<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, 1997
----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-21682
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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
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(Address of principal executive offices)
(Zip Code)
(714) 768-8161
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(Registrant's telephone number, including area code)
Not Applicable
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(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 April 4, 1997, the registrant had 5,783,438 shares of common stock, $.01
par value per share, issued and outstanding.
<PAGE> 2
SPARTA, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 1997
INDEX
PART I FINANCIAL STATEMENTS
ITEM 1 Quarterly Financial Statements
Statements of Income for the Three Months Ended March 31, 1997
and March 31, 1996 (Unaudited)
Balance Sheets as of March 31, 1997 and December 31, 1996
(Unaudited)
Statement of Cash Flows for the Three Months Ended March 31,
1997 and March 31, 1996 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II Other Information
SIGNATURE
EXHIBIT 11 Computations of Earnings per Share
EXHIBIT 27 Financial Data Schedule
<PAGE> 3
PART I
Financial Statements
<PAGE> 4
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Sales ............................ $18,834,000 $14,927,000
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COSTS AND EXPENSES:
Labor costs and related benefits 10,176,000 8,289,000
Subcontractor & other costs .... 4,526,000 2,907,000
Facility costs ................. 1,872,000 1,682,000
Travel and other ............... 802,000 840,000
Interest expense, net .......... 35,000 29,000
----------- -----------
17,411,000 13,747,000
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INCOME BEFORE PROVISION FOR
TAXES ON INCOME ................ 1,423,000 1,180,000
PROVISION FOR TAXES ON INCOME .... 598,000 496,000
----------- -----------
NET INCOME ....................... $ 825,000 $ 684,000
=========== ===========
EARNINGS PER SHARE ............... $ 0.09 $ 0.08
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 5
CONSOLIDATED BALANCE STATEMENT
(Unaudited)
<TABLE>
<CAPTION>
MARCH DECEMBER 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets
Cash ........................................................ $ 169,000 $ 151,000
Accounts receivable ......................................... 18,545,000 21,160,000
Prepaid expenses ............................................ 445,000 306,000
------------ ------------
Total current assets ...................................... 19,159,000 21,617,000
Equipment and improvements, net ............................. 6,277,000 6,028,000
Other assets ................................................ 1,506,000 1,409,000
------------ ------------
$ 26,942,000 $ 29,054,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accrued compensation ........................................ $ 2,213,000 $ 3,871,000
Accounts payable and other accrued expenses ................. 2,082,000 3,320,000
Current portion of notes payable ............................ 289,000 461,000
Current portion of subordinated debt ........................ 621,000 640,000
Income tax payable .......................................... -- 466,000
Deferred income taxes ....................................... 3,677,000 2,849,000
------------ ------------
Total current liabilities ................................. 8,882,000 11,607,000
Notes payable
Subordinated notes payable .................................... 1,280,000 1,090,000
Deferred income taxes ......................................... 2,545,000 2,828,000
Commitments and contingencies
Redeemable Preferred Stock
Preferred stock, $.01 par value; 2,000,000 shares authorized;
569,039 and 569,039 shares issued and outstanding ........... 3,374,000 3,044,000
Stockholders' equity
Common stock, $.01 par value, 25,000,000 shares authorized;
12,577,404 and 12,376,781 shares issued ..................... 126,000 124,000
Additional paid-in capital .................................. 23,651,000 22,229,000
Retained earnings ........................................... 21,426,000 20,929,000
Treasury stock .............................................. (34,342,000) (32,797,000)
------------ ------------
Total stockholders' equity ................................ 10,861,000 10,485,000
------------ ------------
Total Liabilities and Stockholders' Equity .................... $ 26,942,000 $ 29,054,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 6
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income ......................................... $ 825,000 $ 686,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 290,000 390,000
Loss on sale of equipment ...................... 86,000 41,000
Employee compensation paid in stock ............ 905,000 653,000
Changes in assets and liabilities:
Accounts receivable .......................... 2,614,000 1,441,000
Prepaid expenses ............................. (138,000) (100,000)
Other assets ................................. (96,000) 192,000
Accrued compensation ......................... (1,658,000) (139,000)
Accounts payable and other accrued expense ... (1,238,000) (940,000)
Income taxes payable ......................... 362,000 761,000
Deferred income taxes ........................ (283,000) (283,000)
Tax benefit relating to stock plan ............. 8,000 0
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Net cash provided by operating activities .. 1,677,000 2,702,000
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Cash flows from investing activities:
Capital expenditures ............................. (624,000) (196,000)
Cost of acquisition, net of cash acquired ........ 0 0
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Net cash used in investing activities ...... (624,000) (196,000)
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Cash flows from financing activities:
Proceeds from issuance of redeemable preferred stock -- 300,000
Proceeds from issuance of stock .................... 511,000 27,000
Cash purchases of treasury stock ................... (1,544,000) (643,000)
Net (repayments) proceeds line-of-credit agreement . (173,000) (942,000)
Principal payments on debt ......................... 171,000 (510,000)
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Net cash used in financing activities ...... (1,035,000) (1,768,000)
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Net increase in cash ................................. 18,000 738,000
Cash and cash equivalents at beginning of period ..... 151,000 222,000
----------- -----------
Cash and cash equivalents at end of period ........... $ 169,000 $ 960,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ......................................... $ 36,000 $ 29,000
=========== ===========
Income taxes ..................................... $ 524,000 $ 37,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 7
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 January 3, 1997;
and, its first quarter ended April 4, 1997 and corresponding first quarter last
year on March 29, 1996. To aid the reader of the financial statements, the year
end has been presented as December 31, 1996 and the quarters and three months
ended March 31, 1996 and March 31, 1997.
