UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| [X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 28, 2003
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.
| Delaware | 63-0775889 | |
|
|
||
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
25531 Commercentre Drive, Suite 120, Lake Forest, CA 92630-8873
(949) 768-8161
Not Applicable
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of September 28, 2003, the registrant had 5,095,890 shares of common stock, $.01 par value per share, issued and outstanding.
SPARTA, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 28, 2003
INDEX
| PART I | FINANCIAL INFORMATION | |
| Item 1 | Financial Statements | |
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4 | Controls and Procedures | |
| PART II | OTHER INFORMATION | |
| Item 1 | Legal Proceedings | |
| Item 2 | Changes in Securities and Use of Proceeds | |
| Item 3 | Defaults Upon Senior Securities | |
| Item 4 | Submission of Matters to a Vote of Security Holders | |
| Item 5 | Other Information | |
| Item 6 | Exhibits and Reports on Form 8-K | |
| Signature | ||
| Exhibits |
- 1 -
PART I
Item 1 Financial Statements
- 2 -
SPARTA, Inc.
CONSOLIDATED BALANCE SHEET
(Unaudited)
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
ASSETS |
||||||||||
Current Assets |
||||||||||
Cash and cash equivalents |
$ | 28,791,000 | $ | 17,780,000 | ||||||
Receivables, net |
32,980,000 | 31,883,000 | ||||||||
Prepaid expenses |
660,000 | 614,000 | ||||||||
Total current assets |
62,431,000 | 50,277,000 | ||||||||
Equipment and improvements, net |
7,090,000 | 7,054,000 | ||||||||
Other assets |
1,899,000 | 2,033,000 | ||||||||
Total Assets |
$ | 71,420,000 | $ | 59,364,000 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current Liabilities |
||||||||||
Accrued compensation |
$ | 14,463,000 | $ | 12,805,000 | ||||||
Accounts payable and other accrued expenses |
9,539,000 | 7,757,000 | ||||||||
Current portion of subordinated notes payable |
2,418,000 | 2,258,000 | ||||||||
Income taxes payable |
829,000 | 1,454,000 | ||||||||
Deferred income taxes |
1,327,000 | 1,327,000 | ||||||||
Total current liabilities |
28,576,000 | 25,601,000 | ||||||||
Subordinated notes payable |
6,311,000 | 8,095,000 | ||||||||
Deferred income taxes |
666,000 | 666,000 | ||||||||
Stockholders’ equity |
||||||||||
Common stock, $.01 par value, 25,000,000 shares
authorized; 6,379,590 and 5,719,162 shares issued;
5,095,890 and 4,795,213 shares outstanding |
64,000 | 57,000 | ||||||||
Additional paid-in capital |
46,874,000 | 35,559,000 | ||||||||
Retained earnings |
15,164,000 | 7,534,000 | ||||||||
Treasury stock, at cost |
(26,235,000 | ) | (18,148,000 | ) | ||||||
Total stockholders’ equity |
35,867,000 | 25,002,000 | ||||||||
Total Liabilities and Stockholders’ Equity |
$ | 71,420,000 | $ | 59,364,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
- 3 -
SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
| Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Sales |
$ | 49,397,000 | $ | 42,911,000 | $ | 147,516,000 | $ | 119,585,000 | ||||||||||
Costs and expenses: |
||||||||||||||||||
Labor costs and related benefits |
25,932,000 | 22,024,000 | 75,770,000 | 64,561,000 | ||||||||||||||
Subcontractor & other costs |
14,320,000 | 13,095,000 | 45,788,000 | 32,310,000 | ||||||||||||||
Facility costs |
2,685,000 | 2,518,000 | 7,748,000 | 7,544,000 | ||||||||||||||
Travel and other |
2,110,000 | 1,783,000 | 5,357,000 | 4,350,000 | ||||||||||||||
Total costs and expenses |
