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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the Quarterly Period Ended September 30, 2002

OR

For the transition period from __________ to __________

Commission file number   0-21682

SPARTA, Inc.

23041 Avenida de la Carlota, Suite 325, Laguna Hills, CA 92653-1595

(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       

As of September 30, 2002, the registrant had 5,607,616 shares of common stock, $.01 par value per share, issued and outstanding.

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SPARTA, Inc.

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2002

INDEX

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PART I

Item 1. Financial Information

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SPARTA, Inc.
CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of the financial statements

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SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

The accompanying notes are an integral part of the financial statements

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SPARTA, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

The accompanying notes are an integral part of the financial statements

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SPARTA, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Note A — Basis of Presentation

The accompanying financial information has been prepared in accordance with the instructions to Form 10-Q and therefore does not necessarily include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

The Company’s fiscal year is the 52 or 53 week period ending on the Sunday closest to December 31. The Company’s last fiscal year ended on December 30, 2001, its third quarter ended September 29, 2002, and its corresponding third quarter last year ended on September 30, 2001. To aid the reader of the financial statements, the year-end has been presented as December 31, 2001 and the quarters and nine-month period ends have been presented as September 30, 2002 and September 30, 2001.

In the opinion of management, the unaudited financial information for the nine-month periods ended September 30, 2002 and September 30, 2001 reflects all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation thereof.

Note B — Income Taxes

Income taxes for interim periods are computed using the estimated annual effective rate method.

Note C — Computation of Per Share Earnings

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table sets forth, for the periods indicated, selected financial results:

	(1)		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, as well as interest income and interest expense. Management considers gross profit, and gross profit as a percentage of costs, to be key measures of the Company’s contract performance.
	(2)		Equity per share is based on outstanding shares of common stock, excluding shares of treasury stock.
	(3)		The current ratio is the ratio of current assets to current liabilities, and is a commonly-used measure of a company’s liquidity.

New Contracts and Annualized Backlog

In the third quarter, the Company had twelve significant competitive contract and task-order wins and two significant competitive contract and task-order losses.

The Advanced Systems Technology Operation (ASTO) won three efforts with the Missile Defense Agency (MDA). The first effort is to provide support services to the Advanced Systems Directorate’s (MDA/AS) Hercules program under a one-year cost-plus-fixed-fee contract. The second effort is to provide support services to MDA/AS under our Blanket Purchase Agreement (BPA) with MDA. The aggregate value of these two efforts for MDA/AS is estimated at $20 million over the first year. The third effort is a $1.8 million effort to provide support to the Program Director Cooperative Program and Allied Support (MDA/CF), also under our BPA. Each of the BPA efforts is for one year, with three one-year priced options plus award-term options that can extend each program up to a total of ten years. In addition, the AS BPA effort includes the provision for 100% growth, and the CF effort includes provision for 50% growth.

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The Advanced Communications Technology Operation (ACTO) won two follow-on tasks in the third quarter. One task is for $3.3 million over one year for a classified DoD customer. The other task is $1.4 million over 15 months for a classified Intelligence agency customer.

The International Systems Operation (INSO), as a subcontractor to Xontec Corporation, won a labor rate subcontract for the National Aerospace Intelligence Center Have Gold III program. This subcontract has an expected value of $2.5 million and will be performed over five years, with the potential for two option years. Also, INSO won a program from the Technical Support Working Group (TSWG) for the Critical Incident Response Technology Seminars program. This contract has a value of $1.5 million and will be performed over two years.

The Information Systems Security Operation (ISSO) won a contract from the Maryland Procurement Office (MPO) for the Family Replacement System Engineering and Simulator Development Support program. This contract has a value of $1.7 million over 18 months. Additionally, ISSO won a contract from MPO for the Collaborative Netgraph Using GSAKMP program. This contract has a value of $1.1 million over two years. ISSO also won an independent verification and validation (IV&V) contract on the National Security Agency SA KG-30 program for $1.7 million over 18 months.

Integrated Data Systems Operation (IDSO), as a subcontractor to the Advanced Logistics Solutions (ALS) Joint Venture, won two new task orders. The first task order was valued, at the ALS level, at $1 million over three years for the Enterprise Resource Planning/Shared Data Environment Support program. The second task order was valued, at the ALS level, at $4.8 million over three years for the Logistics Support program. Both tasks were for the Army Missile Command (AMCOM) under the Omnibus Logistics Support program. SPARTA’s share of these ALS task orders is $0.3 million and $3 million, respectively. In addition, IDSO won a $10 million GSA task order at AMCOM. The initial tasks under this contract total $1.1 million over 17 months.

ACTO and INSO, in a joint proposal effort, lost the Mission Monitoring Center contract for a classified customer. ASTO lost the Arms Control and Nonproliferation contract for the Defense Threat Readiness Agency. This would have been an Indefinite Delivery Indefinite Quantity (IDIQ) contract over five years.

