<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2000
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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
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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 1, 2000, the registrant had 5,593,721 shares of common stock, $.01
par value per share, issued and outstanding.
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SPARTA, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2000
INDEX
PAGE
----
PART I FINANCIAL INFORMATION 3
ITEM 1 Quarterly Financial Statements 4
Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999 4
Consolidated Statements of Income for the Three and
Nine Month Periods Ended September 30, 2000 and
September 30, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and September 30,
1999 (Unaudited) 6
Notes to Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 9
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 10
ITEM 2 Changes in Securities 10
ITEM 3 Defaults Upon Senior Securities 10
ITEM 4 Submission of Matters to a Vote of Security Holders 10
ITEM 5 Other Information 10
ITEM 6 Exhibits and Reports on Form 8-K 10
SIGNATURE 11
2
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PART I
FINANCIAL INFORMATION
3
<PAGE> 4
SPARTA, INC.
CONSOLIDATED BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 10,212,000 $ 319,000
Accounts receivable 24,709,000 30,410,000
Prepaid expenses 703,000 545,000
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TOTAL CURRENT ASSETS 35,624,000 31,274,000
Equipment and improvements, net 9,611,000 10,007,000
Other assets 2,068,000 1,904,000
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TOTAL ASSETS $ 47,303,000 $43,185,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued compensation $ 6,315,000 $ 6,486,000
Accounts payable and other accrued expenses 4,302,000 7,746,000
Current portion of subordinated notes payable 705,000 972,000
Income tax payable 2,558,000 470,000
Deferred income taxes 1,773,000 1,773,000
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TOTAL CURRENT LIABILITIES 15,653,000 17,447,000
NOTES PAYABLE -- 951,000
SUBORDINATED NOTES PAYABLE 693,000 260,000
DEFERRED INCOME TAXES 614,000 614,000
REDEEMABLE PREFERRED STOCK
Preferred stock, $.01 par value; 2,000,000 shares
authorized; 379,154 and 447,378 shares issued
and outstanding 5,596,000 5,364,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000 shares
authorized; 6,147,063 and 5,610,805 shares issued 61,000 56,000
Additional paid-in capital 24,033,000 18,439,000
Retained earnings 8,015,000 54,000
Treasury stock (7,362,000) --
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TOTAL STOCKHOLDERS' EQUITY 24,747,000 18,549,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,303,000 $43,185,000
============ ===========
</TABLE>
See accompanying notes
4
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SPARTA, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 33,224,000 $29,458,000 $ 93,182,000 $82,702,000
------------ ----------- ------------ -----------
COSTS AND EXPENSES:
Labor costs and related benefits 17,101,000 14,811,000 49,259,000 44,258,000
Subcontractor & other costs 7,926,000 9,157,000 24,093,000 22,823,000
Facility costs 2,205,000 2,011,000 6,697,000 5,920,000
Travel and other 936,000 695,000 2,554,000 2,228,000
Interest (income) expense, net (152,000) 17,000 (164,000) 145,000
------------ ----------- ------------ -----------
28,016,000 26,691,000 82,439,000 75,374,000
------------ ----------- ------------ -----------
Income from operations 5,208,000 2,767,000 10,743,000 7,328,000
Gain on sale of Raleigh division 4,339,000
------------ ----------- ------------ -----------
INCOME BEFORE PROVISION FOR
TAXES ON INCOME 5,208,000 2,767,000 15,082,000 7,328,000
PROVISION FOR TAXES ON INCOME 2,083,000 1,107,000 6,033,000 2,931,000
------------ ----------- ------------ -----------
NET INCOME $ 3,125,000 $ 1,660,000 $ 9,049,000 $ 4,397,000
============ =========== ============ ===========
BASIC EARNINGS PER SHARE $ 0.44 $ 0.21 $ 1.45 $ 0.57
============ =========== ============ ===========
DILUTED EARNINGS PER SHARE $ 0.40 $ 0.19 $ 1.33 $ 0.52
============ =========== ============ ===========
</TABLE>
See accompanying notes
5
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SPARTA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,049,000 $ 4,397,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,237,000 1,313,000
Loss on sale of equipment 112,000 213,000
Employee compensation paid in stock 2,791,000 2,486,000
Gain on sale of Raleigh Division (4,339,000)
Changes in assets and liabilities:
Accounts receivable 5,700,000 3,593,000
Prepaid expenses (158,000) 104,000
Other assets (164,000) (38,000)
Accrued compensation (171,000) (638,000)
Accounts payable and other accrued expense (3,444,000) (2,894,000)
Income taxes payable/receivable 2,089,000 (95,000)
Tax benefit relating to stock plan 874,000 655,000
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NET CASH PROVIDED BY OPERATING ACTIVITIES 13,576,000 9,096,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Raleigh Division 4,800,000
Capital expenditures (1,513,000) (2,007,000)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 3,287,000 (2,007,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 1,934,000 1,747,000
Redemption of preferred Stock (757,000) (1,001,000)
Purchases of treasury stock (6,412,000) (5,919,000)
Net (repayments) borrowing under line-of-credit agreement (951,000) (1,266,000)
Principal payments on debt (784,000) (497,000)
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NET CASH USED IN FINANCING ACTIVITIES (6,970,000) (6,936,000)
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NET INCREASE IN CASH 9,893,000 153,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 319,000 174,000
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,212,000 $ 327,000
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 56,000 $ 159,000
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Income taxes $ 3,370,000 $ 3,024,000
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</TABLE>
See accompanying notes
6
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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 Sunday
closest to December 31. The Company's last fiscal year ended on January 2, 2000
and its third quarter ended October 1, 2000 and corresponding third quarter last
year on October 3, 1999. To aid the reader of the financial statements, the
year-end has been presented as December 31, 1999 and the quarters and nine
months ended September 30, 2000 and September 30, 1999.
