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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 EXCHANGE ACT OF 1934
 For the Quarterly Period Ended July 4, 2004 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
incorporation or organization)
    
    (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 [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [ X ] As of July 4, 2004 the registrant had 5,364,506 shares of common stock, $.01
par value per share, issued and outstanding.




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SPARTA, Inc. QUARTERLY REPORT FOR THE PERIOD ENDED JULY 4, 2004 INDEX PART I FINANCIAL INFORMATIONItem 1Financial StatementsItem 2Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3Quantitative and Qualitative Disclosures About Market RiskItem 4Controls and ProceduresPART II OTHER INFORMATIONItem 1Legal ProceedingsItem 2Changes in Securities and Use of ProceedsItem 3Defaults Upon Senior SecuritiesItem 4Submission of Matters to a Vote of Security HoldersItem 5Other InformationItem 6Exhibits 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) June 30,
    
    December 31,2004
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    19,714,000
    
    
    $
    26,711,000Receivables, net
    
    
    46,369,000
    
    
    
    37,555,000Prepaid expenses
    
    
    1,236,000
    
    
    
    555,000Total current assets
    
    
    67,319,000
    
    
    
    64,821,000Equipment and improvements, net
    
    
    8,964,000
    
    
    
    8,367,000Other assets
    
    
    2,312,000
    
    
    
    2,097,000Total Assets
    
    $
    78,595,000
    
    
    $
    75,285,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccrued compensation
    
    $
    10,996,000
    
    
    $
    17,410,000Accounts payable and other accrued expenses
    
    
    9,310,000
    
    
    
    6,985,000Current portion of subordinated notes payable
    
    
    2,341,000
    
    
    
    2,335,000Income taxes payable
    
    
    1,491,000
    
    
    
    2,360,000Deferred income taxes
    
    
    925,000
    
    
    
    925,000Total current liabilities
    
    
    25,063,000
    
    
    
    30,015,000Subordinated notes payable
    
    
    4,571,000
    
    
    
    5,775,000Deferred income taxes
    
    
    228,000
    
    
    
    228,000Commitments and Contingencies (Note F)Stockholders equityCommon stock, $.01 par value, 25,000,000 shares
authorized; 7,136,680 and 6,498,916 shares issued;
5,364,506 and 5,078,107 shares outstanding
    
    
    71,000
    
    
    
    65,000Additional paid-in capital
    
    
    62,095,000
    
    
    
    50,234,000Retained earnings
    
    
    26,205,000
    
    
    
    18,723,000Treasury stock, at cost
    
    
    (39,638,000
    )
    
    
    (29,755,000
    )Total stockholders equity
    
    
    48,733,000
    
    
    
    39,267,000Total Liabilities and Stockholders Equity
    
    $
    78,595,000
    
    
    $
    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 June 30,
    
    Six Months ended June,2004
    
    2003
    
    2004
    
    2003Sales
    
    $
    64,668,000
    
    
    $
    50,971,000
    
    
    $
    119,473,000
    
    
    $
    98,119,000Costs and expenses:Labor costs and related benefits
    
    
    29,846,000
    
    
    
    25,426,000
    
    
    
    59,986,000
    
    
    
    49,838,000Subcontractor costs
    
    
    23,179,000
    
    
    
    16,896,000
    
    
    
    37,456,000
    
    
    
    31,468,000Facility costs
    
    
    3,062,000
    
    
    
    2,589,000
    
    
    
    6,244,000
    
    
    
    5,063,000Travel and other costs
    
    
    2,595,000
    
    
    
    1,747,000
    
    
    
    4,238,000
    
    
    
    3,247,000Total costs and expenses
    
    
    58,682,000
    
    
    
    46,658,000
    
    
    
    107,924,000
    
    
    
    89,616,000Income from operations
    
    
    5,986,000
    
    
    
    4,313,000
    
    
    
    11,549,000
    
    
    
    8,503,000Interest income
    
    
    (50,000
    )
    
    
    (71,000
    )
    
    
    (135,000
    )
    
    
    (113,000
    )Interest expense
    
    
    27,000
    
    
    
    53,000
    
    
    
    80,000
    
    
    
    97,000Income before provision for
taxes on income
    
    
    6,009,000
    
    
    
