<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, 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
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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 July 2, 2000, the registrant had 5,670,226 shares of common stock, $.01
par value per share, issued and outstanding.
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SPARTA, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2000
INDEX
PART I FINANCIAL INFORMATION
ITEM 1 Quarterly Financial Statements
Consolidated Statements of Income for the Three and Six Months Periods
Ended June 30, 2000 and June 30, 1999 (Unaudited)
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999
(Unaudited)
Consolidated Statement of Cash Flows for the Six Months Ended June 30,
2000 and June 30, 1999 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
SIGNATURE
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PART I
FINANCIAL INFORMATION
<PAGE> 4
SPARTA, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended June 30 Six Months ended June 30
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 31,973,000 $27,727,000 $ 59,959,000 $53,245,000
------------ ----------- ------------ -----------
Costs and expenses:
Labor costs and related benefits 15,934,000 14,438,000 32,158,000 29,447,000
Subcontractor and other costs 10,410,000 7,877,000 16,167,000 13,666,000
Facility costs 2,350,000 2,082,000 4,491,000 3,909,000
Travel and other 224,000 1,139,000 1,619,000 1,535,000
Interest income, net (48,000) 43,000 (12,000) 128,000
------------ ----------- ------------ -----------
28,870,000 25,579,000 54,423,000 48,685,000
------------ ----------- ------------ -----------
Income from operations 3,103,000 2,148,000 5,536,000 4,560,000
Gain on sale of Raleigh division 4,339,000 4,339,000
------------ ----------- ------------ -----------
Income before provision for
taxes on income 7,442,000 2,148,000 9,875,000 4,560,000
Provision for taxes on income 2,977,000 859,000 3,950,000 1,824,000
------------ ----------- ------------ -----------
Net income $ 4,465,000 $ 1,289,000 $ 5,925,000 $ 2,736,000
============ =========== ============ ===========
Basic earnings per share $ 0.77 $ 0.15 $ 0.99 $ 0.35
============ =========== ============ ===========
Diluted earnings per share $ 0.71 $ 0.14 $ 0.91 $ 0.33
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
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SPARTA, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
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(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 11,218,000 $ 319,000
Accounts receivable 21,765,000 30,410,000
Prepaid expenses 865,000 545,000
Income taxes receivable -- --
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Total current assets 33,848,000 31,274,000
Equipment and improvements, net 9,585,000 10,007,000
Other assets 2,026,000 1,904,000
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TOTAL ASSETS $ 45,459,000 $43,185,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accrued compensation $ 5,546,000 $ 6,486,000
Accounts payable and other accrued expenses 3,815,000 7,746,000
Current portion of subordinated notes payable 892,000 972,000
Income tax payable 3,105,000 470,000
Deferred income taxes 1,773,000 1,773,000
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Total current liabilities 15,131,000 17,447,000
Notes payable -- 951,000
Subordinated notes payable 799,000 260,000
Deferred income taxes 614,000 614,000
Redeemable Preferred Stock
Preferred stock, $.01 par value;
2,000,000 shares authorized; 414,389 and
447,378 shares issued and outstanding 5,375,000 5,364,000
Stockholders' equity
Common stock, $.01 par value,
25,000,000 shares authorized; 14,376,253 and
13,886,286 shares issued 60,000 56,000
Additional paid-in capital 22,464,000 18,439,000
Retained earnings 5,567,000 54,000
Treasury stock (4,551,000) --
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Total stockholders' equity 23,540,000 18,549,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,459,000 $43,185,000
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 6
SPARTA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,925,000 $ 2,736,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 753,000 860,000
Loss on sale of equipment 51,000 216,000
Employee compensation paid in stock 2,177,000 1,908,000
Gain on sale of Raleigh Division (4,339,000)
Changes in assets and liabilities:
Accounts receivable 8,645,000 3,643,000
Prepaid expenses (320,000) (203,000)
Other assets (123,000) (221,000)
Accrued compensation (939,000) (637,000)
Accounts payable and other accrued expense (3,931,000) (3,281,000)
Income taxes payable/receivable 2,635,000 835,000
Deferred income taxes -- (564,000)
Tax benefit relating to stock plan 610,000 434,000
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NET CASH PROVIDED BY OPERATING ACTIVITIES 11,144,000 5,726,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Raleigh Division 4,800,000
Capital expenditures (844,000) (1,405,000)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 3,956,000 (1,405,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 1,242,000 1,186,000
Redemption of preferred Stock (400,000)
Purchases of treasury stock (3,601,000) (4,092,000)
Net (repayments) borrowing under line-of-credit
agreement (951,000) (1,266,000)
Principal payments on debt (491,000) (99,000)
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NET CASH USED IN FINANCING ACTIVITIES (4,201,000) (4,271,000)
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NET INCREASE IN CASH 10,899,000 50,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 319,000 174,000
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,218,000 $ 224,000
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 32,000 $ 136,000
============ ===========
Income taxes $ 991,000 $ 1,555,000
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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 Sunday
closest to December 31. The Company's last fiscal year ended on January 2, 2000
and its second quarter ended July 2, 2000 and corresponding second quarter last
year on July 4, 1999. To aid the reader of the financial statements, the
year-end has been presented as December 31, 1999 and the quarters and six months
ended June 30, 2000 and June 30, 1999.
