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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended April 3, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number 0-21682 SPARTA, Inc. 
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    63-0775889
(I.R.S. Employer Identification No.)
 25531 Commercentre Drive, Suite 120, Lake Forest, CA 92630-8873 
  (949) 768-8161 
  Not Applicable 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act or 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes þ     No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o     No þ As of April 3, 2005 the registrant had 5,129,134 shares of common stock, $.01 par value per share,
issued and outstanding.   1




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SPARTA, Inc. QUARTERLY REPORT FOR THE PERIOD ENDED APRIL 3, 2005 INDEX PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements (Unaudited)Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4
    
    Controls and ProceduresPART II
    
    OTHER INFORMATIONItem 1
    
    Legal ProceedingsItem 2
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3
    
    Defaults Upon Senior SecuritiesItem 4
    
    Submission of Matters to a Vote of Security HoldersItem 5
    
    Other InformationItem 6
    
    ExhibitsSignatureExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  - 1 -




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PART I 
 Item 1Financial Statements (Unaudited) - 2 -




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SPARTA, Inc.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    27,595,000
    
    
    $
    29,455,000Receivables, net
    
    
    47,974,000
    
    
    
    48,173,000Prepaid expenses
    
    
    1,103,000
    
    
    
    926,000Income taxes receivable
    
    
    
    
    
    
    943,000Total current assets
    
    
    76,672,000
    
    
    
    79,497,000Equipment and improvements, net
    
    
    10,427,000
    
    
    
    10,460,000Other assets
    
    
    2,579,000
    
    
    
    2,323,000Total Assets
    
    $
    89,678,000
    
    
    $
    92,280,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccrued compensation
    
    $
    12,735,000
    
    
    $
    17,345,000Accounts payable and other accrued expenses
    
    
    8,104,000
    
    
    
    10,849,000Current portion of subordinated notes payable
    
    
    2,918,000
    
    
    
    2,992,000Income taxes payable
    
    
    1,286,000
    
    
    
    Deferred income taxes
    
    
    2,000,000
    
    
    
    2,000,000Total current liabilities
    
    
    27,043,000
    
    
    
    33,186,000Subordinated notes payable
    
    
    7,929,000
    
    
    
    7,415,000Deferred income taxes
    
    
    952,000
    
    
    
    952,000Commitments and Contingencies (Note F)Stockholders EquityCommon stock, $.01 par value, 25,000,000 shares
authorized; 7,689,447 and 7,465,241 shares issued;
5,129,134 and 5,120,836 shares outstanding
    
    
    77,000
    
    
    
    75,000Additional paid-in capital
    
    
    80,160,000
    
    
    
    73,609,000Retained earnings
    
    
    39,020,000
    
    
    
    34,710,000Treasury stock, at cost
    
    
    (65,503,000
    )
    
    
    (57,667,000
    )Total stockholders equity
    
    
    53,754,000
    
    
    
    50,727,000Total Liabilities and Stockholders Equity
    
    $
    89,678,000
    
    
    $
    92,280,000
 The accompanying notes are an integral part of these consolidated financial statements - 3 -




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SPARTA, Inc.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) Three Months ended March 31,2005
    
    
    2004Sales
    
    $
    65,116,000
    
    
    $
    54,805,000Costs and expenses:Labor costs and related benefits
    
    
    35,131,000
    
    
    
    30,140,000Subcontractor costs
    
    
    16,746,000
    
    
    
    14,277,000Facility costs
    
    
    3,905,000
    
    
    
    3,182,000Travel and general administrative costs
    
    
    2,117,000
    
    
    
    1,643,000Total costs and expenses
    
    
    57,899,000
    
    
    
    49,242,000Income from operations
    
    
    7,217,000
    
    
    
    5,563,000Interest income
    
    
    (172,000
    )
    
    
    (85,000
    )Interest expense
    
    
    87,000
    
    
    
    53,000Income before provision for
taxes on income
    
    
    7,302,000
    
    
    
    5,595,000Provision for taxes on income
    
    
    2,992,000
    
    
    
    2,293,000Net income
    
    $
    4,310,000
    
    
    $
    3,302,000Basic earnings per share
    
    $
    0.84
    
    
    $
    0.64Diluted earnings per share
    
    $
    0.76
    
    
    $
    0.58
 The accompanying notes are an integral part of these consolidated financial statements - 4 -




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SPARTA, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) Three Months ended March 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    4,310,000
    