    4,331,000
    
    
    
    11,604,000
    
    
    
    8,519,000Provision for taxes on income
    
    
    1,829,000
    
    
    
    1,803,000
    
    
    
    4,122,000
    
    
    
    3,478,000Net income
    
    $
    4,180,000
    
    
    $
    2,528,000
    
    
    $
    7,482,000
    
    
    $
    5,041,000Basic earnings per share
    
    $
    0.81
    
    
    $
    0.51
    
    
    $
    1.43
    
    
    $
    1.02Diluted earnings per share
    
    $
    0.74
    
    
    $
    0.47
    
    
    $
    1.31
    
    
    $
    0.94
 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) Six Months ended June 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    7,482,000
    
    
    $
    5,041,000Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    1,182,000
    
    
    
    918,000Loss on sale of equipment
    
    
    7,000
    
    
    
    Stock-based compensation
    
    
    5,250,000
    
    
    
    3,283,000Tax benefit relating to stock plan
    
    
    1,176,000
    
    
    
    971,000Changes in assets and liabilities:Receivables, net
    
    
    (8,814,000
    )
    
    
    (3,607,000
    )Prepaid expenses
    
    
    (681,000
    )
    
    
    (301,000
    )Other assets
    
    
    (215,000
    )
    
    
    233,000Accrued compensation
    
    
    (6,414,000
    )
    
    
    (376,000
    )Accounts payable and other accrued expenses
    
    
    2,325,000
    
    
    
    1,031,000Income taxes payable
    
    
    (869,000
    )
    
    
    57,000Net cash used for operating activities
    
    
    429,000
    
    
    
    7,250,000Cash flows from investing activities:Purchases of equipment and improvements
    
    
    (1,786,000
    )
    
    
    (719,000
    )Acquisition, net of cash acquired
    
    
    
    
    
    
    (140,000
    )Net cash used for investing activities
    
    
    (1,786,000
    )
    
    
    (859,000
    )Cash flows from financing activities:Proceeds from issuance of stock
    
    
    5,441,000
    
    
    
    3,224,000Cash purchases of treasury stock
    
    
    (9,883,000
    )
    
    
    (5,286,000
    )Principal payments on subordinated notes payable
    
    
    (1,198,000
    )
    
    
    (1,185,000
    )Net cash used for financing activities
    
    
    (5,640,000
    )
    
    
    (3,247,000
    )Net increase (decrease) in cash
    
    
    (6,997,000
    )
    
    
    3,144,000Cash and cash equivalents at beginning of period
    
    
    26,711,000
    
    
    
    17,780,000Cash and cash equivalents at end of period
    
    $
    19,714,000
    
    
    $
    20,924,000Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    80,000
    
    
    $
    91,000Income taxes
    
    $
    3,831,000
    
    
    $
    2,501,000Non-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 second quarter of fiscal 2004 ended July 4, 2004,
whereas the corresponding second quarter in fiscal 2003 ended on June 29, 2003.
The six month period ending July 4, 2004 was comprised of 27 weeks whereas the
corresponding period in fiscal 2003 was comprised of 26 weeks. To aid the
reader of the financial statements, the year-end has been presented as December
31, 2003 and the three-month and six-month period ends have been presented as
June 30, 2004 and June 30, 2003. In the opinion of management, the unaudited financial information for the
three-month and six-month periods ended June 30, 2004 and June 30, 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. During the quarter ended June 30, 2004, the Company
recorded a $0.6 million reduction in the income tax provision. The reduction
was the result of the reversal of previously accrued taxes, primarily related
to a favorable audit of the Companys tax returns. Note C  Computation of Earnings Per Share Three months ended June 30,
    
    Six months ended June,2004
    
    2003
    
    2004
    
    2003Basic EPSNet income
    
    $
    4,180,000
    
    
    $
    2,528,000
    
    
    $
    7,482,000
    
    
    $
    5,041,000Weighted average
shares outstanding
    
    
    5,183,906
    
    
    
    4,946,425
    
    
    
    5,220,034
    
    
    
    4,960,306Per share amounts
    
    $
    0.81
    
    
    $
    0.51
    
    
    $
    1.43
    
    
    $
    1.02Diluted EPSNet income
    
    $
    4,180,000
    
    
    $
    2,528,000
    
    
    $
    7,482,000
    
    
    $
    5,041,000Weighted average
shares outstanding
    
    
    5,183,906
    
    
    