45,047,000 | 39,420,000 | 134,663,000 | 108,765,000 | ||||||||||||||
Income from operations |
4,350,000 | 3,491,000 | 12,853,000 | 10,820,000 | ||||||||||||||
Interest expense (income), net |
(17,000 | ) | (9,000 | ) | (33,000 | ) | (48,000 | ) | ||||||||||
Income before provision for
taxes on income |
4,367,000 | 3,500,000 | 12,886,000 | 10,868,000 | ||||||||||||||
Provision for taxes on income |
1,778,000 | 1,400,000 | 5,256,000 | 4,347,000 | ||||||||||||||
Net income |
$ | 2,589,000 | $ | 2,100,000 | $ | 7,630,000 | $ | 6,521,000 | ||||||||||
Basic earnings per share |
$ | 0.52 | $ | 0.43 | $ | 1.53 | $ | 1.26 | ||||||||||
Diluted earnings per share |
$ | 0.48 | $ | 0.39 | $ | 1.41 | $ | 1.15 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements
- 4 -
SPARTA, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| Nine Months ended September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 7,630,000 | $ | 6,521,000 | ||||||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
1,369,000 | 1,597,000 | ||||||||||
Loss on sale of equipment |
— | 87,000 | ||||||||||
Stock-based compensation |
4,242,000 | 3,752,000 | ||||||||||
Tax benefit relating to stock plan |
1,676,000 | 1,467,000 | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Receivables, net |
(1,097,000 | ) | (810,000 | ) | ||||||||
Prepaid expenses |
(46,000 | ) | (141,000 | ) | ||||||||
Other assets |
134,000 | 48,000 | ||||||||||
Accrued compensation |
1,658,000 | 767,000 | ||||||||||
Accounts payable and other accrued expenses |
1,782,000 | 91,000 | ||||||||||
Income taxes payable |
(625,000 | ) | (410,000 | ) | ||||||||
Net cash provided by (used for) operating activities |
16,723,000 | 12,969,000 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of equipment and improvements |
(1,265,000 | ) | (743,000 | ) | ||||||||
Acquisition, net of cash acquired |
(140,000 | ) | — | |||||||||
Proceeds from sale of short-term investments |
— | 8,727,000 | ||||||||||
Net cash provided by (used for) investing activities |
(1,405,000 | ) | 7,984,000 | |||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of stock |
5,404,000 | 3,703,000 | ||||||||||
Redemption of preferred stock |
— | (3,095,000 | ) | |||||||||
Cash purchases of treasury stock |
(7,904,000 | ) | (11,346,000 | ) | ||||||||
Principal payments on subordinated notes payable |
(1,807,000 | ) | (1,516,000 | ) | ||||||||
Net cash provided by (used for) financing activities |
(4,307,000 | ) | (12,254,000 | ) | ||||||||
Net increase in cash |
11,011,000 | 8,699,000 | ||||||||||
Cash and cash equivalents at beginning of period |
17,780,000 | 10,303,000 | ||||||||||
Cash and cash equivalents at end of period |
$ | 28,791,000 | $ | 19,002,000 | ||||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Interest |
$ | 126,000 | $ | 183,000 | ||||||||
Income taxes |
$ | 4,257,000 | $ | 3,325,000 | ||||||||
Non-cash investing and financing activities: |
||||||||||||
Issuance of subordinated notes payable in connection
with purchases of treasury stock |
$ | 183,000 | $ | 3,450,000 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements
- 5 -
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 December 29, 2002, its third quarter ended September 28, 2003, and its corresponding third quarter last year ended on September 29, 2002. To aid the reader of the financial statements, the year-end has been presented as December 31, 2002 and the three and nine-month period ends have been presented as September 30, 2003 and September 30, 2002.
