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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
 For the Quarterly Period Ended April 4, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
 For the transition period from __________to __________ Commission file number 0-21682 SPARTA,
Inc.  Delaware
    
    63-0775889(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 25531 Commercentre Drive, Suite 120, Lake Forest, CA
    
    92630-8873(Address of principal executive offices)
    
    (Zip Code)
 (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 April 4, 2004 the registrant had 5,218,996 shares of common stock, $.01
par value per share, issued and outstanding.




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SPARTA, Inc. QUARTERLY REPORT FOR THE PERIOD ENDED APRIL 4, 2004 INDEX  
 PART I FINANCIAL INFORMATIONItem 1 Financial StatementsItem 2 Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3 Quantitative and Qualitative Disclosures About Market RiskItem 4 Controls and ProceduresPART II OTHER INFORMATIONItem 1 Legal ProceedingsItem 2 Changes in Securities and Use of ProceedsItem 3 Defaults Upon Senior SecuritiesItem 4 Submission of Matters to a Vote of Security HoldersItem 5 Other InformationItem 6 Exhibits and Reports on Form 8-KSignatureExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 -1-




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PART I 
 Item 1 Financial Statements -2-




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SPARTA, Inc.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 31,
    
    December 31,2004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    15,495,000
    
    
    $
    26,711,000Receivables, net
    
    
    44,627,000
    
    
    
    37,555,000Prepaid expenses
    
    
    1,095,000
    
    
    
    555,000Total current assets
    
    
    61,217,000
    
    
    
    64,821,000Equipment and improvements, net
    
    
    8,698,000
    
    
    
    8,367,000Other assets
    
    
    2,135,000
    
    
    
    2,097,000Total Assets
    
    $
    72,050,000
    
    
    $
    75,285,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccrued compensation
    
    $
    9,082,000
    
    
    $
    17,410,000Accounts payable and other accrued expenses
    
    
    7,050,000
    
    
    
    6,985,000Current portion of subordinated notes payable
    
    
    2,325,000
    
    
    
    2,335,000Income taxes payable
    
    
    2,290,000
    
    
    
    2,360,000Deferred income taxes
    
    
    925,000
    
    
    
    925,000Total current liabilities
    
    
    21,672,000
    
    
    
    30,015,000Subordinated notes payable
    
    
    5,165,000
    
    
    
    5,775,000Deferred income taxes
    
    
    228,000
    
    
    
    228,000Stockholders equityCommon stock, $.01 par value, 25,000,000 shares
authorized; 6,833,851 and 6,498,916 shares issued;
5,218,996 and 5,078,107 shares outstanding
    
    
    68,000
    
    
    
    65,000Additional paid-in capital
    
    
    57,920,000
    
    
    
    50,234,000Retained earnings
    
    
    22,025,000
    
    
    
    18,723,000Treasury stock, at cost
    
    
    (35,028,000
    )
    
    
    (29,755,000
    )Total stockholders equity
    
    
    44,985,000
    
    
    
    39,267,000Total Liabilities and Stockholders Equity
    
    $
    72,050,000
    
    
    $
    75,285,000
 The accompanying notes are an integral part of these consolidated financial statements -3-




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SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) Three Months ended March 31,2004
    
    2003Sales
    
    $
    54,805,000
    
    
    $
    47,148,000Costs and expenses:Labor costs and related benefits
    
    
    30,140,000
    
    
    
    24,412,000Subcontractor & other costs
    
    
    14,277,000
    
    
    
    14,572,000Facility costs
    
    
    3,182,000
    
    
    
    2,474,000Travel and other
    
    
    1,643,000
    
    
    
    1,500,000Total costs and expenses
    
    
    49,242,000
    
    
    
    42,958,000Income from operations
    
    
    5,563,000
    
    
    
    4,190,000Interest income
    
    
    (85,000
    )
    
    
    (62,000
    )Interest expense
    
    
    53,000
    
    
    
    64,000Income before provision for
taxes on income
    
    
    5,595,000
    
    
    
    4,188,000Provision for taxes on income
    
    
    2,293,000
    
    
    
