UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended April 3, 2005
OR
| o | 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 (State or other jurisdiction of incorporation or organization) |
63-0775889 (I.R.S. Employer Identification No.) |
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of April 3, 2005 the registrant had 5,129,134 shares of common stock, $.01 par value per share, issued and outstanding.
1
SPARTA, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED APRIL 3, 2005
INDEX
- 1 -
SPARTA, Inc.
CONSOLIDATED BALANCE SHEET
(Unaudited)
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 27,595,000 | $ | 29,455,000 | ||||
Receivables, net |
47,974,000 | 48,173,000 | ||||||
Prepaid expenses |
1,103,000 | 926,000 | ||||||
Income taxes receivable |
— | 943,000 | ||||||
Total current assets |
76,672,000 | 79,497,000 | ||||||
Equipment and improvements, net |
10,427,000 | 10,460,000 | ||||||
Other assets |
2,579,000 | 2,323,000 | ||||||
Total Assets |
$ | 89,678,000 | $ | 92,280,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Accrued compensation |
$ | 12,735,000 | $ | 17,345,000 | ||||
Accounts payable and other accrued expenses |
8,104,000 | 10,849,000 | ||||||
Current portion of subordinated notes payable |
2,918,000 | 2,992,000 | ||||||
Income taxes payable |
1,286,000 | — | ||||||
Deferred income taxes |
2,000,000 | 2,000,000 | ||||||
Total current liabilities |
27,043,000 | 33,186,000 | ||||||
Subordinated notes payable |
7,929,000 | 7,415,000 | ||||||
Deferred income taxes |
952,000 | 952,000 | ||||||
Commitments and Contingencies (Note F) |
||||||||
Stockholders’ Equity |
||||||||
Common stock, $.01 par value, 25,000,000 shares
authorized; 7,689,447 and 7,465,241 shares issued;
5,129,134 and 5,120,836 shares outstanding |
77,000 | 75,000 | ||||||
Additional paid-in capital |
80,160,000 | 73,609,000 | ||||||
Retained earnings |
39,020,000 | 34,710,000 | ||||||
Treasury stock, at cost |
(65,503,000 | ) | (57,667,000 | ) | ||||
Total stockholders’ equity |
53,754,000 | 50,727,000 | ||||||
Total Liabilities and Stockholders’ Equity |
$ | 89,678,000 | $ | 92,280,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements
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SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
| Three Months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Sales |
$ | 65,116,000 | $ | 54,805,000 | ||||
Costs and expenses: |
||||||||
Labor costs and related benefits |
35,131,000 | 30,140,000 | ||||||
Subcontractor costs |
16,746,000 | 14,277,000 | ||||||
Facility costs |
3,905,000 | 3,182,000 | ||||||
Travel and general administrative costs |
2,117,000 | 1,643,000 | ||||||
Total costs and expenses |
57,899,000 | 49,242,000 | ||||||
Income from operations |
7,217,000 | 5,563,000 | ||||||
Interest income |
(172,000 | ) | (85,000 | ) | ||||
Interest expense |
87,000 | 53,000 | ||||||
Income before provision for
taxes on income |
7,302,000 | 5,595,000 | ||||||
Provision for taxes on income |
2,992,000 | 2,293,000 | ||||||
Net income |
$ | 4,310,000 | $ | 3,302,000 | ||||
Basic earnings per share |
$ | 0.84 | $ | 0.64 | ||||
Diluted earnings per share |
$ | 0.76 | $ | 0.58 | ||||
The accompanying notes are an integral part of these consolidated financial statements
- 4 -
SPARTA, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| Three Months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 4,310,000 | $ | 3,302,000 | ||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||
Depreciation and amortization |
719,000 | 562,000 | ||||||
Loss on sale of equipment |
— | 7,000 | ||||||
Stock-based compensation |
3,865,000 | 3,908,000 | ||||||
Tax benefit relating to stock plan |
468,000 | 605,000 | ||||||
Changes in assets and liabilities: |
||||||||
Receivables, net |
199,000 | (7,072,000 | ) | |||||
Prepaid expenses |
(177,000 | ) | (540,000 | ) | ||||
Other assets |
(256,000 | ) | (38,000 | ) | ||||
Accrued compensation |
(4,610,000 | ) | (8,328,000 | ) | ||||
Accounts payable and other accrued expenses |
(2,745,000 | ) | 65,000 | |||||
Income taxes payable |
2,229,000 | (70,000 | ) | |||||
Net cash from (used for) operating activities |
4,002,000 | (7,599,000 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchases of equipment and improvements |
(686,000 | ) | (900,000 | ) | ||||
Net cash used for investing activities |
(686,000 | ) | (900,000 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of stock |
2,220,000 | 3,176,000 | ||||||
Cash purchases of treasury stock |
(6,707,000 | ) | (5,273,000 | ) | ||||
Principal payments on subordinated notes payable |
(689,000 | ) | (620,000 | ) | ||||
Net cash used for financing activities |
(5,176,000 | ) | (2,717,000 | ) | ||||
Net decrease in cash |
(1,860,000 | ) | (11,216,000 | ) | ||||