In the opinion of management, the unaudited financial information for the three
and nine-month periods ended September 30, 2000 and September 30, 1999 reflects
all adjustments (which include only normal, recurring adjustments) necessary for
a fair presentation thereof.
NOTE B - INCOME TAXES
Income taxes for interim periods are computed using the estimated annual
effective rate method.
NOTE C - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC EPS
Net income $ 3,125,000 $ 1,660,000 $ 9,049,000 $ 4,397,000
Less accretion (679,000) (483,000) (1,036,000) (1,240,000)
----------- ----------- ----------- -----------
$ 2,446,000 $ 1,177,000 $ 8,013,000 $ 3,157,000
=========== =========== =========== ===========
Shares outstanding 5,600,243 5,648,381 5,544,540 5,541,212
Per share amounts $ 0.44 $ 0.21 $ 1.45 $ 0.57
=========== =========== =========== ===========
DILUTIVE EFFECT
Net income $ 3,125,000 $ 1,660,000 $ 9,049,000 $ 4,397,000
Less accretion (679,000) (483,000) (1,036,000) (1,240,000)
----------- ----------- ----------- -----------
$ 2,446,000 $ 1,177,000 $ 8,013,000 $ 3,157,000
=========== =========== =========== ===========
Shares outstanding 5,600,243 5,648,381 5,544,540 5,541,212
Stock options 383,214 594,081 353,393 412,357
Deferred Stock 114,347 102,395 114,347 102,395
----------- ----------- ----------- -----------
6,097,804 6,344,857 6,012,280 6,055,964
Per share amounts $ 0.40 $ 0.19 $ 1.33 $ 0.52
=========== =========== =========== ===========
</TABLE>
7
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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 refer to the
Company's Form 10-K for the year ended December 31, 1999.
The following table sets forth, for the periods indicated, selected financial
results:
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales 33,224,000 29,458,000 93,182,000 82,702,000
Gross profit (1) 5,229,000 2,676,000 10,935,000 7,501,000
Gross profit as a % of costs 18.68% 9.99% 13.30% 9.97%
Net income 3,125,000 1,660,000 9,049,000 4,397,000
Number of staff 749 724 749 724
</TABLE>
<TABLE>
<CAPTION>
Balance at
--------------------------------------------------
September 30 December 31 September 30
2000 1999 1999
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<S> <C> <C> <C>
Funded 12 month backlog 41,100,000 41,900,000 44,200,000
Total 12 month contract backlog 138,500,000 116,200,000 123,900,000
Stockholders equity 24,747,000 18,549,000 17,070,000
Equity per share (2) 5.10 3.30 3.06
Stock repurchase notes 1,398,000 1,232,000 1,230,000
Line of credit -- 951,000 --
Number in days sales in receivables 69 80 71
Current ratio 2.3 1.8 2.4
</TABLE>
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(1) The Company defines gross profit as sales less costs and expenses excluding
interest costs and certain expenses which cannot be billed to its government
customers.
(2) Equity per share is based on outstanding shares of common stock
REVENUES
The Company's contract revenues for the third quarter and the first nine months
of 2000 were up 12.8% and 12.7%, respectively, from the corresponding periods in
1999 due to increased project billings, including the effect of new work as
described below. Gross profit for the three-month and nine-month periods ended
September 30, 2000 was up 95% and 46%, respectively, when compared to the
corresponding periods of 1999. Gross profit as a percent of costs increased from
9.99% to 18.68% for the corresponding quarter in 1999 and increased from 9.97%
to 13.30% for the respective nine month period in 1999. The increase in
profitability during the third quarter of 2000 compared with the same period in
1999 was driven primarily by the uncharacteristically high gross margin on one
contract.