    1,675,000Net income
    
    $
    3,302,000
    
    
    $
    2,513,000Basic earnings per share
    
    $
    0.64
    
    
    $
    0.51Diluted earnings per share
    
    $
    0.58
    
    
    $
    0.47
 The accompanying notes are an integral part of these consolidated financial statements -4-




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SPARTA, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) Three Months ended March 312004
    
    2003Cash flows from operating activities:Net income
    
    $
    3,302,000
    
    
    $
    2,513,000Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    562,000
    
    
    
    470,000Loss on sale of equipment
    
    
    7,000
    
    
    
    Stock-based compensation
    
    
    3,908,000
    
    
    
    2,338,000Tax benefit relating to stock plan
    
    
    605,000
    
    
    
    721,000Changes in assets and liabilities:Receivables, net
    
    
    (7,072,000
    )
    
    
    (720,000
    )Prepaid expenses
    
    
    (540,000
    )
    
    
    (373,000
    )Other assets
    
    
    (38,000
    )
    
    
    62,000Accrued compensation
    
    
    (8,328,000
    )
    
    
    (5,770,000
    )Accounts payable and other accrued expenses
    
    
    65,000
    
    
    
    (2,236,000
    )Income taxes payable
    
    
    (70,000
    )
    
    
    457,000Net cash used for operating activities
    
    
    (7,599,000
    )
    
    
    (2,538,000
    )Cash flows from investing activities:Purchases of equipment and improvements
    
    
    (900,000
    )
    
    
    (219,000
    )Purchase of short-term investments
    
    
    
    
    
    
    (1,000,000
    )Net cash used for investing activities
    
    
    (900,000
    )
    
    
    (1,219,000
    )Cash flows from financing activities:Proceeds from issuance of stock
    
    
    3,176,000
    
    
    
    1,848,000Cash purchases of treasury stock
    
    
    (5,273,000
    )
    
    
    (3,118,000
    )Principal payments on subordinated notes payable
    
    
    (620,000
    )
    
    
    (566,000
    )Net cash used for financing activities
    
    
    (2,717,000
    )
    
    
    (1,836,000
    )Net decrease in cash
    
    
    (11,216,000
    )
    
    
    (5,593,000
    )Cash and cash equivalents at beginning of period
    
    
    26,711,000
    
    
    
    17,780,000Cash and cash equivalents at end of period
    
    $
    15,495,000
    
    
    $
    12,187,000Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    53,000
    
    
    $
    64,000Income taxes
    
    $
    1,757,000
    
    
    $
    548,000Non-cash investing and financing activities:Issuance of subordinated notes payable in connection
with purchases of treasury stock
    
    $
    
    
    
    $
    183,000
 The accompanying notes are an integral part of these consolidated financial statements -5-




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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 2004 comprises the 53 week period ending
January 2, 2005, whereas fiscal year 2003 comprised the 52 week period ended
December 28, 2003. The first quarter of fiscal 2004 comprised the 14 weeks
ended April 4, 2004, whereas the corresponding first quarter in fiscal 2003
comprised the 13 weeks ended on March 30, 2003. To aid the reader of the
financial statements, the year-end has been presented as December 31, 2003 and
the three-month period ends have been presented as March 31, 2004 and March 31,
2003. In the opinion of management, the unaudited financial information for the
three-month periods ended March 31, 2004 and March 31, 2003 reflects all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof. Certain reclassifications have been made to the
2003 financial statements to conform to 2004 presentation. 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 31,2004
    
    2003Basic EPSNet income
    
    $
    3,302,000
    
    
    $
    2,513,000Weighted average
shares outstanding
    
    
    5,183,906
    
    
    
    4,946,425Per share amounts
    
    $
    0.64
    
    
    $
    0.51Dilutied EPSNet income
    
    $
    3,302,000
    
    
    $
    2,513,000Weighted average
shares outstanding
    
    
    5,183,906
    
    
    
    4,946,425Stock options
    
    
    416,287
    
    
    
    313,134Restricted stock
    
    
    61,613
    
    
    
    73,8875,661,806
    
    
    
    5,333,446Per share amounts
    
    $
    0.58
    
    
    $
    0.47
 -6-




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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 March 312004
    
    2003Net incomeAs reported
    
    $
    3,302,000
    
    
    $
    2,513,000Add after-tax stock-based
compensation expense
included in determining
net income
    