Cash and cash equivalents at beginning of period |
29,455,000 | 26,711,000 | ||||||
Cash and cash equivalents at end of period |
$ | 27,595,000 | $ | 15,495,000 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 87,000 | $ | 53,000 | ||||
Income taxes |
$ | 294,000 | $ | 1,757,000 | ||||
Non-cash investing and financing activities: |
||||||||
Issuance of subordinated notes payable in connection
with purchases of treasury stock |
$ | 1,129,000 | $ | — | ||||
Receipt of notes receivable in exchange for exercise of
stock options |
$ | 39,000 | $ | 102,000 | ||||
The accompanying notes are an integral part of these consolidated 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. Fiscal year 2005 comprises the 52-week period ending January 1, 2006, whereas fiscal year 2004 comprised the 53-week period ended January 2, 2005. The first quarter of fiscal 2005 comprised the 13 weeks ended April 3, 2004 whereas the corresponding first quarter in fiscal 2004 comprised the 14 weeks ended April 4, 2004. To aid the reader of the financial statements, the year-end has been presented as December 31, 2004 and the three-month period ends have been presented as March 31, 2005 and March 31, 2004.
In the opinion of management, the unaudited financial information for the three-month periods ended March 31, 2005 and March 31, 2004 reflects all adjustments (which include only normal, recurring adjustments) necessary for a fair statement of the results for such periods.
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 March 31, | ||||||||
| 2005 | 2004 | |||||||
Basic EPS |
||||||||
Net income |
$ | 4,310,000 | $ | 3,302,000 | ||||
Weighted average
shares outstanding |
5,136,268 | 5,183,906 | ||||||
Per share amounts |
$ | 0.84 | $ | 0.64 | ||||
Diluted EPS |
||||||||
Net income |
$ | 4,310,000 | $ | 3,302,000 | ||||
Weighted average
shares outstanding |
5,136,268 | 5,183,906 | ||||||
Stock options |
480,306 | 416,287 | ||||||
Restricted stock |
58,905 | 61,613 | ||||||
| 5,675,479 | 5,661,806 | |||||||
Per share amounts |
$ | 0.76 | $ | 0.58 | ||||
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
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SPARTA, INC.
Notes to Consolidated Financial Statements
(Unaudited)
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 March 31, | ||||||||
| 2005 | 2004 | |||||||
Net income
|
||||||||
Net income
As reported |
$ | 4,310,000 | $ | 3,302,000 | ||||
Add after-tax stock-based
compensation expense
included in determining
net income |
575,000 | 308,000 | ||||||
Deduct after-tax stock-based
compensation expense as
if the fair value method had
been used |
(912,000 | ) | (627,000 | ) | ||||
Pro forma net income |
$ | 3,973,000 | $ | 2,983,000 | ||||
Basic EPS |
||||||||
As reported |
$ | 0.84 | $ | 0.64 | ||||
Pro forma |
0.77 | 0.58 | ||||||
Diluted EPS |
||||||||
As reported |
0.76 | 0.58 | ||||||
Pro forma |
0.71 | 0.54 | ||||||
Note E – Stockholders’ Equity
For the three months ended March 31, 2005, proceeds from the issuance of common stock, primarily as the result of exercises of stock options, totaled $2.2 million. In addition, the Company repurchased a total of 215,908 common shares at their current fair value totaling approximately $7.8 million. Of this total, the Company repurchased $6.7 million for cash, and $1.1 million by delivery of promissory notes. The promissory notes provide for principal payments over periods ranging from two to five years, plus interest at the lesser of the prime rate, the Federal Reserve discount rate (3.75% at March 31, 2005) or 10%.
Treasury stock is shown at cost, and consisted of 2,560,313 shares and 2,344,405 shares of common stock at March 31, 2005 and December 31, 2004, 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. In connection with its right to repurchase the stockholdings of individuals who terminate their association with the Company, the Company recognized stock compensation expense of $368,000 and 0 for the quarters ended March 31, 2005 and 2004, respectively. 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, market multiple analysis, comparable transaction analysis and other financial valuation techniques.
- 7 -
SPARTA, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Certain employees are eligible to participate in a program whereby they may exercise certain stock options by delivery of a note payable to the Company. The notes are full recourse, are secured by the underlying shares of common stock, bear interest at prime plus 0.5%, and are repaid through payroll deductions over a period of less than one year. At March 31, 2005 and December 31, 2004, the outstanding principal balances of these notes were $358,000 and $618,000, respectively, and are included as a reduction of additional paid-in capital.
