<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, 1998
--------------------------
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)
(949) 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 July 5, 1998, the registrant had 5,756,473 shares of common stock, $.01
par value per share, issued and outstanding.
<PAGE> 2
SPARTA, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1998
INDEX
PART I FINANCIAL STATEMENTS
ITEM 1 Quarterly Financial Statements
Statements of Income for the Six Months Ended June 30, 1998 and June 30,
1997 (Unaudited)
Balance Sheets as of June 30, 1998 and December 31, 1997 (Unaudited)
Statement of Cash Flows for the Six Months Ended June 30, 1998 and June
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
<PAGE> 4
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
- ---------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $23,650,000 $21,277,000 $46,594,000 $40,111,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Labor costs and related benefits 12,096,000 10,850,000 24,537,000 21,026,000
Subcontractor & other costs 6,717,000 5,624,000 12,582,000 10,150,000
Facility costs 1,823,000 1,665,000 3,636,000 3,537,000
Travel and other 1,044,000 938,000 1,684,000 1,740,000
Interest expense, net 116,000 73,000 198,000 108,000
----------- ----------- ----------- -----------
21,796,000 19,150,000 42,637,000 36,561,000
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
TAXES ON INCOME 1,854,000 2,127,000 3,957,000 3,550,000
PROVISION FOR TAXES ON INCOME 779,000 893,000 1,662,000 1,491,000
----------- ----------- ----------- -----------
NET INCOME $ 1,075,000 $ 1,234,000 $ 2,295,000 $ 2,059,000
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.13 $ 0.17 $ 0.26 $ 0.26
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.16 $ 0.25 $ 0.25
=========== =========== =========== ===========
</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> 5
CONSOLIDATED BALANCE STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 244,000 $ 198,000
Accounts receivable 20,180,000 23,557,000
Prepaid expenses 572,000 448,000
------------ ------------
TOTAL CURRENT ASSETS 20,996,000 24,203,000
Equipment and improvements, net 8,406,000 7,321,000
Other assets 1,956,000 1,685,000
------------ ------------
TOTAL ASSETS $ 31,358,000 $ 33,209,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation $ 3,655,000 $ 5,723,000
Accounts payable and other accrued expenses 722,000 3,005,000
Current portion of notes payable 440,000 477,000
Income tax payable -- 199,000
Deferred income taxes 2,422,000 2,446,000
------------ ------------
TOTAL CURRENT LIABILITIES 7,239,000 11,850,000
NOTES PAYABLE 2,925,000 2,658,000
SUBORDINATED NOTES PAYABLE 434,000 646,000
DEFERRED INCOME TAXES 1,111,000 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 4,734,000 3,926,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000
shares authorized; 13,606,953 and 13,070,700
shares issued 136,000 131,000
Additional paid-in capital 29,754,000 26,340,000
Retained earnings 26,640,000 25,152,000
Treasury stock (41,615,000) (39,171,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,915,000 12,452,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,358,000 $ 33,209,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 6
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,295,000 $ 2,059,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 751,000 787,000
Loss on sale of equipment 5,000 105,000
Employee compensation paid in stock 1,969,000 1,283,000
Changes in assets and liabilities:
Accounts receivable 2,964,000 2,040,000
Prepaid expenses (125,000) (92,000)
Other assets 141,000 (274,000)
Accrued compensation (2,068,000) (142,000)
Accounts payable and other accrued expense (2,283,000) (1,144,000)
Income taxes payable (223,000) (758,000)
Deferred income taxes (566,000) (564,000)
Tax benefit relating to stock plan 357,000 59,000
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,217,000 3,359,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures 1,840,000 (1,308,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES 1,840,000 (1,308,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 1,094,000 955,000
Cash purchases of treasury stock (2,033,000) (2,387,000)
Net (repayments) proceeds line-of-credit agreement 268,000 (228,000)
Principal payments on debt (660,000) (360,000)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (1,331,000) (2,020,000)
----------- -----------
NET DECREASE IN CASH 46,000 31,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 198,000 151,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 244,000 $ 182,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 202,000 $ 108,000
=========== ===========
Income taxes $ 2,451,000 $ 2,762,000
=========== ===========
</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 2, 1998;
and, its first quarter ended July 5, 1998 and corresponding second quarter last
year on July 4, 1997. To aid the reader of the financial statements, the year
end has been presented as December 31, 1997 and the quarters and six months
ended June 30, 1997 and June 30, 1998.
In the opinion of management, the unaudited financial information for the
six-month periods ended June 30, 1998 and June 30, 1997 reflects all adjustments
(which include only normal, recurring adjustments) necessary for a fair
presentation thereof.
NOTE B - RECEIVABLES
- --------------------
Unbilled accounts receivable include $1,874,000 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, 1998.