    
    308,000
    
    
    
    184,000Deduct after-tax stock-based
compensation expense as
if the fair value method had
been used
    
    
    (627,000
    )
    
    
    (479,000
    )Pro forma net income
    
    $
    2,983,000
    
    
    $
    2,218,000Basic EPSAs reported
    
    $
    0.64
    
    
    $
    0.51Pro forma
    
    
    0.58
    
    
    
    0.45Diluted EPSAs reported
    
    
    0.58
    
    
    
    0.47Pro forma
    
    
    0.53
    
    
    
    0.42
 Note E  Stockholders Equity For the three months ended March 31, 2004, proceeds from the issuance of
common stock, primarily as the result of exercises of stock options, totaled
$3.2 million. In addition, the Company repurchased a total of 194,046 common
shares totaling approximately $5.3 million. Treasury stock is shown at cost, and consisted of 1,614,855 shares and
1,420,809 shares of common stock at March 31, 2004 and December 31, 2003,
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. 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. -7-




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Note G  Recent Accounting Pronouncements In January 2003, the FASB issued FIN 46, which requires that certain
variable interest entities be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have a controlling
financial interest or do not have sufficient equity at risk. FIN 46 is
effective immediately for all variable interest entities created after January
31, 2003. For all such entities created prior to February 1, 2003, FIN 46 is
effective for interim or annual fiscal periods ending after December 15, 2003.
Adoption of this statement did not have a material effect on the Companys
financial position or results of operations. In December 2003, the FASB replaced FIN 46 with FIN 46R to clarify the
application of Accounting Research Bulletin Number 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. FIN 46R was effective for all public entities
that have interest in variable interest entities or potential variable interest
entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities for all other types of
entities is required in financial statements for periods ending after March 15,
2004. Adoption of this statement did not have a material effect on the
Companys financial position and/or results of operations. In April 2003, the FASB issued SFAS 149, which amends and clarifies
accounting guidance on derivative instruments and hedging activities. In May
2003, the FASB issued SFAS 150, which addresses accounting for certain
financial instruments that have characteristics of both liabilities and equity.
The Company has not entered into derivative instruments covered by SFAS 149 or
financial instruments covered by SFAS 150. Adoption of these statements
therefore did not have a material effect on the Companys financial position or
results of operations. -8-




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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 2004 comprises the 53 week period ending
January 2, 2005, whereas fiscal year 2003 comprised the 52 week period ended
December 28, 2003. The first quarter of fiscal 2004 comprised 14 weeks,
whereas the corresponding first quarter in fiscal 2003 comprised 13 weeks. The following tables present certain key operating data for the periods
indicated: Operating Results(amounts in thousands, except percentages)Three months ended March 31,2004
    
    2003Sales
    
    $
    54,805
    
    
    $
    47,148Sales by business area, as a
percentage of total sales:Ballistic Missile Defense (BMD)
    
    
    45
    %
    
    
    45
    %Other Dept of Defense (DoD)
    
    
    52
    %
    
    
    51
    %Non-DoD
    
    
    3
    %
    
    
    4
    %Gross profit (1)
    
    $
    5,920
    
    
    $
    4,338Gross profit as a % of costs (1)
    
    
    12.1
    %
    
    
    10.1
    %Income from operations
    
    $
    5,563
    
    
    $
    4,190Net income
    
    $
    3,302
    
    
    $
    2,513
  (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
and gross profit as a percentage of costs are non-GAAP financial
measure. The Company defines gross profit as sales less all costs that
are allowable for and allocable to contracts under government
procurement regulations. As such, gross profit excludes certain
unallowable expenses. Management considers gross profit, and gross
profit as a percentage of costs, to be key measures of the Companys
contract performance. It 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 31,2004
    
    2003Gross profit
    
    $
    5,920
    
    
    $
    4,338Less unallowable expenses
    
    
    (357
    )
    
