,894,000
Facility costs 1,788,000 1,833,000 3,470,000 3,757,000
Travel and other 1,111,000 1,231,000 1,951,000 2,796,000
Loss on sale of ACT -- 700,000 -- 700,000
Interest expense, net 11,000 150,000 40,000 255,000
----------- ----------- ----------- -----------
16,621,000 15,720,000 30,368,000 30,453,000
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
TAXES ON INCOME 1,616,000 353,000 2,796,000 835,000
PROVISION FOR TAXES ON INCOME 679,000 148,000 1,174,000 350,000
----------- ----------- ----------- -----------
NET INCOME $ 937,000 $ 205,000 $ 1,622,000 $ 485,000
=========== =========== =========== ===========
EARNINGS PER SHARE(1) $ 0.17 $ 0.03 $ 0.25 $ 0.08
=========== =========== =========== ===========
</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
CONSOLIDATED BALANCE STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE DECEMBER 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,101,000 $ 222,000
Accounts receivable 19,245,000 19,744,000
Income tax receivable - 57,000
Prepaid expenses 486,000 357,000
------------ ------------
TOTAL CURRENT ASSETS 22,832,000 20,380,000
Equipment and improvements, net 5,534,000 5,757,000
Other assets 1,603,000 2,525,000
------------ ------------
$ 29,969,000 $ 28,662,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation $ 2,611,000 $ 2,766,000
Accounts payable and other accrued expenses 5,029,000 4,261,000
Current portion of notes payable 11,000 19,000
Current portion of subordinated debt 821,000 1,209,000
Deferred income taxes 3,454,000 2,649,000
------------ ------------
TOTAL CURRENT LIABILITIES 11,926,000 10,904,000
------------ ------------
NOTES PAYABLE 3,000 953,000
------------ ------------
SUBORDINATED NOTES PAYABLE 1,370,000 1,735,000
------------ ------------
DEFERRED INCOME TAXES 3,551,000 4,125,000
------------ ------------
Commitments and contingencies
REDEEMABLE PREFERRED STOCK
Preferred stock, $.01 par value; 2,000,000 shares
authorized; 507,815 and 376,474 shares issued
and outstanding 2,275,000 1,535,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000 shares authorized;
12,176,917 and 11,754,560 shares issued and outstanding 122,000 118,000
Additional paid-in capital 21,019,000 19,823,000
Retained earnings 19,809,000 18,455,000
Treasury stock (30,106,000) (28,986,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,844,000 9,410,000
------------ ------------
$ 29,969,000 $ 28,662,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 5
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------------
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,622,000 $ 485,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 795,000 868,000
Loss on sale of equipment 103,000 5,000
Employee compensation paid in stock 987,000 924,000
Decrease in accounts receivable 0 120,000
Changes in assets and liabilities:
Accounts receivable 556,000 313,000
Prepaid expenses (130,000) 44,000
Other assets 923,000 476,000
Accrued compensation (155,000) 140,000
Accounts payable and other accrued expense 768,000 (1,220,000)
Income taxes payable 797,000 (1,150,000)
Deferred income taxes (566,000) (565,000)
Tax benefit relating to stock plan 1,000 1,000
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,701,000 441,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (676,000) (510,000)
Cost of acquisition, net of cash acquired 0 (150,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (676,000) (660,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable preferred stock 600,000 600,000
Proceeds from issuance of stock 84,000 190,000
Cash purchases of treasury stock (1,119,000) (830,000)
Net (repayments) proceeds line-of-credit agreement (942,000) 1,137,000
Principal payments on debt (769,000) (853,000)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (2,146,000) 244,000
----------- -----------
NET INCREASE IN CASH 2,879,000 25,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 222,000 122,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,101,000 $ 147,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 40,000 $ 255,000
=========== ===========
Income taxes $ 943,000 $ 1,365,000
=========== ===========
</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 second quarter ended June 30, 1996 and corresponding second
quarter last year on June 30, 1995. To aid the reader of the financial
statements, the year end has been presented as December 31, 1995 and the
quarters and six months ended June 30, 1995 and June 30, 1996.
In the opinion of management, the unaudited financial information for the
six-month period ended June 30, 1996 and June 30, 1995 reflects all adjustments
(which include only normal, recurring adjustments) necessary for a fair
presentation thereof.
NOTE B - RECEIVABLES
- --------------------
Unbilled accounts receivable include $1,025,000 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 June 30, 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.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For three months ended June 30, For six months ended June 30,
------------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
Sales 18,247,000 16,073,000 33,164,000 31,288,000
Gross profit(1) 1,863,000 886,000 3,210,000 2,215,000
Gross profit as a % of costs 11.37% 5.83% 10.72% 7.62%
Net income(2) 937,000 205,000 1,622,000 485,000
Number of staff 460 466 460 446
Balance at
-------------------------------------------------
June 30, 1996 Dec. 31, 1995 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Funded 12 month backlog 23,700,000 12,000,000 17,200,000
Total 12 month contract backlog 62,200,000 67,300,000 60,300,000
Stockholders equity 10,844,000 9,410,000 9,981,000
Equity per common share 1.64 1.47 1.55
Stock repurchase notes 2,191,000 2,944,000 3,425,000
Line of credit 0 942,000 3,380,000
Number in days sales in receivables 90 110 128
Current ratio 2.1 1.7 2.4
</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 11
REVENUES
The Company's contract revenues for the second quarter were up 13.5% from the
corresponding three month period in 1995. Profitability for the three month
period, ended June 30, 1996, was up 122.8% when compared to the corresponding
period in 1995. The quarterly profitability increase represented primarily a
return to historic profit rates. 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 no longer exist. There were no borrowings against
the Company's line of credit as of the end of the second quarter as compared
to a borrowing level of $3,408,000 at the end of the corresponding period in
1995. The Company believes the reduction in borrowing requirements will
continue through the third quarter and will contribute to improved net
profitability for the year, but that the current, exceptionally high rate of
profitability may not be sustained for the entire year.