In the opinion of management, the unaudited financial information for the
three-month periods ended March 31, 1997 and March 31, 1996 reflects all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof.
NOTE B - RECEIVABLES
- --------------------
Unbilled accounts receivable include $1,443,000 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, 1997.
NOTE C - INCOME TAXES
- ---------------------
Income taxes for interim periods are computed using the estimated annual
effective rate method.
<PAGE> 8
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, 1996, 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>
Three months ended March 31,
--------------------------
1997 1996
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<S> <C> <C>
Sales ...................... 18,834,000 14,927,000
Gross profit (1) ........... 1,536,000 1,347,000
Gross profit as a % of costs 8.88% 9.93%
Net income (2) ............. 825,000 684,000
Number of staff ............ 543 443
</TABLE>
<TABLE>
<CAPTION>
Balance at
--------------------------------------------
December 31,
March 31, 1997 1997 March 31, 1996
---------- ---------- --------------
<S> <C> <C> <C>
Funded 12 month backlog ........... 35,100,000 36,200,000 17,500,000
Total 12 month contract backlog ... 81,500,000 76,400,000 62,700,000
Stockholders equity ............... 10,860,000 10,722,000 9,914,000
Equity per common share ........... 1.71 1.67 1.53
Stock repurchase notes ............ 1,901,000 1,730,000 2,442,000
Line of credit .................... 289,000 476,000 0
Number in days sales in receivables 88 109 106
Current ratio ..................... 2.0 1.8 1.9
</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 first quarter were up 26.2% from the
corresponding three month period in 1996. Profitability for the three month
period ended March 31, 1997 was up 14.0% when compared to the corresponding
period in 1996. Profitability as a percent of costs decreased to 8.88% from
9.93% for the corresponding period in 1996, but continues to represent
historical levels of profitability. Borrowings against the Company's line of
credit totaled $289,000 as of the end of the first quarter compared to a
borrowing level of zero at the end of the corresponding period in 1996. Expenses
for the quarter ended March 31, 1996 included approximately $120,000 for under
utilized facilities. With the relocation of the AMP Operation in LaJolla,
California, to a new facility consistent with its reduced space requirements in
February, 1997, the Company's facilities under lease are essentially consistent
with its staffing and laboratory requirements.
ANNUALIZED BACKLOG
During the first quarter, the Company had one major competitive win--the
National Air & Space Model contract as subcontractor to Raytheon valued at
approximately $5,000,000 over a seven year period. This contract was won by the
Company's DSS Operation in Huntsville, AL. The Company's only significant losses
were a $2,000,000 bid over five
<PAGE> 9
years on the NASA ARC FIPS Support Services program by the TS Operation and a
$1,800,000 bid on a berthing and docking instrumentation project in Indonesia by
SPARTA Marine Instrumentation, the Company's wholly owned subsidiary. The
protest of the TMD SETA contract award to the Company last October, a project
valued at approximately $52,000,000 over five years, was resolved in February in
the Company's favor. This program is now essentially fully staffed with
projected sales of greater than $10,000,000 in 1997. Funding increments on
existing contracts continued the pace of the two prior quarters with nearly $21M
in funding received. Quarterly funding during each of the past three quarters
has been in excess of an annual rate of $80,000,000.