    
    (148
    )Income from Operations
    
    $
    5,563
    
    
    $
    4,190
 The Companys contract revenues for the three-month period ended March 31,
2004 increased 16%, from $47.1 million for the first quarter of 2003 to $54.8
million for the first quarter of 2004. The most significant contributor to the
Companys revenue growth was other DoD programs, where revenues increased 19%,
from $24.0 million for the three-month period ended March 30, 2003 to $28.5
million for the corresponding period in 2004. The increase in other DoD
revenues was primarily 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. The Company
also experienced other DoD revenue growth on training and range management
programs for the U.S. Army and on engineering support programs for the U.S. Air
Force. Revenue on BMD programs increased 16%, from $21.2 million during the
first quarter of 2003 to $24.7 million for the first quarter of 2004. In
addition to continuing its
work on BMD systems engineering and technical analysis, the Company has
generated growth in its -9-




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BMD business base through penetration of other BMD
program elements. Non-DoD sales decreased 17% during the first quarter, from
$1.9 million as of March 2003 to $1.6 million as of March 2004. The gross profit rate (gross profit as a percentage of contract costs)
increased from 10.1% in the first quarter of 2003 to 12.1% in first quarter of
2004. The increase in the gross profit rate is primarily attributable to the
mix of contract types. During the first quarter of 2004, time and material and
fixed price contracts comprised 40% of total sales, compared with 32% of total
sales in the corresponding quarter of 2003. The Company generally earns higher
profits 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 quarter of 2004,
compared with net interest expense during the first quarter of 2003. The
increase in interest income during the first quarter resulted from higher cash
and investment balances, offset by the decline in prevailing interest rates.
The decrease in interest expense resulted from a decline in notes payable due
to scheduled principal payments, as well as the decline in interest rates.
During the first quarter of 2004, the Company had cash receipts totaling $49.8
million, an increase of $3.7 million over the corresponding period in 2003.
Both the Companys investments in cash equivalents and the Companys long-term
debt are floating rate. Accordingly, the reduction in average interest rates
from 2003 to 2004 had a minimal effect on net interest. The Companys effective income tax rate was 41% and 40% during the first
quarter of 2004 and 2003, respectively. The increase in the effective tax rate
in 2004 is attributable to an increase in certain non-deductible compensation
costs, partially offset by a decline in the effective state tax rate. Backlog Funded annualized contract backlog represents all current contracts on
which the Company expects to perform during the next 12 months for which the
Company has received funding from its customer. Unfunded annualized contract
backlog includes the expected value during the next 12 months of future
incremental funding on existing contracts and on certain proposals where the
Company expects a high probability of winning the procurement. Multi-year
contract backlog represents total funded and unfunded contract backlog, without
regard to when the relevant contracts will be performed. Historically, the
Companys end-of-year annualized contract backlog has generally been indicative
of its revenues in the following year. For example, annualized contract
backlog as a percentage of the following years sales was 86%, 88%, and 96%, in
2003, 2002, and 2001, respectively. Although the Companys 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 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 results of operations. -10-




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The following table compares the Companys annualized contract backlog as
of the dates indicated: Contract Backlog(amounts in thousands)March 31,
    
    December 31,
    
    March 31,2004
    
    2003
    
    2003Funded
    
    $
    125,800
    
    
    $
    76,900
    
    
    $
    84,500Unfunded
    
    
    89,000
    
    
    
    126,200
    
    
    
    95,700Total annualized contract backlog
    
    $
    214,800
    
    
    $
    203,100
    
    
    $
    180,200By business area:BMD
    
    $
    96,300
    
    
    $
    90,800
    
    
    $
    86,200Other DoD
    
    
    112,500
    
    
    
    105,100
    
    
    
    87,600Non-DoD
    
    
    6,000
    
    
    
    7,200
    
    
    