Note F — Commitments and Contingencies
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.
During 2004, the U.S. government terminated for its convenience several task orders on one contract. The contract value of the terminated task orders totaled approximately $22 million; however, approximately $9 million of the total termination amount was incurred prior to the effective date of the termination and has been, or is expected to be, paid to the Company. As of March 31, 2005, the Company had accounts receivable totaling approximately $1.9 million for costs incurred on the terminated task orders. These costs were incurred prior to the effective date of the termination. During the first quarter of 2005, the government agreed to reimburse the Company for substantially all of these costs, and in April, 2005, the Company received a partial reimbursement of $1.5 million for costs incurred on the terminated task orders. The Company is continuing to negotiate with the government regarding settlement of the remaining costs and believes that this termination will not have a material effect on the Company’s financial condition or results of operations.
Note G — Recent Accounting Pronouncements
In December, 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R) [SFAS 123(R)], Share Based Payments. SFAS 123(R) replaces SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123(R) requires that the compensation cost related to all share-based payment transactions (including employee stock options) be recognized in the financial statements. Share-based compensation costs must be measured based on the fair value of the equity or liability instruments issued. The Company anticipates adopting SFAS 123(R) at the beginning of the first annual reporting period beginning after December 15, 2005. The Company has not determined the transition method that will be selected to implement this statement or the impact that adopting this statement will have on the Company’s financial position and/or results of operations.
Note H — Subsequent Event
On April 8, 2005, the Company acquired the assets of McAfee Research, a division of McAfee, Inc., for $1.5 million in cash. McAfee Research conducts advanced computer and network security research focused on a variety of different technologies; such business is complementary to the Company’s existing information assurance business. The acquisition will be accounted for by the purchase method. The Company has not completed allocating the purchase price to the assets acquired or determined the impact of the acquisition on the Company’s financial position and/or results of operations.
- 8 -
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The Company’s fiscal year is the 52 or 53-week period ending on the Sunday closest to December 31. Fiscal year 2005 comprises the 52-week period ending January 1, 2006, whereas fiscal year 2004 comprised the 53 week period ended January 2, 2005. The first quarter of fiscal 2005 comprised 13 weeks, whereas the corresponding first quarter in 2004 comprised 14 weeks.
The following tables present certain key operating data for the periods indicated:
| Operating Results | |||||||||||
| (amounts in thousands, except percentages) | |||||||||||
| Three months ended March 31, | |||||||||||
| 2005 | 2004 | ||||||||||
Sales |
$ | 65,116 | $ | 54,805 | |||||||
Sales by business area, as a
percentage of total sales: |
|||||||||||
Ballistic Missile Defense (“BMD”) |
46 | % | 45 | % | |||||||
Other Dept of Defense (“DoD”) |
50 | % | 52 | % | |||||||
Non-DoD |
4 | % | 3 | % | |||||||
Gross profit (1) |
$ | 7,690 | $ | 5,920 | |||||||
Gross profit as a % of costs (1) |
13.4 | % | 12.1 | % | |||||||
Income from operations |
$ | 7,217 | $ | 5,563 | |||||||
Net income |
$ | 4,310 | $ | 3,302 | |||||||
| (1) | Under SEC regulations, data derived from consolidated financial information but not required by GAAP to be presented in the financial statements are considered “non-GAAP financial measures”. Gross profit, as defined by the Company, and gross profit as a percentage of costs are non-GAAP financial measures. The Company defines gross profit as sales less contract costs. Contract costs are all costs that are allowable for and allocable to contracts under government procurement regulations. As such, gross profit excludes certain operating expenses that are unallowable under government procurement regulations. Management considers gross profit, and gross profit as a percentage of costs, to be key measures of the Company’s contract performance. They should also be considered in conjunction with income from operations, net income, and other measures of financial performance. The following presents a reconciliation of gross profit to income from operations (amounts in thousands): |
| Three months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Gross profit |
$ | 7,690 | $ | 5,920 | ||||
Less unallowable expenses |
(473 | ) | (357 | ) | ||||
Income from Operations |
$ | 7,217 | $ | 5,563 | ||||
The Company’s sales for the three-month period ended March 31, 2005 increased 19%, from $54.8 million for the first quarter of 2004 to $65.1 million for the first quarter of 2005. The most significant contributor to the Company’s revenue growth was BMD programs, where revenues increased 20%, from $24.9 million for the three-month period ended March 31, 2004 to $29.7 million for the corresponding period in 2005. In addition to continuing its work on BMD systems engineering and technical analysis, the Company has generated growth in its BMD business base through penetration of other BMD program elements. Revenue on other DoD programs increased 16% from $28.4 million for the first quarter of 2004 to $32.9 million for the first quarter of 2005. The increase in other DoD
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revenues was primarily due to revenue growth on training and range management programs for the U.S. Army, on engineering support programs for the U.S. Army and U.S. Air Force, and on a variety of defense-related composite production programs. In addition, other DoD revenues increased due to increased revenue on programs for a variety of intelligence agencies as a result of the government’s increased focus on intelligence in response to the terrorist attacks of September 11. Non-DoD revenues increased 58% from $1.6 million in 2004 to $2.5 million in 2005 as the result of an increase in revenues on a commercial composite manufacturing program.