Annualized contract backlog increased 6.7% in the first quarter, from
$76,400,000 to $81,500,000. However, the Company has submitted very few
proposals and proposal backlog has declined nearly 50%. Consequently, the
Company expects contract backlog to decline later in the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company'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. Borrowings under the line
of credit at March 31, 1997 totaled $289,000. The Company is in the process of
negotiating its bank line of credit requirements for 1998, and expects to have
the agreement in place by mid year. Days sales outstanding decreased to 88 days
at March 31, 1997, from 109 days at December 31, 1996, and from 106 days at
March 31, 1996. 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. The Company's debt-to-equity
ratio, as defined by the bank, was 0.6 at March 31, 1997 versus 0.8 at December
31, 1996 and 0.9 at March 31, 1996. All capital expenditures were financed
through operating funds and the revolving line of credit. The Company's cash
flow from operations plus borrowing under its line of credit are expected to
provide sufficient funds for the Company's operations, common stock repurchases,
capital expenditures, and future long-term debt requirements.
STOCKHOLDER EQUITY
The Company increased stockholder's equity from $10,722,000 at the end of 1996
to $10,860,000 at March 31, 1997. This included the effect of a special stock
repurchase of $500,000 out of equity for stock offered by former employees in
the quarterly repurchase in November, 1996 and paid in the first quarter of
1997. The special repurchase of stock from former employees was authorized by
the Board of Directors to be in the best interests of the Company and its
continuing employee 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 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 grants SAIC the option
to require the Company to repurchase all of the Preferred Stock held by SAIC at
the Formula Price at time of option exercise. 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%. SAIC suspended its purchase of Company
preferred stock in the last quarter of 1996. The total purchase to March 31,
1997 of $2,400,000 of Company Preferred Stock represents 8.96% of the Company's
outstanding stock. Through March 31, 1997 accretion of Preferred Stock was
$974,000.
EFFECTS OF FEDERAL FUNDING FOR DEFENSE PROGRAMS
The Company continues to have over 85% of its contracts with the Department of
Defense. The Company anticipates little or no effect on its anticipated sales
for 1997 as a result of the outcome of the November, 1996 federal elections for
President, Senate, and House of Representatives. However, sales in its
government business areas for 1998 and subsequent years could be significantly
impacted by the yet to be resolved federal budget for Government Fiscal Year
1998.
<PAGE> 10
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company has no investigations, claims, and lawsuits arising out of its
business, nor any known to be pending.
ITEM 2 CHANGES IN SECURITIES
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters where presented for shareholder vote in the quarter ended March 31,
1997. The Company's Annual Meeting will be held on May 9, 1997 at which time
proxies and shareholders present will vote on Directors and the continuation of
Price Waterhouse as auditor.
ITEM 5 OTHER MATERIALLY IMPORTANT EVENTS
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
No report(s) on Form 8-K were filed by the Company during the fiscal quarter for
which this report is filed.
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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 13, 1997 B. Warren Knudson
Vice President and Chief
Financial Officer
(Principal Finance and
Accounting Officer)
<PAGE> 12
EXHIBIT INDEX
SPARTA, INC.
QUARTER ENDED MARCH 31, 1997
<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 MARCH 31
1997 1996
----------- -----------
<S> <C> <C>
PRIMARY
Net income from Operations ..................... $ 825,000 $ 684,000
Interest and accretion ......................... (330,000) (219,000)
----------- -----------
Net income (Note 1) ............................ $ 495,000 $ 465,000
=========== ===========
Average shares outstanding ..................... 5,64,288 5,980,247
Dilutive stock options - based on the treasury
stock method using the average established
price
----------- -----------
Total ..................................... 5,664,288 5,980,247
----------- -----------
Per share amounts .............................. $ 0.09 $ 0.08
=========== ===========
FULLY DILUTED
Net income from Operations ..................... $ 825,000 $ 684,000
Interest and accretion ......................... (330,000) (219,000)
----------- -----------
Net income (Note 1) ............................ $ 495,000 $ 465,000
=========== ===========
Average shares outstanding ..................... 5,664,288 5,980,247
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 ..................................... 5,664,288 5,980,247
----------- -----------
Per share amounts .............................. $ 0.09 $ 0.08
=========== ===========
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 169
<SECURITIES> 0
<RECEIVABLES> 19,065
<ALLOWANCES> 520
<INVENTORY> 0
<CURRENT-ASSETS> 19,159
<PP&E> 17,005
<DEPRECIATION> 10,728
<TOTAL-ASSETS> 26,942
<CURRENT-LIABILITIES> 8,882
<BONDS> 0
3,374
0
<COMMON> 23,777
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,942
<SALES> 18,834
<TOTAL-REVENUES> 18,834
<CGS> 17,298
<TOTAL-COSTS> 17,298
<OTHER-EXPENSES> 78
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 1,423
<INCOME-TAX> 598
<INCOME-CONTINUING> 825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 825
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