    6,400Total annualized contract backlog
    
    $
    214,800
    
    
    $
    203,100
    
    
    $
    180,200Multi-year contract backlog
    
    $
    580,000
    
    
    $
    556,000
    
    
    $
    578,000
 The annualized contract backlog increased from $203.1 million at the end
of 2003 to $214.8 million as of March 31, 2004, an increase of 6%. Other DoD
contract backlog increased $7.4 million, or 7% during the first three months of
2004, primarily in intelligence programs for the national and military
intelligence communities and in training and range support programs for the
U.S. Army. BMD contract backlog increased $5.5 million, or 6%, during the
first three months of 2004, as the Company continued to expand its BMD
engineering support provided to both the Missile Defense Agency and to the U.S.
Army. Non-DoD contract backlog decreased $1.2 million, or 17%, during the
first three months of 2004. In the first quarter of 2004, the Company had five significant competitive
contract/task order wins, obtained one contract that was novated to the
Company, and had five competitive contract/task order losses. In the Missile
Defense business area, the Advanced Systems Technology Operation (ASTO), as a
subcontractor to Dynamics Research Corporation/Andrulis Corporation, won a
competitive contract from the Missile Defense Agency for the Manufacturing and
Producibility Systems Engineering and Technical Assistance program, a $3.7
million award over four years. Additionally, ASTO, as a subcontractor to URS
Corporation/EG&G Technical Services Division won a competitive contract from
the Naval Sea Systems Warfare Center  Dahlgren Division for a Battle
Management, Command, Control, Communications, Computers and Intelligence
program. This is a $2.5 million award over five years. As a subcontractor to
Calibre, the Technical and Acquisition Support Operation (TASO) won the
Department of the Army Sustainable Range Program Support Contract. This effort
has an expected value of $40 million over five years. The Space and Missile
Defense Operation (SMDO) won a competitive task-order under its EADD II prime
contract for the Air Force Situation Awareness Integration program. This is a
$3 million task order over 18 months. In the Mission Systems business area, the Defense Systems and Technology
Operation (DSTO) won a competitive contract from the Missile Defense Agency for
the Joint Defense Planner Ballistic Missile Defense program, a $1.8 million
award over one year. In the National Security Systems business area, the Information System and
Security Operation (ISSO) received a $3.4 million, 40 month contract with the
Defense Information Systems Agency for the Domain Name Systems Security
program. This contract was novated from Network Associates, Inc. (NAI) as a
result of the Companys acquisition in 2003 of NAIs Network Security Research
Division. -11-




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A joint effort in the Hardware Systems and Mission Systems business areas
between the Spiral Technology Operation (STO) and DSTO, as a subcontractor to
Cubic Corporation, resulted in the loss of the Army Dugway Proving Grounds
Laboratory and Range Support program. This was a competitive $57 million
program over 15 years. DSTO also lost a competitive follow-on contract with
the Technical Support Working Group for Critical Incidence Response Technology
Seminars. This was a $6.6 million program over five years. STO, in a joint
effort with AECOM Government Services, lost the Army Test and Evaluation
Command Threat Support Activity program. This was a competitive bid with STOs
share projected at $3.5 million over 15 years. In the Missile Defense business area, ASTO, as a subcontractor to Computer
Sciences Corporation lost a competitive contract with the Joint Chiefs of
Staff/J-8 Division for the Joint Analytical Services program, a $5 million,
five year contract. TASO, as a subcontractor to the ALS Joint Venture, lost a
competitive task order for the Army Aviation and Missile Command for Supply
Services, Tracking and Expediting Analysis program. This was a $2.8 million
task order over four years. Liquidity and Capital Resources The following tables sets forth, for the periods indicated, selected
financial information: Balance atMarch 30,
    
    December 31,
    
    March 30,2004
    
    2003
    
    2003Cash and cash equivalents
    
    $
    15,495,000
    
    
    $
    26,711,000
    
    
    $
    12,154,000Stockholders equity
    
    $
    44,985,000
    
    
    $
    39,267,000
    
    
    $
    29,121,000Subordinated notes payable
    
    $
    7,490,000
    
    
    $
    8,110,000
    
    
    $
    9,970,000Borrowings under line of credit
    
    
    
    
    
    
    
    
    
    
    Number of days sales in
receivables
(year-to-date average)
    
    
    65
    
    
    
    62
    
    
    
    69Current ratio
    
    
    2.8
    
    
    
    2.1
    
    
    
    2.6
 Overview The Companys principal sources of capital for funding its operations are
funds generated by ongoing business activities and proceeds from exercise of
stock options and the issuance of common stock. These sources are augmented,
as necessary, by borrowings under the Companys bank line of credit. The
principal uses of capital are for the repurchase of common stock, repayments of
amounts borrowed under the bank line of credit, principal payments on
subordinated promissory notes, and capital expenditures. U.S. Government contracts are conditioned upon the continuing availability
of congressional appropriations. Congress usually appropriates funds on a
fiscal year basis, even though contract performance may take several years.
Consequently, at the outset of a major program, the contract is usually
partially funded and additional monies are normally committed to the contract
by the procuring agency only as Congress makes appropriations for future years.
These appropriations are therefore
subject to changes as a result of increases or decreases in the overall budget.
New presidential administrations, change 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 liquidity and days sales outstanding (DSO). -12-