The gross profit rate (gross profit as a percentage of contract costs) increased from 12.1% in the first quarter of 2004 to 13.4% in the first quarter of 2005. The increase in the gross profit rate is primarily attributable to the mix of contract types, as the Company has continued to experience a decline in the percentage of revenues derived from cost reimbursable contracts. During the first quarter of 2005, time and material and fixed price contracts comprised 54% of total sales, compared with 47% of total sales in the corresponding period in 2004. The Company generally earns higher profit rates on time and material and fixed price contracts than it does on cost reimbursable contracts, due to the greater risk associated with such contract types.
The Company earned net interest income during the first quarters of 2005 and 2004. The increase in net interest income during the first quarter resulted from higher cash and investment balances. Both the Company’s investments in cash equivalents and the Company’s long-term debt are at floating rates. Accordingly, the change in average short- and medium-term interest rates from 2004 to 2005 had a minimal effect on net interest.
The Company’s effective income tax rate was 41% during the first quarters of both 2005 and 2004.
Backlog
Annualized funded contract backlog represents all current contracts on which the Company expects to perform during the next 12 months and for which the customer has appropriated funds for payment of goods and services. Annualized unfunded contract backlog includes the expected value during the next 12 months of future incremental funding on existing contracts. Multi-year contract backlog represents the total funded and unfunded contract backlog, without regard to when the relevant contract work will be performed. As a result of U.S. Government funding practices, the Company expects that most of its funded backlog will be performed within the next 12 months.
The Company has historically used an additional metric for assessing expected future business performance. In addition to funded and unfunded contract backlog, as defined above, the Company has historically included the expected value of future incremental funding on certain proposals where the Company expects a high probability of winning the procurement. The Company believes that this metric, denoted “Company-defined backlog” in the following table, is more indicative of its expected future revenues. For example, as of December 31, 2003, 2002 and 2001, annualized Company-defined backlog comprised 81%, 86% and 88% of sales for fiscal 2004, 2003 and 2002, respectively.
Although the annualized Company-defined backlog has historically been indicative of its future revenues, there can be no assurance that this will continue. The Company’s backlog is typically subject to variations from year to year as contracts are completed, major existing contracts are renewed, or major new contracts are awarded. Additionally, all U.S. Government contracts included in backlog, whether or not funded, may be terminated at the convenience of the U.S. Government. Moreover, U.S. Government contracts are conditioned upon the continuing availability of Congressional appropriations. New
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Presidential Administrations, changes in the composition of Congress, and disagreement or significant delay between Congress and the Administration in reaching a defense budget accord can all significantly affect the timing of funding on the Company’s contract backlog. Delays in contract funding resulting from these factors may have a significant adverse effect on the Company’s financial position and/or results of operations.
The following table compares the Company’s contract backlog and Company defined backlog at the dates indicated:
| March 31, | December 31, | March 31, | |||||||||||||||
| 2005 | 2004 | 2004 | |||||||||||||||
Annualized funded contract backlog |
$ | 111,600 | $ | 102,200 | $ | 125,800 | |||||||||||
Annualized unfunded contract backlog |
62,300 | 79,200 | 48,200 | ||||||||||||||
Total annualized contract backlog |
173,900 | 181,400 | 174,000 | ||||||||||||||
Expected 12-month value of future
funding on proposals with high
probability of winning procurement |
72,000 | 45,900 | 40,800 | ||||||||||||||
Total annualized Company-defined
backlog |
$ | 245,900 | $ | 227,300 | $ | 214,800 | |||||||||||
Total multi-year contract backlog |
$ | 534,000 | $ | 569,700 | $ | 457,700 | |||||||||||
Expected value of future funding on
proposals with high probability of
winning procurement |
157,500 | 139,800 | 121,900 | ||||||||||||||
Total multi-year Company-defined
backlog |
$ | 691,500 | $ | 709,500 | $ | 579,600 | |||||||||||
Annualized Company-defined backlog
(by business area): |
|||||||||||||||||
BMD |
$ | 97,400 | $ | 98,100 | $ | 96,300 | |||||||||||
Other DoD |
141,000 | 122,100 | 112,500 | ||||||||||||||
Non-DoD |
7,500 | 7,100 | 6,000 | ||||||||||||||
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