<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 September 30, 1998
------------------------------
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.
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(Exact name of registrant as specified in its charter)
Delaware 63-0775889
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(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)
(949) 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 October 4, 1998, the registrant had 5,683,537 shares of common stock, $.01
par value per share, issued and outstanding.
<PAGE> 2
SPARTA, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1998
INDEX
PART I FINANCIAL STATEMENTS
ITEM 1 Quarterly Financial Statements
Statements of Income for the Nine Months Ended September 30, 1998
and September 30, 1997 (Unaudited)
Balance Sheets as of September 30, 1998 and December 31, 1997
(Unaudited)
Statement of Cash Flows for the Nine Months Ended September 30, 1998 and
September 30, 1997 (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
<PAGE> 3
PART I
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
SALES $24,169,000 $23,408,000 $70,763,000 $63,519,000
--------------- --------------- --------------- ---------------
COSTS AND EXPENSES:
Labor costs and related
benefits 14,100,000 12,316,000 38,637,000 33,342,000
Subcontractor & other costs 5,824,000 7,121,000 18,406,000 17,271,000
Facility costs 1,798,000 1,620,000 5,434,000 5,157,000
Travel and other 515,000 328,000 2,199,000 2,068,000
Interest expense, net 58,000 26,000 256,000 134,000
--------------- --------------- --------------- ---------------
22,295,000 21,411,000 64,932,000 57,972,000
--------------- --------------- --------------- ---------------
INCOME BEFORE PROVISION FOR
TAXES ON INCOME 1,874,000 1,997,000 5,831,000 5,547,000
PROVISION FOR TAXES ON INCOME 787,000 839,000 2,449,000 2,330,000
--------------- --------------- --------------- ---------------
NET INCOME $ 1,087,000 $ 1,158,000 $ 3,382,000 $ 3,217,000
=============== =============== =============== ===============
BASIC EARNINGS PER SHARE $ 0.20 $ 0.15 $ 0.48 $ 0.42
=============== =============== =============== ===============
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.14 $ 0.45 $ 0.39
=============== =============== =============== ===============
</TABLE>
* EARNINGS PER SHARE AMOUNTS PRESENTED FOR PRIOR YEARS HAVE BEEN RESTATED IN
ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS
PER SHARE".
The accompanying notes are an integral part of the financial statements
<PAGE> 4
CONSOLIDATED BALANCE STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
1998 1997
---------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 178,000 $ 198,000
Accounts receivable 18,941,000 23,557,000
Prepaid expenses 503,000 448,000
---------------- ----------------
TOTAL CURRENT ASSETS 19,622,000 24,203,000
Equipment and improvements, net 9,049,000 7,321,000
Other assets 2,000,000 1,685,000
---------------- ----------------
TOTAL ASSETS $30,671,000 $33,209,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation $ 4,726,000 $ 5,723,000
Accounts payable and other accrued expenses 1,043,000 3,005,000
Current portion of notes payable 433,000 477,000
Income tax payable -- 199,000
Deferred income taxes 2,708,000 2,446,000
---------------- ----------------
TOTAL CURRENT LIABILITIES 8,910,000 11,850,000
NOTES PAYABLE -- 2,658,000
SUBORDINATED NOTES PAYABLE 328,000 646,000
DEFERRED INCOME TAXES 828,000 1,677,000
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 4,604,000 3,926,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000
shares authorized; 13,692,211 and 13,070,700
shares issued 137,000 131,000
Additional paid-in capital 30,909,000 26,340,000
Retained earnings 27,857,000 25,152,000
Treasury stock (42,902,000) (39,171,000)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 16,001,000 12,452,000
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,671,000 $ 33,209,000
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 5
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $3,382,000 $3,217,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 960,000 1,134,000
Loss on sale of equipment 19,000 105,000
Employee compensation paid in stock 2,382,000 1,690,000
Changes in assets and liabilities:
Accounts receivable 4,132,000 (245,000)
Prepaid expenses (55,000) 11,000
Other assets 168,000 (137,000)
Accrued compensation (998,000) 1,227,000
Accounts payable and other accrued expense (1,961,000) (1,388,000)
Income taxes payable/receivable 63,000 (393,000)
Deferred income taxes (847,000) (849,000)
Tax benefit relating to stock plan 404,000 84,000
----------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,649,000 4,456,000
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,707,000) (2,178,000)
----------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (2,707,000) (2,178,000)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 1,789,000 1,622,000
Cash purchases of treasury stock (3,731,000) (3,785,000)
Net (repayments) proceeds line-of-credit agreement (2,658,000) 802,000
Principal payments on debt (362,000) (886,000)
----------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES (4,962,000) (2,247,000)
----------------- ----------------
NET DECREASE IN CASH (20,000) 31,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 198,000 151,000
----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 178,000 182,000
================= ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 266,000 $ 134,000
================= ================
Income taxes $ 3,235,000 $ 3,494,000
================= ================
</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 January 2, 1998;
and, its third quarter ended October 4, 1998 and corresponding third quarter
last year on October 3, 1997. To aid the reader of the financial statements, the
year end has been presented as December 31, 1997 and the quarters and nine
months ended September 30, 1997 and September 30, 1998.