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The Companys bank line of credit provides for borrowings of up to $6.0
million, and matures July 1, 2005. Borrowings under the line of credit
agreement are secured by accounts receivable and certain equipment and
improvements, and bear interest at the prime rate. The line of credit
agreement prohibits the payment of dividends by the Company without the banks
prior consent and requires the Company to maintain certain financial ratios.
The Company was in compliance with all such requirements at March 31, 2004.
The Company believes that, as in the past, it will be able to renew its banking
agreement under similar terms. There were no amounts outstanding under the
bank line of credit at March 31, 2004. Generally, the Company limits its stockholders to current employees and
directors of the Company. Accordingly, the Companys Amended and Restated
Certificate of Incorporation places restrictions on the transferability of the
Companys common stock and grants the Company the right to repurchase the
shares held by any stockholder whose association with the Company terminates.
Although not obligated to do so, the Company generally exercises its right to
repurchase the stockholdings of all individuals terminating their association
with the Company, so as to retain all stockholdings among active employees and
directors. As of March 31, 2004, the percentage of the Companys outstanding
common stock held by former employees totaled approximately 3.5%. In addition to repurchasing the stockholdings of terminated employees, the
Company has established and maintains a program that periodically permits the
Companys stockholders to offer shares for sale to the Company. The Companys
repurchase program, which is conducted on a quarterly basis, is a voluntary
program on the part of the Company, and the Companys stockholders therefore
have no right to compel the Company to repurchase any of the stockholders
shares. There can be no assurance that the Company will continue its voluntary
repurchase program. Moreover, the number of shares that the Company may
repurchase is subject to legal restrictions imposed by applicable corporate law
affecting the ability of corporations generally to repurchase shares of their
capital stock. In addition, the number of shares which the Company may
repurchase is subject to a self-imposed quarterly repurchase limitation which
is designed to ensure that the Companys repurchase of its shares does not
materially impair the Companys liquidity or financial condition. The Board of
Directors may approve waivers to the self-imposed quarterly repurchase
limitation. Cash Flow Information During the first quarter of 2004 the Companys cash balances declined
$11.2 million compared with the prior year end. Operating activities consumed $8.0 million in cash during the first
quarter of 2004. The Company generated $3.3 million in net income during the
quarter. Non-cash expenses totaled $4.5 million, of which $3.9 million related
to the Companys practice of issuing shares of common stock in connection with
certain compensation and benefit plans. The Company expects to continue to
follow this practice for the foreseeable future. The Company generated cash
flow (in the form of a reduction in its tax liabilities) of $0.6 million as a
result of the income tax benefit relating to its stock compensation plans. The
Company used $16.0 million in cash for working capital during the first quarter
of 2004, principally to reduce accrued compensation and to fund an increase in
accounts receivable. Although first quarter sales increased 16% in comparison with the
corresponding period in 2003, accounts receivable grew nearly 19% from $37.6
million at December 31, 2003 to $44.6 million at March 31, 2004. As a result
of this unfavorable aspect of working capital performance (relative to sales
growth) average DSO increased from 62 days as of December 2003 to 65 days as of
March 2004. The Company continues to emphasize rapid billing and collection of
its receivables, however, there can be no assurance that the Company will be
able to reduce, or maintain, its average DSO. -13-