    4,946,425
    
    
    
    5,220,034
    
    
    
    4,960,306Stock options
    
    
    427,433
    
    
    
    382,351
    
    
    
    416,376
    
    
    
    347,749Restricted stock
    
    
    61,613
    
    
    
    73,887
    
    
    
    61,613
    
    
    
    73,8875,672,952
    
    
    
    5,402,663
    
    
    
    5,698,023
    
    
    
    5,381,942Per share amounts
    
    $
    0.74
    
    
    $
    0.47
    
    
    $
    1.31
    
    
    $
    0.94
 - 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 June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Net incomeAs reported
    
    $
    4,180,000
    
    
    $
    2,528,000
    
    
    $
    7,482,000
    
    
    $
    5,041,000Add after-tax stock-based
compensation expense
included in determining
net income
    
    
    352,000
    
    
    
    550,000
    
    
    
    660,000
    
    
    
    733,000Deduct after-tax stock-based
compensation expense as
if the fair value method had
been used
    
    
    (672,000
    )
    
    
    (850,000
    )
    
    
    (1,299,000
    )
    
    
    (1,327,000
    )Pro forma net income
    
    $
    3,860,000
    
    
    $
    2,228,000
    
    
    $
    6,843,000
    
    
    $
    4,447,000Basic EPSAs reported
    
    $
    0.81
    
    
    $
    0.51
    
    
    $
    1.43
    
    
    $
    1.02Pro forma
    
    
    0.74
    
    
    
    0.45
    
    
    
    1.31
    
    
    
    0.90Diluted EPSAs reported
    
    
    0.74
    
    
    
    0.47
    
    
    
    1.31
    
    
    
    0.94Pro forma
    
    
    0.68
    
    
    
    0.41
    
    
    
    1.20
    
    
    
    0.83
 Note E  Stockholders Equity For the six months ended June 30, 2004, 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 350,469 common
shares totaling approximately $9.9 million. Treasury stock is shown at cost, and consisted of 1,771,278 shares and
1,420,809 shares of common stock at June 30, 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. 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 June 30, 2004 and December
31, 2003, the outstanding principal balances of these notes were $1,037,000 and
$560,000, respectively, and are included as an offset to additional paid-in
capital. - 7 -




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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. 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 six-month period ending July 4, 2004 was comprised of
27 weeks whereas the corresponding period in 2003 comprised 26 weeks. The following tables present certain key operating data for the periods
indicated: Operating Results(amounts in thousands, except percentages)Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Sales
    
    $
    64,668
    
    
    $
    50,971
    
    
    $
    119,473
    
    
    $
    98,119Sales by business area, as a
percentage of total sales:Ballistic Missile Defense (BMD)
    
    
    47
    %
    
    
    51
    %
    
    
    46
    %
    
    
    49
    %Other Dept of Defense (DoD)
    
    
    50
    %
    
    
    46
    %
    
    
    51
    %
    
    
    48
    %Non-DoD
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %Gross profit (1)
    
    $
    6,606
    
    
    $
    4,667
    
    
    $
    12,526
    
    
    $
    9,005Gross profit as a % of costs (1)
    
    
    11.4
    %
    
    
    10.1
    %
    
    
    11.7
    %
    
    
    10.1
    %Income from operations
    
    $
    5,986
    
    
    $
    4,313
    
    
    $
    11,549
    
    
    $
    8,503Net income
    
    $
    4,180
    
    
    $
    2,528
    
    
    $
    7,482
    
    
    $
    5,041
  (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
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 unallowable expenses. 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 June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Gross profit
    
    $
    6,606
    
    
    $
    4,667
    
    
    $
    12,526
    
    
    $
    9,005Less unallowable expenses
    
    
    (620
    )
    
    
    (354
    )
    
    
    (977
    )
    