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, 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 Six months ended
June 30, June 30,
------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales 23,650,000 21,277,000 46,594,000 40,111,000
Gross profit (1) 2,093,000 2,416,000 4,312,000 3,952,000
Gross profit as a % of costs 9.71% 12.81% 10.20% 10.93%
Net income (2) 1,075,000 1,234,000 2,295,000 2,059,000
Number of staff 679 575 679 575
</TABLE>
<TABLE>
<CAPTION>
Balance at
----------------------------------------
June 30, December 31, June 30,
1998 1997 1997
------------ ------------- ------------
<S> <C> <C> <C> <C>
Funded 12 month backlog 35,900,000 29,900,000 41,000,000
Total 12 month contract backlog 88,900,000 93,200,000 86,800,000
Stockholders equity 14,915,000 12,452,000 11,469,000
Equity per share (3) 2.36 1.89 1.80
Stock repurchase notes 874,000 1,123,000 1,781,000
Line of credit 2,925,000 2,658,000 233,000
Number in days sales in receivables 80 93 81
Current ratio 2.9 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 second quarter were up 11.2% from the
corresponding three month period in 1997. Second quarter sales of $23,650,000
were the highest quarterly total in the Company's history. Profitability for the
three month period ended June 30, 1998 was down 13.4% when compared to the
corresponding period of 1997. Profitability as a percent of costs decreased from
12.8% to 9.7% for the corresponding period in 1998. Borrowings against the
Company's line of credit totaled $2,925,000 as of the end of the 2nd quarter
compared to a borrowing level of $233,000 at the end of the corresponding period
in 1997. This is primarily due to the high capital spending and independent
research and development (IR&D) spending in the first two quarters of this year.
The Company has been successful in reducing its days sales from 97 days at March
31, 1998 to 80 days at June 30, 1998. The Company believes that reducing
spending for capital and IR&D items as well as improvement in days sales will
contribute to a reduction in borrowing requirements during the second half of
the year.
<PAGE> 9
ANNUALIZED BACKLOG
During the second quarter, the Company had one new competitive win - the
Integrated Data and Systems Operation won the re-compete of the Army SSDC's
Defense Systems Mission Analysis contract. This is a $9,300,000 contract over
five years. The company had two major losses during the second quarter. One was
a bid to Lockheed-Martin by Advance Materials Products Operations for JASSM
parts. This was a $9,600,000 bid over seven years. The other loss was by the
Integrated Data and Systems Operation on an Army program named CIMS. This was a
subcontract bid to Kottman, Inc. for $15,750,000 over seven years. Funding
increments on existing contracts were down 12.4% from the same period last year.
The Company's funded backlog at the end of the second quarter was $35,900,000 as
compared to $41,000,000 for the same period last year.
Annualized contract backlog decreased 4.6% in the first two quarters from the
backlog starting the year. Backlog went from $93,200,000 to start the year to
$88,900,000 at the end of the second quarter. The Company plans to submit many
proposals in the next two quarters as the opportunity backlog is 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 June 30, 1998 totaled $2,925,000. Days
sales outstanding decreased to 80 days at June 30, 1998, from 97 days at March
31, 1998, and from 81 days at June 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 0.5 at June 30, 1998 versus
0.8 at December 31, 1997 and 0.6 at June 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 $14,915,000 at June 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 rest of the year.
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 June 30, 1998 of $2,400,000 (569,039 shares) of
Company Preferred Stock represents 9.08% of the Company's total outstanding
stock. Through June 30, 1998 accretion of Preferred Stock was $2,334,000.
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
(a) Exhibits
--------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) 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.
<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.
Date: August 17, 1998 /s/ B. Warren Knudson
----------------------------------------
B. Warren Knudson Vice President and
Chief Financial Officer (Principal
Finance and Accounting Officer)
<PAGE> 12
EXHIBIT INDEX
SPARTA, INC.
QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
--- ----------------------- --------
<C> <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
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic EPS
Net income $ 1,075,000 $ 1,234,000 $ 2,295,000 $ 2,059,000
Less accretion (359,000) (245,000) (808,000) (575,000)
----------- ----------- ----------- -----------
$ 716,000 $ 989,000 $ 1,487,000 $ 1,484,000
=========== =========== =========== ===========
Shares outstanding 5,533,959 5,717,201 5,630,489 5,718,679
Per share amounts $ 0.13 $ 0.17 $ 0.26 $ 0.26
=========== =========== =========== ===========
Dilutive Effect
Net income $ 1,075,000 $ 1,234,000 $ 2,295,000 $ 2,059,000
Less accretion (359,000) (245,000) (808,000) (557,000)
----------- ----------- ----------- -----------
$ 716,000 $ 989,000 $ 1,487,000 $ 1,502,000
Shares outstanding 5,533,959 5,664,288 5,630,489 5,718,679
Stock options 546,784 361,557 261,431 163,412
Deferred Stock 68,858 48,590 68,858 48,590
----------- ----------- ----------- -----------
6,149,601 6,074,435 5,960,778 5,930,681
Per share amounts $ 0.12 $ 0.16 $ 0.25 $ 0.25
=========== =========== =========== ===========
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 244
<SECURITIES> 0
<RECEIVABLES> 20,951
<ALLOWANCES> 772
<INVENTORY> 0
<CURRENT-ASSETS> 20,996
<PP&E> 19,423
<DEPRECIATION> 11,017
<TOTAL-ASSETS> 31,358
<CURRENT-LIABILITIES> 7,239
<BONDS> 0
4,734
0
<COMMON> 29,890
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 31,358
<SALES> 46,594
<TOTAL-REVENUES> 46,594
<CGS> 42,283
<TOTAL-COSTS> 42,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198
<INCOME-PRETAX> 3,957
<INCOME-TAX> 1,662
<INCOME-CONTINUING> 2,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,295
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