Results of Operations

The Company’s contract revenues for the three- and nine-month periods ended September 30, 2002 increased 23% and 20%, respectively, from the corresponding periods in 2001 due to increased project activities, including the effect of new work as described above. BMD sales for the three- and nine-month periods increased 46% and 37%, respectively, over the corresponding periods in 2001, as the Company won several new missile defense contracts (or extensions of previous contracts) during 2002. Non-BMD DoD sales for the three- and nine-month periods increased 29% and 20%, respectively, over the corresponding periods in 2001, as the Company has continued to experience growth in its business for various intelligence organizations. Non-DoD sales for the three- and nine-month periods decreased 49% and 28%, respectively, over the corresponding periods in 2001 due to the completion of a commercial development contract early in the first quarter of 2002 and the completion of a NASA contract early in the third quarter of 2002.

The Company defines gross profit as sales less all costs that are allowable for and allocable to contracts under government procurement regulations and cost principles. As such, gross profit excludes certain unallowable expenses, as well as interest income and interest expense. Management considers gross profit, and the gross profit rate (gross profit as a percentage of costs), to be key measures of the Company’s contract performance. Gross profit for the three-month period ended September 30, 2002 decreased 2% compared to the corresponding period of 2001, and the gross profit rate decreased to 9.8% for the three-month period in 2002, from 12.5% for the corresponding period in 2001. Gross profit for the nine-month period ended September 30, 2002 increased 5% compared to the corresponding period in 2001, however, the gross profit rate decreased to 10.4% for the nine-month period in 2002, from 12.0% for the corresponding period in 2001. The changes in gross profit and the gross profit rate are primarily attributable to sales mix, as the gross profit rate on BMD programs, which comprised a higher percentage of revenues during the three- and nine-month periods in 2002, are somewhat lower than on other programs.

Liquidity and Capital Resources

     The Company’s principal sources of capital resources for funding its operations are cash and short-term investments on hand, 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 resources are for the repurchase of preferred and common stock, repayments of amounts borrowed under the bank line of credit, principal payments on subordinated promissory notes, and capital expenditures.

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There were no borrowings against the Company’s $6 million line of credit during the third quarter of 2002 or the corresponding period in 2001. Sustaining the low reliance on borrowings is largely due to the Company’s cash and short-term investment position, emphasis on rapid billing and collection of receivables, a concerted effort to control capital expenditures and expenditures for independent research and development, and a planned reduction of investment in product initiatives. Year-to-date average days sales outstanding (DSO) decreased to 64 days at September 30, 2002 from 68 days at June 30, 2002. This decrease was primarily attributable to the receipt of payments on two large fixed price contracts. The Company continues to actively monitor receivables with emphasis placed on collection activities.

Significant uses of cash during the third quarter of 2002 include the repurchase of $3.7 million of common stock in accordance with the Company’s voluntary stock repurchase policy and the repurchase of $1.2 million of redeemable preferred stock.

During the second quarter of 2002, the Company and its bank entered into an Amended and Restated Loan Agreement (the Loan Agreement). The Loan Agreement extends the Company’s $6 million line of credit facility through July 1, 2004. Borrowings under the Loan Agreement are at the bank’s reference rate (or LIBOR plus 2%, at the Company’s option), and are secured by substantially all of the Company’s assets. In addition, the Loan Agreement restricts the ability of the Company to pay dividends, and requires the Company to maintain certain financial ratios. The Company was in compliance with all such requirements at September 30, 2002. The Company anticipates that its existing capital resources and access to its line of credit will be sufficient to fund planned operations for the foreseeable future.

Stock Purchase Agreement

In November 1994, the Company entered into a Stock Purchase Agreement with Science Applications International Corporation (SAIC), pursuant to which SAIC purchased a total of 569,039 shares of redeemable preferred stock at a cost of $2.4 million. Beginning in May 1999, by agreement with SAIC, the Company began repurchasing shares of this preferred stock. During the three- and nine-month periods ended September 30, 2002, the Company repurchased 57,834 and 160,223 shares, respectively, at a cost of $1.2 million and $3.1 million, respectively. As of September 30, 2002, SAIC held 63,459 shares of redeemable preferred stock, with an aggregate accreted value of $1.3 million. It is the Company’s intent to continue to repurchase SAIC stock.

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 third quarter of 2002. The Company does not anticipate any termination of programs and contracts in 2002. 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.

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 30, 2001, 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.

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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 30, 2001.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

Management has evaluated the Company’s disclosure controls and procedures as of November 11, 2002 (a date within 90 days of the filing of this Quarterly Report on Form 10-Q). Based on the results of this evaluation, management believes that such controls and procedures are operating effectively.

(b)

Changes in Internal Controls

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the aforementioned controls and procedures subsequent to November 11, 2002 (the date of their evaluation)

(c)

Asset-Backed Issuers

Not Applicable

Part II Other Information

Item 1. Legal Proceedings

The Company has no investigations, claims, or lawsuits arising out of its business, nor any known to be pending.

Item 2. Changes in Securities

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5. Other Materially Important Events

Not Applicable

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

See Index to Exhibits on page 14.

(b)

Reports on Form 8-K

The Company did not file any Reports on Form 8-K during the fiscal quarter for which this report is filed.

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Certification

I, Robert C. Sepucha, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of SPARTA, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 13, 2002

/s/ Robert C. Sepucha

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Certification

I, David E. Schreiman, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of SPARTA, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 13, 2002

/s/ David E. Schreiman

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INDEX TO EXHIBITS
PART II, ITEM 6(a)

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