In the opinion of management, the unaudited financial information for the
nine-month periods ended September 30, 1998 and September 30, 1997 reflects all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof.
NOTE B - RECEIVABLES
- --------------------
Unbilled accounts receivable include $1,778,000 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 September 30, 1998.
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, 1997, 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 September 30, Nine months ended September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Sales 24,169,000 23,408,000 70,763,000 63,519,000
Gross profit (1) 2,231,000 1,967,000 6,543,000 5,919,000
Gross profit as a % of costs 10.17% 9.17% 10.19% 10.28%
Net income (2) 1,087,000 1,158,000 3,382,000 3,217,000
Number of staff 699 610 699 610
</TABLE>
<TABLE>
<CAPTION>
Balance at
------------------------------------------------
September 30, December 31, September 30,
1998 1997 1998
--------------- --------------- --------------
<S> <C> <C> <C>
Funded 12 month backlog 33,000,000 29,900,000 37,500,000
Total 12 month contract
backlog 105,200,000 93,200,000 92,200,000
Stockholders equity 16,001,000 12,452,000 12,032,000
Equity per share (3) 2.58 1.89 1.92
Stock repurchase notes 761,000 1,123,000 1,255,000
Line of credit -- 2,658,000 1,263,000
Number in days sales in
receivables 75 93 83
Current ratio 2.4 2.1 2.0
</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.
(3) Equity per share based on weighted shares of common stock outstanding for
period ending, including weighted shares of preferred stock outstanding.
REVENUES
The Company's contract revenues for the third quarter were up 3.3% from the
corresponding three month period in 1997. Third quarter sales of $24,619,000
were the highest quarterly total in the Company's history. Profitability for the
three month period ended September 30, 1998 was up 13.4% when compared to the
corresponding period of 1997. Profitability as a percent of costs increased from
9.17% to 10.17% for the corresponding period in 1998. Borrowings against the
Company's line of credit were zero as of the end of the 3rd quarter compared to
a borrowing level of $1,262,000 at the end of the corresponding period in 1997.
The Company has been successful in reducing its days sales from 80 days at June
30, 1998 to 75 days at September 30, 1998. Reduced spending for capital and IR&D
projects as well as improvement in days sales outstanding in the second half of
the year has contributed to this reduction in borrowing requirements.
<PAGE> 8
NEW CONTRACTS AND ANNUALIZED BACKLOG
During the third quarter, the Company reversed roles with the small business
prime contractor on the Range Facilities and Information Support Services
(RF&ISS) contract at NASA Dryden. As the new prime contractor on this program,
the Company's Technical Services Operation (TSO) will gain a small increase in
sales this fiscal year, but a large increase in sales over the next three years
(about $9,000,000 increase per year). The International Systems Operation (INSO)
won a competitive bid with the Army's Missile Systems Intelligence Command
(MSIC) for the Laboratory Operation Support (LOS) contract. This is a
$43,000,000 contract over five years. Backlog increases were experienced on
several existing contracts by the Company's Command, Control, Communications,
Computer Intelligence Operation (C4IO), the Advanced Systems and Technology
Operation (ASTO), and the Defense Programs Operation (DPO). The Company had one
major competitive loss during the quarter by its Technical Services Operation
(TSO). It was a bid to the Air Force Research Laboratory at Edwards Air force
Base for the Rocket Propulsion Services Program. It was a $30,000,000 program
over five years.
In summary, the Company's funded backlog at the end of the third quarter was
$33,000,000 as compared to $37,500,000 for the same period last year. Annualized
contract backlog increased 12.9% in the first three quarters from the backlog
starting the year. Backlog went from $93,200,000 at the start of the year to
$105,000,000 at the end of the third quarter. The Company plans to submit many
proposals in the next two quarters as the opportunity backlog is still very
strong.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are funds provided by operations and
the bank line of credit. The Company's line of credit limit is $12,000,000.