In the opinion of management, the unaudited financial information for the three and nine-month periods ended September 30, 2003 and September 30, 2002 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 Earnings Per Share
| Three months ended September 30, | Nine months ended September, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Basic EPS |
|||||||||||||||||
Net income |
$ | 2,589,000 | $ | 2,100,000 | $ | 7,630,000 | $ | 6,521,000 | |||||||||
Accretion adjustment |
— | (347,000 | ) | ||||||||||||||
| $ | 2,589,000 | $ | 2,100,000 | $ | 7,630,000 | $ | 6,174,000 | ||||||||||
Weighted average
shares outstanding |
4,946,425 | 4,831,686 | 4,996,988 | 4,889,930 | |||||||||||||
Per share amounts |
$ | 0.52 | $ | 0.43 | $ | 1.53 | $ | 1.26 | |||||||||
Dilutied EPS |
|||||||||||||||||
Net income |
$ | 2,589,000 | $ | 2,100,000 | $ | 7,630,000 | $ | 6,521,000 | |||||||||
Accretion adjustment |
— | — | — | (347,000 | ) | ||||||||||||
| $ | 2,589,000 | $ | 2,100,000 | $ | 7,630,000 | $ | 6,174,000 | ||||||||||
Weighted average
shares outstanding |
4,946,425 | 4,831,686 | 4,996,988 | 4,889,930 | |||||||||||||
Stock options |
370,030 | 446,295 | 355,393 | 395,415 | |||||||||||||
Restricted stock |
73,887 | 90,327 | 73,887 | 90,327 | |||||||||||||
| 5,390,342 | 5,368,308 | 5,426,268 | 5,375,672 | ||||||||||||||
Per share amounts |
$ | 0.48 | $ | 0.39 | $ | 1.41 | $ | 1.15 | |||||||||
- 6 -
Note D – Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance with the intrinsic value method described in Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations. Had compensation expense for these plans been determined in accordance with the fair value method described in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), the Company’s net income and net income per share would have been reduced to the pro forma amounts in the following table.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income |
|||||||||||||||||
As reported |
$ | 2,589,000 | $ | 2,100,000 | $ | 7,630,000 | $ | 6,174,000 | |||||||||
Add after-tax stock-based
compensation expense
included in determining
net income |
421,000 | 344,000 | 1,084,000 | 679,000 | |||||||||||||
Deduct after-tax stock-based
compensation expense as
if the fair value method had
been used |
(742,000 | ) | (580,000 | ) | (1,742,000 | ) | (1,595,000 | ) | |||||||||
Pro forma net income |
$ | 2,268,000 | $ | 1,864,000 | $ | 6,972,000 | $ | 5,258,000 | |||||||||
Basic EPS |
|||||||||||||||||
As reported |
$ | 0.52 | $ | 0.43 | $ | 1.53 | $ | 1.26 | |||||||||
Pro forma |
0.46 | 0.39 | 1.40 | 1.08 | |||||||||||||
Diluted EPS |
|||||||||||||||||
As reported |
0.48 | 0.39 | 1.41 | 1.15 | |||||||||||||
Pro forma |
0.42 | 0.35 | 1.28 | 0.98 | |||||||||||||
Note E – Stockholders’ Equity
For the nine months ended September 30, 2003, proceeds from the issuance of common stock, primarily as the result of exercises of stock options, totaled $5.4 million. In addition, the Company repurchased a total of 358,096 common shares totaling approximately $8.1 million, of which $0.2 million was repurchased in exchange for promissory notes.
Treasury stock is shown at cost, and consisted of 1,282,045 shares and 923,949 shares of common stock at September 30, 2003 and December 31, 2002, respectively. Repurchase of outstanding stock by the Company in exercise of its right of repurchase upon termination of employment (as defined) are made at estimated fair value. The stock price is calculated quarterly by the Company using a formula approved by the Board of Directors (which the Company believes estimates fair value). The stock price formula is evaluated annually by reference to discounted cash flow analysis and other financial valuation techniques.
- 7 -
Note F – Commitments and Contingencies
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements 5, 57, and 107, and rescission of FASB Interpretation No. 34.” FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, during the first quarter of fiscal 2003. The adoption of FIN 45 did not have a material effect on the Company’s consolidated financial statements.
As permitted under Delaware law, the Company has entered into agreements whereby it indemnifies its officers and directors over his or her lifetime for certain events or occurrences while the officer or director is, or was serving, in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and should enable it to recover a portion of any future amounts paid. As a result of the insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. All of these indemnification agreements were grandfathered under the provisions of FIN 45 as they were in effect prior to December 31, 2002. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2003.
In addition, the Company has entered into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party (generally our business partners or customers) in connection with any claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2003.
The Company has no material investigations, claims, or lawsuits arising out of its business, nor any known to be pending. The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the ultimate outcome of such matters will not have a material impact on the Company’s financial position, results of operations or cash flows.
Note G – Other Recent Accounting Pronouncements
The Company adopted the following Statements of Financial Accounting Standards (SFAS) as of January 1, 2002: SFAS 141, which addresses accounting for acquired business using the purchase method of accounting; SFAS 142, which addressees accounting for acquired goodwill and other intangible assets; SFAS 143, which addresses accounting for obligations associated with the retirement
- 8 -
of tangible long-lived assets and the associated retirement costs; and SFAS 144,