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Through the three months ended March 2004 the Companys capital
expenditures totaled approximately $0.9 million. The Company currently does
not expect a significant change in its level of capital expenditures. In connection with the aforementioned stock repurchase policies, the
Company repurchased a total of 194,046 common shares totaling approximately
$5.3 million. Year-to-date principal payments on promissory notes as of the
end of the first quarter of 2004 totaled $0.6 million. Proceeds from the
issuance of common stock, primarily as the result of exercises of stock
options, totaled $3.2 million. The Company anticipates that its existing capital resources and access to
its line of credit will be sufficient to fund planned operations for the next
year and for the foreseeable future. Recent Accounting Pronouncements In January 2003, the FASB issued FIN 46, which requires that certain
variable interest entities be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have a controlling
financial interest or do not have sufficient equity at risk. FIN 46 is
effective immediately for all variable interest entities created after January
31, 2003. For all such entities created prior to February 1, 2003, FIN 46 is
effective for interim or annual fiscal periods ending after December 15, 2003.
Adoption of this statement did not have a material effect on the Companys
financial position or results of operations. In December 2003, the FASB replaced FIN 46 with FIN 46R to clarify the
application of Accounting Research Bulletin Number 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. FIN 46R was effective for all public entities
that have interest in variable interest entities or potential variable interest
entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities for all other types of
entities is required in financial statements for periods ending after March 15,
2004. Adoption of this statement did not have a material effect on the
Companys financial position and/or results of operations. In April 2003, the FASB issued SFAS 149, which amends and clarifies
accounting guidance on derivative instruments and hedging activities. In May
2003, the FASB issued SFAS 150, which addresses accounting for certain
financial instruments that have characteristics of both liabilities and equity.
The Company has not entered into derivative instruments covered by SFAS 149 or
financial instruments covered by SFAS 150. Adoption of these statements
therefore did not have a material effect on the Companys financial position or
results of operations. Effects of Federal Funding for Defense Programs The Company continues to derive over 90% of its revenues from contracts
with U.S. Government agencies. 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 first quarter of 2004. The Company does not anticipate
termination of any of its programs or contracts in 2004. However, no
assurances can be given that such events will not occur. -14-




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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
therefore subject to changes as a result of increases or decreases in the
overall budget. New presidential administrations, change 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 revenue recognition, liquidity, and DSO. Forward-Looking Statements All statements in this report that do not directly and exclusively relate
to historical facts constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements
represent the Companys intentions, plans, expectations and beliefs, and are
subject to risks, uncertainties and other factors, many of which are outside
the Companys control. These factors could cause our actual results,
performance, achievements or industry results to differ materially from the
results, performance or achievements expressed or implied by such
forward-looking statements. These factors are described in more detail in the
Companys Annual Report on Form 10-K for the fiscal year ended December 28,
2003, and such other filings that the Company makes with the SEC from time to
time. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date hereof. 
 Item 3 Quantitative and Qualitative Disclosures about Market Risk Refer to item 7A in the Companys Annual Report on Form 10-K for the year ended
December 28, 2003. 
 Item 4 Controls and Procedures  (a)
    
    Evaluation of Disclosure Controls and Procedures Management has evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of April 4,
2004. Based on the results of this evaluation, management believes that such
controls and procedures are operating effectively.  (b)
    
    Changes in Internal Controls There has been no change in the Companys internal control over financial
reporting that occurred in the quarterly period covered by this report that has
materially affected, or is reasonably likely to materially affect the Companys
internal control over financial reporting. -15-




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Part II OTHER INFORMATION 
 Item 1 Legal Proceedings 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. 
 Item 2 Changes in Securities and Use of Proceeds Not Applicable 
 Item 3 Defaults Upon Senior Securities Not Applicable 
 Item 4 Submission of Matters to a Vote of Security Holders Not Applicable 
 Item 5 Other Information Not Applicable 
 Item 6 Exhibits and Reports on Form 8-K (a)
    
    ExhibitsExhibit 31.1
    
    Certification of Chief Executive Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification of Chief Financial Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 -16-




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(b)
    
    Reports on Form 8-K On January 21, 2004, SPARTA, Inc issued a memorandum to its stockholders
and its employees dated January 21, 2004 regarding Fourth Quarter 2003
Report and Stock Price Evaluation reporting (1) the establishment of the
price of its common stock at $28.02 per share, and (2) revenues and net
income for the fiscal quarter ended December 28, 2003. Pursuant to the
Commissions regulations, the foregoing information was disclosed on Form
8-K filed January 27, 2004. -17-




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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.(Registrant)Date: May 11, 2004
    
    By: /s/ David E. SchreimanDavid E. SchreimanVice President andChief Financial Officer
 -18-




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EXHIBIT INDEX Exhibit 31.1
    
    Certification of Chief Executive Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification of Chief Financial Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.