UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the Quarterly Period Ended April 4, 2004

OR

For the transition period from __________ to __________

Commission file number 0-21682

SPARTA, Inc.

(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.

SPARTA, Inc.

QUARTERLY REPORT FOR THE PERIOD ENDED APRIL 4, 2004

INDEX

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PART I

Item 1 Financial Statements

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SPARTA, Inc.
CONSOLIDATED BALANCE SHEET
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements

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SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements

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

The accompanying notes are an integral part of these consolidated financial statements

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

Note A - Basis of Presentation

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

     The Company’s fiscal year is the 52 or 53 week period ending on the Sunday closest to December 31. Fiscal year 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

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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.

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.

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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.

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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:

(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):

     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

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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.

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     The following table compares the Company’s annualized contract backlog as of the dates indicated:

     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.

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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:

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).

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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.

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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.

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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.

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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

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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.

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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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EXHIBIT INDEX