    
    (502
    )Income from Operations
    
    $
    5,986
    
    
    $
    4,313
    
    
    $
    11,549
    
    
    $
    8,503
 The Companys contract revenues for the three-month period ended June 30,
2004 increased 27%, from $51.0 million for the second quarter of 2003 to $64.7
million for the second quarter of 2004. Year-to-date sales for 2004 are $119.5
million, an increase of 22% above performance in the first half of 2003. The
most significant contributor to the Companys revenue growth was other DoD
programs, where revenues increased 40%, from $23.5 million for the three-month
period ended June 30, 2003 to $32.9 million for the corresponding period in
2004. Similarly, year-to-date revenue on other DoD programs increased 29%,
from $47.3 million in 2003 to $61.2 million in 2004. The increase in other DoD
revenues was primarily due to revenue growth on training and range management
programs for the - 9 -




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U.S. Army, on engineering support programs for the U.S. Air Force, and on
composite production for unmanned air vehicle components for a variety of
military customers. 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. Revenue on BMD programs increased 15%, from $26.0
million during the second quarter of 2003 to $30.0 million for the second
quarter of 2004. Year-to-date, BMD program revenue increased 16%, from $47.4
million in 2003 to $54.8 million in 2004. 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. The gross profit rate (gross profit as a percentage of contract costs)
increased from 10.1% in the second quarter of 2003 to 11.4% in the second
quarter of 2004. Year-to-date gross profit increased from 9.6% for the six
months ended June 30, 2003 to 11.2% for the six months ended June 30, 2004.
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
second quarter of 2004, time and material and fixed price contracts comprised
44% of total sales, compared with 36% 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 second quarters of 2004
and 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 30% and 42% during the second
quarter of 2004 and 2003, respectively, and 36% and 41% for the corresponding
six-month periods. The decrease in the effective tax rate in 2004 is primarily
attributable to a $0.6 million reduction in the income tax provision during the
quarter. The reduction was the result of the reversal of previously accrued
taxes, primarily related to a favorable audit of the Companys tax returns.
The decrease in the effective tax rate in 2004 is also attributable to a
decline in the Companys 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 - 10 -




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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. The following table compares the Companys contract backlog as of the
dates indicated: Contract Backlog(amounts in thousands)June 30,
    
    December 31,
    
    June 30,2004
    
    2003
    
    2003Funded
    
    $
    111,500
    
    
    $
    76,900
    
    
    $
    83,500Unfunded
    
    
    103,900
    
    
    
    126,200
    
    
    
    104,000Total annualized contract backlog
    
    $
    215,400
    
    
    $
    203,100
    
    
    $
    187,500By business area:BMD
    
    $
    98,300
    
    
    $
    90,800
    
    
    $
    87,600Other DoD
    
    
    111,800
    
    
    
    105,100
    
    
    
    94,100Non-DoD
    
    
    5,300
    
    
    
    7,200
    
    
    
    5,800Total annualized contract backlog
    
    $
    215,400
    
    
    $
    203,100
    
    
    $
    187,500Multi-year contract backlog
    
    $
    580,000
    
    
    $
    556,000
    
    
    $
    624,000
 The annualized contract backlog increased from $203.1 million at the end
of 2003 to $215.4 million as of June 30, 2004, an increase of 6%. BMD contract
backlog increased $7.5 million, or 8%, during the first six 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. Other DoD contract backlog
increased $6.7 million, or 6% 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. Non-DoD contract
backlog decreased $1.9 million, or 26%, during the first six months of 2004. In the second quarter of 2004, the Company had six significant competitive
contract/task-order wins and nine significant competitive contract/task-order
losses. In the Missile Defense Sector, the Space and Missile Defense Operation
(SMDO), as a subcontractor to Dynetics, won a competitive contract from the Air
Force Space and Missile Command for Space and Missile Defense Initiatives
Support II. This is an $8 million contract covering a five-year period of
performance. Additionally, SMDO, under its EADD II contract, won a competitive
task order from the Air Force Space and Missile Command for the Think Tank task
order, an $8 million task order over seventeen months. SMDO also won a
competitive contract from the Army Space Command for the Advanced Concept
Development program, an $8 million effort over sixteen months. The Technical
and Acquisition Support Operation (TASO) won a competitive contract from the
Army Space and Missile Defense Command for Spares Control, a $3.7 million
contract over a period of five years. The Advanced Systems Technology
Operation (ASTO) won a $10 million five-year contract from the Joint Single
Integrated Air Picture (SIAP) Systems Engineering Office for follow-on support
to the SIAP project. In the Mission Systems Sector, the Defense Systems and Technology
Operation (DSTO), as a subcontractor to the Human Resources Research
Organization, won a competitive contract from the Army Research Institute for
the Army Leadership program, a $2 million contract over a period of fifty-four
months. - 11 -