Borrowings under the line of credit at September 30, 1998 were zero. Days sales
outstanding decreased to 75 days at September 30, 1998, from 80 days at June 30,
1998, and from 83 days at September 30, 1997. 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 0.4 at September 30, 1998
versus 0.8 at December 31, 1997 and 0.7 at September 30, 1997. 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 $12,452,000 at the end of 1997
to $16,001,000 at September 30, 1998. The Company's strong earnings and net
proceeds from the sale and repurchase of stock have accounted for this increase.
The Company is now repurchasing all the stock from terminating employees and
intends to continue to do so for the foreseeable future.
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 and has not purchased any stock
since. The total purchase as of September 30, 1998 of $2,400,000 (569,039
shares) of Company Preferred Stock represents 9.10% of the Company's total
outstanding stock. Through September 30, 1998 accretion of Preferred Stock was
$2,204,000.
<PAGE> 9
EFFECTS OF FEDERAL FUNDING FOR DEFENSE PROGRAMS
The Company continues to have over 90% of its contracts with the Department of
Defense. The Company anticipates little or no effect on its anticipated sales
for 1998 as a result of the outcome of the November, 1998 federal elections for
the Senate and House of Representatives. However, sales in its government
business areas for 1999 and subsequent years could be impacted by this election
and the yet to be resolved federal budget for Government Fiscal Year 1999.
<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
The Company's Annual Meeting will be held on May 1, 1998 at which time proxies
and shareholders present voted on and approved the 1997 Stock Plan, the Amended
and Restated Certificate of Incorporation, the 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.
(a) Exhibits
Exhibit No. Exhibit
----------- -------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 11
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 19, 1998 B. Warren Knudson
Vice President and Chief
Financial Officer
(Principal Finance and
Accounting Officer)
<PAGE> 12
EXHIBIT INDEX
SPARTA, INC.
QUARTER ENDED SEPTEMBER 30, 1998
Exhibit Sequential
No. Description of Exhibits Page No.
- ------- ----------------------- ----------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
SPARTA, INC.
EXHIBIT TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------
COMPUTATION OF PER SHARE EARNINGS
---------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
-------------------------------- -------------------------------
1998 1997 1998 1997
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
BASIC EPS
Net income $1,087,000 $1,158,000 $3,382,000 $3,217,000
Less accretion -- (296,000) (678,000) (871,000)
---------------- --------------- --------------- ---------------
$1,087,000 $ 862,000 $2,704,000 $2,346,000
================ =============== =============== ===============
Shares outstanding 5,533,959 5,664,288 5,587,676 5,597,940
Per share amounts $ 0.20 $ 0.15 $ 0.48 $ 0.42
================ =============== =============== ===============
DILUTIVE EFFECT
Net income $1,087,000 $1,158,000 $3,382,000 $3,217,000
Less accretion -- (296,000) (678,000) (871,000)
---------------- --------------- --------------- ---------------
$1,087,000 $ 862,000 $2,704,000 $2,346,000
Shares outstanding 5,533,959 5,664,288 5,587,676 5,597,940
Preferred Stock 569,037 -- --
Stock options 498,315 443,713 386,009 386,250
Deferred Stock 68,858 48,590 68,858 48,590
---------------- --------------- --------------- ---------------
6,670,169 6,156,591 6,042,543 6,032,780
Per share amounts $ 0.16 $ 0.14 $ 0.45 $ 0.39
================ =============== =============== ===============
</TABLE>
Note: Earnings per share amounts presented for prior years have been restated in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share".
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 178
<SECURITIES> 0
<RECEIVABLES> 19,962
<ALLOWANCES> 1,021
<INVENTORY> 0
<CURRENT-ASSETS> 30,671
<PP&E> 20,226
<DEPRECIATION> 11,177
<TOTAL-ASSETS> 30,671
<CURRENT-LIABILITIES> 8,910
<BONDS> 0
4,604
0
<COMMON> 31,046
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,671
<SALES> 70,763
<TOTAL-REVENUES> 70,763
<CGS> 64,221
<TOTAL-COSTS> 64,221
<OTHER-EXPENSES> 455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256
<INCOME-PRETAX> 5,831
<INCOME-TAX> 2,449
<INCOME-CONTINUING> 3,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,382
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.45
</TABLE>