ANNUALIZED BACKLOG
During the second quarter, the Company had no major competitive wins and no
major competitive losses. There were a number of small contract value wins and
losses during the second quarter on contracts between $500,000 and $1,500,000.
<PAGE> 8
Annualized contract backlog decreased 0.8% from $62,700,000 at the end of the
first quarter to $62,200,000 at the end of the second quarter. As a result of
these reductions in backlog, the Company estimates the projected sales in 1996
between $66,000,000 and $68,000,000.
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 excess leased facilities. Management has made a
concerted effort to reduce facility costs by lease buyouts, subletting excess
space, 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. A lease on a new facility location in Rosslyn, Virginia,
was entered into in the second quarter for the Company's Advanced Systems and
Technology Operation.
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 June 30, 1996. Total borrowings under the line for
the year through June 30, 1996, have resulted in interest costs of $3,100 as
compared to $149,000 for the same period in 1995.
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 $10,844,000 on June 30, 1996.
This included the effect of special stock repurchases, in addition to normal
quarterly repurchases, of $1,000,000 in stock from shareholders in July of 1995
and of $507,000 from former employees in the second quarter of 1996. The 1995
repurchase was authorized by the Board of Directors to provide additional stock
liquidity to any stockholder who wanted to participate in the repurchase.
Additionally, the second quarter 1996 repurchase of former employee stock was
authorized by the Board of Directors as in the best interests of the company
and its stockholders.
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 is 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 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
<PAGE> 9
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 second
quarter of 1996, bringing its total purchase to $2,100,000 which represents
7.7% of the outstanding stock.
STOCK REPURCHASE PROGRAM
The Company continues to conduct its stock 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, during any extended period of non-liquidity, the Board
of Directors may 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. All audits to
date have shown the stock price calculated by the current formula to fall
within the range of price determined by the independent auditor for companies
of similar size and business areas.
RECEIVABLES
Days sales outstanding decreased to 90 days at June 30, 1996, from 106 days at
March 31, 1996, and from 128 days at June 30, 1995. The decrease was caused by
an active program to turn around receivables, the billing of retentions for
years audited and closed (1990 through 1993), and the completion of its 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 June 30,
1996 versus 0.9 at March 31, 1996 and 1.0 at June 30, 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: August 7, 1996 B. Warren Knudson
Vice President and Chief
Financial Officer
(Principal financial and chief
accounting officer)
<PAGE> 11
EXHIBIT INDEX
SPARTA, INC.
QUARTER ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
- --------- ----------------------- --------
<S> <C>
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
SPARTA, INC.
EXHIBIT TO CONSOLIDATED FINANCIAL STATEMENTS
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY
Net income from Operations $ 937,000 $ 205,000 $1,622,000 $ 485,000
Interest and accretion 79,000 -- (140,000) --
---------- ---------- ---------- ----------
Net income (Note 1) $1,016,000 $ 205,000 $1,482,000 $ 485,000
========== ========== ========== ==========
Average shares outstanding 6,008,000 6,394,000 5,994,000 6,364,000
Dilutive stock options -- based on the
treasury stock method using the average
established price
---------- ---------- ---------- ----------
Total 6,008,000 6,394,000 5,994,000 6,364,000
---------- ---------- ---------- ----------
Per share amounts $ 0.17 $ 0.03 $ 0.25 $ 0.08
========== ========== ========== ==========
FULLY DILUTED
Net income from Operations $ 937,000 205,000 $1,622,000 $ 485,000
Interest and accretion 79,000 -- (140,000) --
---------- ---------- ---------- ----------
Net income (Note 1) $1,016,000 $ 205,000 $1,482,000 $ 485,000
========== ========== ========== ==========
Average shares outstanding 6,008,000 6,394,000 5,994,000 6,364,000
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 6,008,000 6,394,000 5,994,000 6,364,000
---------- ---------- ---------- ----------
Per share amounts $ 0.17 $ 0.03 $ 0.25 $ 0.08
========== ========== ========== ==========
</TABLE>
Note 1 -- Net income has been adjusted for (1) 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
(2) accretion on Preferred Stock.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 3,101
<SECURITIES> 0
<RECEIVABLES> 20,050
<ALLOWANCES> 805
<INVENTORY> 0
<CURRENT-ASSETS> 22,832
<PP&E> 16,555
<DEPRECIATION> 11,022
<TOTAL-ASSETS> 29,969
<CURRENT-LIABILITIES> 11,926
<BONDS> 0
2,275
0
<COMMON> 21,141
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,969
<SALES> 33,164
<TOTAL-REVENUES> 33,164
<CGS> 16,206
<TOTAL-COSTS> 16,206
<OTHER-EXPENSES> 415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 2,796
<INCOME-TAX> 1,174
<INCOME-CONTINUING> 1,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,622
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