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In the Missile Defense Sector, ASTO, as a subcontractor to Computer
Sciences Corporation, lost a competitive contract from the DoD Development Test
and Evaluation Office for test and evaluation program support. This was a $2.5
million contract over a period of five years. In the Mission Systems Sector, DSTO, as a subcontractor to General
Dynamics, lost a competitive contract from the Army Chem/Bio Defense Office
program for Program Manager Guardian, a $6 million effort over a period of five
years. Additionally DSTO lost a competitive $3 million, 18-month bid to the
Defense Advanced Research Project Agency for the Terahertz Imaging Focal Plane
Array Technology program. As a subcontractor to Lockheed Martin, DSTO also
lost a competitive contract from the Army Program Executive Office for
Simulation, Training, and Range Instrumentation for the National Training
Center Component Development and Area Weapons Effects Modeling program. This
was a $5 million contract over a period of 30 months. In the National Security Systems Sector, the Applied Communications and
Technology Operation (ACTO), as a subcontractor to SYTEX Corporation, lost a
competitive contract for the Army Information Operations support program. This
was a $10 million, five-year program. The Information Systems and Security
Operation (ISSO), as a subcontractor to Computer Sciences Corporation, lost a
competitive contract from the National Security Agency for the Information
Assurance Directorate Technical Support program. This was a $5 million
contract over a period of 84 months. Additionally, ISSO, as a subcontractor to
Northrop Grumman, lost a competitive contract from the National Security Agency
for the War Goddess Certification and Accreditation program, a $1.5 million
four-year contract. In the Hardware Systems Sector, the Composite Products Operation (CPO)
lost a competitive bid to Delphi for their Under Hood Beautification Kits
program. This was a $2 million contract over a period of eighteen months. The
Spiral Technology Operation (STO), as a subcontractor to DynCorp, lost a
competitive contract from the Naval Air Warfare Center Weapons Division for
their Combat Environment Simulation program. This was a $13.5 million contract
over a period of five years. Liquidity and Capital Resources The following tables sets forth, for the periods indicated, selected
financial information: Balance atJune 30,
    
    December 31,
    
    June 30,2004
    
    2003
    
    2003Cash and cash equivalents
    
    $
    19,714,000
    
    
    $
    26,711,000
    
    
    $
    18,971,000Stockholders equity
    
    $
    48,733,000
    
    
    $
    39,267,000
    
    
    $
    32,052,000Subordinated notes payable
    
    $
    6,912,000
    
    
    $
    8,110,000
    
    
    $
    9,351,000Borrowings under line of credit
    
    
    
    
    
    
    
    
    
    
    Number of days sales in
receivables
(year-to-date average)
    
    
    63
    
    
    
    62
    
    
    
    64Current ratio
    
    
    2.7
    
    
    
    2.1
    
    
    
    2.2
 - 12 -




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Overview The Companys principal sources of capital for funding its operations are
funds generated by ongoing business activities and proceeds from the 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). 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 June 30, 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 June 30, 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, but not the
obligation, 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 June 30, 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. - 13 -




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Cash Flow Information During the six months ended June 30, 2004 the Companys cash balances
declined $7.0 million compared with the prior year end. Operating activities generated $0.4 million in cash during the first six
months of 2004. The Company generated $7.5 million in net income through the
six months ended June 30, 2004. Non-cash expenses totaled $6.4 million, of
which $5.2 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 $1.2 million as a result of the income tax benefit relating to
its stock compensation plans. The Company used $14.7 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. Year-to-date sales through June 30, 2004 increased 22% in comparison with
the corresponding period in 2003, and accounts receivable increased 23% from
$37.6 million at December 31, 2003 to $46.4 million at June 30, 2004. Average
year-to-date DSO of 63 days as of June 30, 2004 increased slightly from 62 days
as of December 31, 2003, but decreased slightly from 64 days as of June 30,
2003. The relatively constant DSO resulted in an increase in accounts
receivable commensurate with the increase in sales. 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. Through the six months ended June 30, 2004 the Companys capital
expenditures totaled approximately $1.8 million, an increase of $1.1 million
over the corresponding period in 2003. The increase in capital expenditures is
primarily attributable to faster growth in the number of employees, requiring
investment in computer equipment, software, and improvements to leased
facilities. 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 350,469 common shares totaling approximately
$9.9 million. Year-to-date principal payments on promissory notes as of the
end of the second quarter of 2004 totaled $1.2 million. Proceeds from the
issuance of common stock, primarily as the result of exercises of stock
options, totaled $5.4 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. The Companys significant contractual obligations relate to subordinated
promissory notes and operating lease commitments. As of June 30, 2004 the
Company has no significant commercial commitments, nor significant commitments
for capital expenditures. As of June 30, 2004 contractual obligations are
payable as follows: Payments Due by Period(amounts in thousands)Total
    