In the opinion of management, the unaudited financial information for the three
and six-month periods ended June 30, 2000 and June 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 JUNE 30 SIX MONTHS ENDED JUNE 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
BASIC EPS
Net income $ 4,465,000 $ 1,289,000 $ 5,925,000 $ 2,736,000
Less accretion (174,000) (438,000) (411,000) (756,000)
----------- ----------- ----------- -----------
$ 4,291,000 $ 851,000 $ 5,514,000 $ 1,980,000
=========== =========== =========== ===========
Shares outstanding 5,600,243 5,648,381 5,587,424 5,593,873
Per share amounts $ 0.77 $ 0.15 $ 0.99 $ 0.35
=========== =========== =========== ===========
DILUTIVE EFFECT
Net income $ 4,465,000 $ 1,289,000 $ 5,925,000 $ 2,736,000
Less accretion (174,000) (438,000) (411,000) (756,000)
----------- ----------- ----------- -----------
$ 4,291,000 $ 851,000 $ 5,514,000 $ 1,980,000
=========== =========== =========== ===========
Shares outstanding 5,600,243 5,648,381 5,587,424 5,593,873
Stock options 335,538 541,945 338,308 263,836
Deferred Stock 114,347 87,395 114,347 87,395
----------- ----------- ----------- -----------
6,050,128 6,277,721 6,040,079 5,945,104
Per share amounts $ 0.71 $ 0.14 $ 0.91 $ 0.33
=========== =========== =========== ===========
</TABLE>
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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 June 30 Six months ended June 30
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales 31,973,000 27,727,000 59,959,000 53,245,000
Gross profit (1) 2,782,000 2,555,000 5,706,000 4,825,000
Gross profit as a % of costs 9.53% 10.15% 10.52% 9.96%
Net income excluding Raleigh sale (2) 1,864,000 1,289,000 3,024,000 2,736,000
Net income including gain on Raleigh (2) 4,465,000 1,289,000 5,925,000 2,736,000
Number of staff 777 721 777 721
</TABLE>
<TABLE>
<CAPTION>
Balance at
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June 30 December 31 June 30
2000 1999 1999
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<S> <C> <C> <C>
Funded 12 month backlog 54,700,000 41,900,000 50,000,000
Total 12 month contract backlog 128,500,000 116,200,000 116,600,000
Stockholders equity 23,540,000 18,549,000 16,820,000
Equity per share (3) 4.14 3.30 2.97
Stock repurchase notes 1,691,000 1,232,000 1,172,000
Line of credit -- 951,000 --
Number in days sales in receivables 66 80 75
Current ratio 2.2 1.8 2.3
</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) Prior to adjustments for interest and accretion on stock - See Note D.
(3) Equity per share is based on outstanding shares of common stock.
REVENUES
The Company's contract revenues for the second quarter were up 15.3% from the
corresponding three-month period in 1999 due to increased project billings
including the effect of new work as described below. Gross profit for the
three-month period ended June 30, 2000 was up 8.9% when compared to the
corresponding period of 1999. Gross profit as a percent of costs decreased from
10.2% to 9.5% for the corresponding period in 1999. The small decrease in the
profit rate for the quarter represents a return to historical profit rates.
NEW CONTRACTS AND ANNUALIZED BACKLOG
The Company had one major competitive win during this quarter. The Space and
Missile Defense Operation won the Engineering Analysis Design and Development
(EADD) contract as a prime contractor for Air Force Space and Missile Command
(AF SMC). This contract is estimated to be worth $100,000,000 to $150,000,000
over the five-year period of performance.
The Company also had one major competitive loss during this quarter. The
Integrated Data Systems Operation lost a $5,000,000 five-year bid for Terminal
High Altitude Air Defense (THADD) logistics to Lockheed-Martin Company.
<PAGE> 9
Annualized contract backlog increased 5.3% in the second quarter over backlog at
the end of the first quarter, and increased 10.8% over backlog at the beginning
of the year. Backlog increased from $122,000,000 at the end of the first quarter
to $128,500,000 at the end of the second quarter. Proposal backlog increased
$21,600,000 in the quarter to $72,000,000 as a number of large proposals were
written and submitted to customers. Opportunity backlog remains high and
additional proposals will be written in the next two quarters.
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.
There were no borrowings against the Company's line of credit as of the end of
the 2nd 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 66 days at June 30, 2000 from 75 days at June 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 0.5 at June 30, 2000 versus
0.5 at December 31, 1999 and 0.4 at June 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
The Company increased stockholders' equity from $18,549,000 at the end of 1999
to $23,540,000 at June 30, 2000. The Company's strong earnings and net proceeds
from the sale and repurchase of stock have accounted for approximately
$2,390,000 of the nearly $5,000,000 increase. In the second quarter the Company
sold its Advanced Signal Processing Division (ASPD) in Raleigh, N. C., to JSI, a
Canadian company. The purchase price was equal to approximately six times annual
revenues of ASPD. The net gain after taxes on this sale accounted for the rest
of the increase in 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 June 30, 2000 totaled 414,389 shares and represents 5.4% 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
second 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.
<PAGE> 10
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.
<PAGE> 11
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 was held on June 2, 2000 at which time
proxies and shareholders present voted for the Directors and the continuation of
Pricewaterhouse Coopers as the Company's independent accountant to examine the
consolidated financial statements for the year ending December 31, 2000.
ITEM 5 OTHER MATERIALLY IMPORTANT EVENTS
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
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27 Financial Data Schedule
(b) 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
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Date: August 16, 2000 B. Warren Knudson
Vice President and Chief
Financial Officer
(Principal Finance and
Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
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27 Financial Data Schedule
