<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, 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.
- --------------------------------------------------------------------------------
(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)
(949) 768-8161
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(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 April 5, 1998, the registrant had 5,733,914 shares of common stock, $.01
par value per share, issued and outstanding.
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SPARTA, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 1998
INDEX
PART I FINANCIAL STATEMENTS
ITEM 1 Quarterly Financial Statements
Statements of Income for the Three Months Ended March 31, 1998 and March
31, 1997 (Unaudited)
Balance Sheets as of March 31, 1998 and December 31, 1997 (Unaudited)
Statement of Cash Flows for the Three Months Ended March 31, 1998 and
March 31, 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
ITEM 1. FINANCIAL STATEMENTS
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SPARTA, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
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1998 1997
----------- -----------
<S> <C> <C>
SALES $22,944,000 $18,834,000
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COSTS AND EXPENSES:
Labor costs and related
benefits 12,441,000 10,176,000
Subcontractor & other costs 5,865,000 4,526,000
Facility costs 1,813,000 1,872,000
Travel and other 640,000 802,000
Interest expense, net 82,000 35,000
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20,839,000 17,411,000
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INCOME BEFORE PROVISION FOR
TAXES ON INCOME 2,103,000 1,423,000
PROVISION FOR TAXES ON INCOME 883,000 598,000
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NET INCOME $ 1,220,000 $ 825,000
=========== ===========
BASIC EARNINGS PER SHARE $ 0.14 $ 0.09
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.13 $ 0.08
=========== ===========
</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
SPARTA, INC.
CONSOLIDATED BALANCE STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH DECEMBER 31,
1998 1997
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(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 86,000 $ 198,000
Accounts receivable 24,026,000 23,557,000
Prepaid expenses 669,000 448,000
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TOTAL CURRENT ASSETS 24,781,000 24,203,000
Equipment and improvements, net 7,775,000 7,321,000
Other assets 1,544,000 1,685,000
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TOTAL ASSETS $ 34,100,000 $ 33,209,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation $ 2,632,000 $ 5,723,000
Accounts payable and other accrued expenses 1,315,000 3,005,000
Current portion of notes payable 461,000 477,000
Income tax payable 821,000 199,000
Deferred income taxes 1,394,000 2,446,000
------------ ------------
TOTAL CURRENT LIABILITIES 6,623,000 11,850,000
NOTES PAYABLE 5,342,000 2,658,000
SUBORDINATED NOTES PAYABLE 525,000 646,000
DEFERRED INCOME TAXES 2,645,000 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 4,376,000 3,926,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000 shares
authorized; 13,383,529 and 13,070,700 shares
issued 134,000 131,000
Additional paid-in capital 28,539,000 26,340,000
Retained earnings 25,923,000 25,152,000
Treasury stock (40,007,000) (39,171,000)
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TOTAL STOCKHOLDERS' EQUITY 14,589,000 12,452,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,100,000 $ 33,209,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 5
SPARTA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
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1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,220,000 $ 825,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 370,000 290,000
Loss on sale of equipment 1,000 86,000
Employee compensation paid in stock 1,467,000 905,000
Changes in assets and liabilities:
Accounts receivable (470,000) 2,614,000
Prepaid expenses (221,000) (138,000)
Other assets 141,000 (96,000)
Accrued compensation (3,091,000) (1,658,000)
Accounts payable and other accrued expense (1,690,000) (1,238,000)
Income taxes payable 821,000 362,000
Deferred income taxes (283,000) (283,000)
Tax benefit relating to stock plan 115,000 8,000
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NET CASH PROVIDED BY OPERATING ACTIVITIES (1,620,000) 1,677,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (825,000) (624,000)
Cost of acquisition, net of cash acquired 0 0
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NET CASH USED IN INVESTING ACTIVITIES (825,000) (624,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 620,000 511,000
Cash purchases of treasury stock (425,000) (1,544,000)
Net (repayments) proceeds line-of-credit agreement 2,685,000 (173,000)
Principal payments on debt (548,000) 171,000
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NET CASH USED IN FINANCING ACTIVITIES 2,332,000 (1,035,000)
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NET DECREASE IN CASH (112,000) 18,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 198,000 151,000
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 86,000 $ 169,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 83,000 $ 36,000
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Income taxes $ 1,251,000 $ 524,000
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</TABLE>
The accompanying notes are an integral part of the financial statements
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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 April 5, 1998 and corresponding first quarter last
year on April 4, 1997. 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, 1997 and March 31, 1998.
In the opinion of management, the unaudited financial information for the
three-month periods ended March 31, 1998 and March 31, 1997 reflects all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof.
NOTE B - RECEIVABLES
Unbilled accounts receivable include $1,293,649 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, 1998.
NOTE C - INCOME TAXES
Income taxes for interim periods are computed using the estimated annual
effective rate method.