    Current
    
    1-3 years
    
    4-5 years
    
    After 5 yearsSubordinated Promissory Notes
    
    $
    6,912
    
    
    $
    2,341
    
    
    $
    4,306
    
    
    $
    265
    
    
    $
    0Operating Leases
    
    
    26,165
    
    
    
    6,450
    
    
    
    12,021
    
    
    
    6,161
    
    
    
    1,533Total Contractual Obligations
    
    $
    33,077
    
    
    $
    8,791
    
    
    $
    16,327
    
    
    $
    6,426
    
    
    $
    1,533
 - 14 -




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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 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 95% 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 six months 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. 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. - 15 -




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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 July 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. 
 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 - 16 -




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Item 4 Submission of Matters to a Vote of Security Holders  (a)
    
    The Annual Meeting of Stockholders of the registrant was held on May 14,
2004. (b) All of the directors nominated by management in registrants 2004 Proxy
Statement were elected and no solicitation in opposition to managements
nominees was made.  (c)
    
    At the Annual Meeting, the stockholders of the registrant approved the
following:  (1)
    
    The election of the following directors by the votes set
forth below: Number of Votes of Common StockFor
    Against/WithheldWayne R. Winton
    
    
    3,839,438
    
    
    
    23,943Robert C. Sepucha
    
    
    3,839,438
    
    
    
    23,943John O. Carroll
    
    
    3,705,137
    
    
    
    158,244Carl T. Case
    
    
    3,700,908
    
    
    
    162,473William E. Cook
    
    
    3,838,438
    
    
    
    24,943Rockell N. Hankin
    
    
    3,816,646
    
    
    
    46,735R. Stephen McCarter
    
    
    3,653,434
    
    
    
    209,947Roy J. Nichols
    
    
    3,782,665
    
    
    
    80,716Gen. John L. Piotrowski (USAF Ret.)
    
    
    3,850,868
    
    
    
    12,513Gerald A. Zionic
    
    
    3,818,182
    
    
    
    45,199
  (2)
    
    The ratification, by the votes set forth below, of the
appointment of Pricewaterhouse Coopers LLP as the Companys
independent registered public accounting firm for the year ending
December 31, 2004: For:
Against:
Abstain:
    
    3,816,504
10,525
36,352
  (d)
    
    Not applicable. 
 Item 5 Other Information Not Applicable 
 Item 6 Exhibits and Reports on Form 8-K  (a)
    
    Exhibits Exhibit 31.1
    
    Certification of Chief Executive Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
 - 17 -




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Exhibit 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.
  (b)
    
    Reports on Form 8-K  On April 21, 2004, SPARTA, Inc issued a memorandum to its stockholders
and its employees dated April 21, 2004 regarding First Quarter 2004
Report and Stock Price Evaluation reporting (1) the establishment of the
price of its common stock at $30.32 per share, and (2) revenues and net
income for the fiscal quarter ended April 4, 2004. Pursuant to the
Commissions regulations, the foregoing information was disclosed on Form
8-K filed April 23, 2004. - 18 -




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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: August 11, 2004
    By:
    /s/  David E. SchreimanDavid E. SchreimanVice President and
Chief Financial Officer - 19 -




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EXHIBIT INDEX Exhibits
    
    Description31.1
    
    Certification of Chief Executive Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    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 2002.32.2
    
    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.
 - 20 -