NEW CONTRACTS AND ANNUALIZED BACKLOG
The Company had one major competitive win and four major competitive losses
during the quarter. The major win was the TEIS contract, won by C4I Operation as
a subcontractor to Signal Corp. The Company share is expected to be worth at
least $10,000,000 over 5 years. The major competitive losses consisted of one
bid as a prime contractor and three as subcontractor. The bid as prime
contractor was a $20,000,000 5-year bid by INS Operation for Analytical Systems
support to Missile and Space Intelligence Center [MSIC]. The bids as
subcontractor consisted of a $10,000,000 8-year bid by SMD Operation as a
subcontractor to TRW for ISC2 Phase 2; a $3,500,000 5-year bid by DSS Operation
as subcontractor to Boeing for AADC Phase 2; and a $2,500,000 5-year bid by TS
Operation as subcontractor to DynCorp for Airborne Sciences.
8
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Annualized contract backlog increased 7.8% in the third quarter over backlog at
the end of the second quarter, and increased 16.1% over backlog at the beginning
of the year. Backlog increased from $128,500,000 at the end of the second
quarter to $138,500,000 at the end of the third quarter. Proposal backlog
declined $5,000,000 in the quarter to $67,000,000. Opportunity backlog remains
high and additional proposals will be written in the next quarter.
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 $10,000,000.
There were no borrowings against the Company's line of credit as of the end of
the 3rd quarter, the same as at the end of the corresponding period in 1999. The
reduction in borrowings is largely due to the Company's concerted effort to
control expenditures for independent research and development as well as a
planned reduction of investment in product initiatives. Additionally, at the
start of the second quarter, the Company was authorized by the Defense Contract
Audit Agency (DCAA) to participate in the Direct Billing Initiative (DBI)
program. Under this program, interim (i.e. except for first and last) vouchers
can be directly submitted to the Defense Finance and Accounting Service (DFAS),
NASA, and the Maryland Procurement office (MPO). DBI reduces the time between
submittal and payment of vouchers and reduces days sales outstanding (DSO). DSO
decreased to 69 days at September 30, 2000 from 71 days at September 30, 1999.
The Company continues to actively monitor receivables with emphasis placed on
collection activities and bi-monthly billing if allowed under the contract. The
Company's debt-to-equity ratio, as defined by the bank, was 0.4 at September 30,
2000 versus 0.5 at December 31, 1999 and 0.4 at September 30, 1999. 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.
STOCKHOLDERS' EQUITY
Stockholders' equity increased by $6,198,000, from $18,549,000 at December 31,
1999 to $24,747,000 at September 30, 2000. The increase in stockholders' equity
was due primarily to the Company's strong earnings and net proceeds from the
sale of Common Stock; offset somewhat by the purchase of Treasury Stock.
Additionally, the sale of the Advanced Signal Processing Division (ASPD) in
Raleigh, N.C., to JSI, a Canadian company, contributed $2,610,000 to
stockholders' equity.
STOCK PURCHASE AGREEMENT
Under the Stock Purchase Agreement, which the Company entered into with Science
Applications International Corporation ("SAIC") in November, 1994, SAIC
purchased $2,400,000 of Company Preferred Stock in 1994, 1995 and 1996 totaling
569,039 shares. By agreement with SAIC, the Company began quarterly repurchase
of SAIC Preferred Stock starting with the May 21, 1999 quarterly trade with
funds available within the stock repurchase limitation. Preferred stock held by
SAIC as of September 30, 2000 totaled 379,154 shares and represents 4.9% of the
Company's total outstanding stock. It is the Company's intent to continue to
repurchase SAIC stock within the Company's quarterly stock repurchase
limitation.
EFFECTS OF FEDERAL FUNDING FOR DEFENSE PROGRAMS
The Company continues to have approximately 85% of its contracts with the
Department of Defense. The Company's government contracts may be terminated, in
whole or in part, at the convenience of the customer (as well as in the event of
default). In the event of a termination for convenience, the customer is
generally obligated to pay the costs incurred by the Company under the contract
plus a fee based upon work completed. There were no contracts terminated in the
third quarter of 2000. The Company does not anticipate any termination of
programs and contracts in 2000. However, no assurances can be given that such
events will not occur.
In addition to the right of the U.S. government to terminate contracts for
convenience, U.S. government contracts are conditioned upon the continuing
availability of congressional appropriations. These appropriations are subject
to unforeseen changes in the allocation of the overall Department of Defense
budget for government fiscal year (GFY) 2001. It can also be affected by the
2000 national elections resulting from changes in the Administration or
leadership in Congress.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to item 7A in the Company's Annual Report on Form 10K for the year ended
January 2, 2000.
9
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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
None
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 -- Financial Data Schedule
No report(s) on Form 8-K were filed by the Company during the fiscal
quarter for which this report is filed.
10
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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: November 15, 2000 B. Warren Knudson
Vice President and Chief
Financial Officer
(Principal Finance and
Accounting Officer)
11
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule