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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 March 31,
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1998 1997
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<S> <C> <C>
Sales 22,944,000 18,834,000
Gross profit (1) 2,219,000 1,536,000
Gross profit as a % of costs 10.71% 8.88%
Net income (2) 1,220,000 825,000
Number of staff 647 543
</TABLE>
<TABLE>
<CAPTION>
Balance at
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March 31, December 31, March 31,
1998 1997 1997
----------- ------------ ------------
<S> <C> <C> <C>
Funded 12 month backlog 38,400,000 29,900,000 35,100,000
Total 12 month contract backlog 88,200,000 93,200,000 81,500,000
Stockholders equity 14,589,000 12,452,000 10,860,000
Equity per share (3) 2.35 1.89 1.71
Stock repurchase notes 986,000 1,123,000 1,901,000
Line of credit 5,343,000 2,658,000 289,000
Number in days sales in receivables 97 93 88
Current ratio 3.0 2.1 2.0
</TABLE>
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(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 first quarter were up 21.8% from the
corresponding three month period in 1997. Operating profitability for the three
month period ended March 31, 1998 was up 44.5% when compared to the
corresponding period in 1997. Operating profitability as a percent of costs
increased to 10.71% from 8.88% for the corresponding period in 1997, primarily
due to better than expected profits on fixed price contracts and strong award
fees on cost plus award fee contracts. Current profit rates are at historical
levels. Borrowings against the Company's line of credit totaled $5,343,000 as of
the end of the first quarter compared to a borrowing level of $289,000 at the
end of the corresponding period in 1997. The high level of borrowing for the
first quarter is the result of investments in the Company's product initiatives
and expenditures for independent research and development. The Company's current
plan is to scale back these costs after the first quarter.
ANNUALIZED BACKLOG
During the first quarter, the Company had no major new competitive contract
wins, but a few significant sole source contract awards. The only significant
losses in the quarter were bids where the Company was a proposed subcontractor
to
<PAGE> 8
prime contractors: a $10,000,000 share of the China Lake O&M contract bid
where the Company was a proposed subcontractor to AmComp, a $5,000,000 share of
an Army MISSI contract bid where the Company was a proposed subcontractor to
Computer Services Corporation, and a $2,400,000 share of a DARPA Information
Services contract bid where the Company was a proposed subcontractor to SRS.
These losses were all five year programs. Funding increments on existing
contracts were down from the same period last year. The Company received
contract funding of only $15,463,000 in the first quarter as compared to nearly
$21,000,000 in funding received for the same period last year.
Annualized contract backlog decreased 5.4% in the first quarter over backlog
starting the year. Backlog went from $93,200,000 to start the year to
$88,200,000 at the end of the first 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 $8,000,000, but
is currently being renegotiated with the bank to increase it to $12,000,000. It
is anticipated that the increased amount may be needed to provide funds to
support the Company's investment in its product initiatives and anticipated
growth in 1999. Borrowings under the line of credit at March 31, 1998 totaled
$5,343,000. Days sales outstanding increased to 97 days at March 31, 1998, from
93 days at December 31, 1997, and from 88 days at March 31, 1997. The increase
is primarily due to slower than normal invoicing because of start-up problems
with the Company's new accounting system. 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 0.7 at March 31, 1998 versus
0.8 at December 31, 1997 and 0.6 at March 31, 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 $14,589,000 at March 31, 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 March 31, 1998 of $2,400,000 of Company
Preferred Stock represents 9.03% of the Company's total outstanding stock.
Through March 31, 1998 accretion of Preferred Stock was $1,976,000.
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> 9
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 were presented for shareholder vote in the quarter ended March 31,
1998. The Company's Annual Meeting will be held on May 1, 1998 at which time
proxies and shareholders present will vote on the proposed 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.
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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.
Date: May 15, 1998 /s/ B. Warren Knudson
-------------------------------------
B. Warren Knudson
Vice President and Chief
Financial Officer
(Principal Finance and
Accounting Officer)
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EXHIBIT INDEX
SPARTA, INC.
QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
- ------- ----------------------- ----------
<S> <C> <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
--------------------------------
1998 1997
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<S> <C> <C>
Basic EPS
Net income $ 1,220,000 $ 825,000
Less accretion (450,000) (330,000)
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$ 770,000 $ 495,000
=========== ===========
Shares outstanding 5,632,277 5,717,201
Per share amounts $ 0.14 $ 0.09
=========== ===========
Dilutive Effect
Net income $ 1,220,000 $ 825,000
Less accretion (450,000) (330,000)
----------- -----------
$ 770,000 $ 495,000
Shares outstanding 5,632,277 5,717,201
Stock options 124,737 73,022
Deferred Stock 68,858 48,590
----------- -----------
5,825,872 5,838,813
Per share amounts $ 0.13 $ 0.08
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 24,627
<ALLOWANCES> 601
<INVENTORY> 0
<CURRENT-ASSETS> 24,781
<PP&E> 18,931
<DEPRECIATION> 11,156
<TOTAL-ASSETS> 34,100
<CURRENT-LIABILITIES> 6,623
<BONDS> 0
0
4,376
<COMMON> 28,673
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,100
<SALES> 22,944
<TOTAL-REVENUES> 22,944
<CGS> 20,725
<TOTAL-COSTS> 20,725
<OTHER-EXPENSES> 33
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> 2,103
<INCOME-TAX> 883
<INCOME-CONTINUING> 1,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,220
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