    
    $
    3,302,000Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    719,000
    
    
    
    562,000Loss on sale of equipment
    
    
    
    
    
    
    7,000Stock-based compensation
    
    
    3,865,000
    
    
    
    3,908,000Tax benefit relating to stock plan
    
    
    468,000
    
    
    
    605,000Changes in assets and liabilities:Receivables, net
    
    
    199,000
    
    
    
    (7,072,000
    )Prepaid expenses
    
    
    (177,000
    )
    
    
    (540,000
    )Other assets
    
    
    (256,000
    )
    
    
    (38,000
    )Accrued compensation
    
    
    (4,610,000
    )
    
    
    (8,328,000
    )Accounts payable and other accrued expenses
    
    
    (2,745,000
    )
    
    
    65,000Income taxes payable
    
    
    2,229,000
    
    
    
    (70,000
    )Net cash from (used for) operating activities
    
    
    4,002,000
    
    
    
    (7,599,000
    )Cash flows from investing activities:Purchases of equipment and improvements
    
    
    (686,000
    )
    
    
    (900,000
    )Net cash used for investing activities
    
    
    (686,000
    )
    
    
    (900,000
    )Cash flows from financing activities:Proceeds from issuance of stock
    
    
    2,220,000
    
    
    
    3,176,000Cash purchases of treasury stock
    
    
    (6,707,000
    )
    
    
    (5,273,000
    )Principal payments on subordinated notes payable
    
    
    (689,000
    )
    
    
    (620,000
    )Net cash used for financing activities
    
    
    (5,176,000
    )
    
    
    (2,717,000
    )Net decrease in cash
    
    
    (1,860,000
    )
    
    
    (11,216,000
    )Cash and cash equivalents at beginning of period
    
    
    29,455,000
    
    
    
    26,711,000Cash and cash equivalents at end of period
    
    $
    27,595,000
    
    
    $
    15,495,000Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    87,000
    
    
    $
    53,000Income taxes
    
    $
    294,000
    
    
    $
    1,757,000Non-cash investing and financing activities:Issuance of subordinated notes payable in connection
with purchases of treasury stock
    
    $
    1,129,000
    
    
    $
    Receipt of notes receivable in exchange for exercise of
stock options
    
    $
    39,000
    
    
    $
    102,000
 The accompanying notes are an integral part of these consolidated financial statements - 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 2005 comprises the 52-week period ending January 1, 2006, whereas fiscal year 2004
comprised the 53-week period ended January 2, 2005. The first quarter of fiscal 2005 comprised the
13 weeks ended April 3, 2004 whereas the corresponding first quarter in fiscal 2004 comprised the
14 weeks ended April 4, 2004. To aid the reader of the financial statements, the year-end has been
presented as December 31, 2004 and the three-month period ends have been presented as March 31,
2005 and March 31, 2004. In the opinion of management, the unaudited financial information for the three-month periods
ended March 31, 2005 and March 31, 2004 reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair statement of the results for such periods. Note B - Income Taxes Income taxes for interim periods are computed using the estimated annual effective rate
method. Note C  Computation of Earnings Per Share Three months ended March 31,2005
    
    
    2004Basic EPSNet income
    
    $
    4,310,000
    
    
    $
    3,302,000Weighted average
shares outstanding
    
    
    5,136,268
    
    
    
    5,183,906Per share amounts
    
    $
    0.84
    
    
    $
    0.64Diluted EPSNet income
    
    $
    4,310,000
    
    
    $
    3,302,000Weighted average
shares outstanding
    
    
    5,136,268
    
    
    
    5,183,906Stock options
    
    
    480,306
    
    
    
    416,287Restricted stock
    
    
    58,905
    
    
    
    61,6135,675,479
    
    
    
    5,661,806Per share amounts
    
    $
    0.76
    
    
    $
    0.58
 Note D  Accounting for Stock-Based Compensation The Company accounts for employee stock-based compensation in accordance with the
intrinsic value method described in Accounting Principles Board Opinion No. 25 (APB 25) and related - 6 -




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SPARTA, INC.Notes to Consolidated Financial Statements(Unaudited) interpretations. Had compensation expense for these plans been determined in accordance with the
fair value method described in Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), the Companys net income and net income per share would have
been reduced to the pro forma amounts in the following table. Three months ended March 31,2005
    
    
    2004Net incomeNet income
As reported
    
    $
    4,310,000
    
    
    $
    3,302,000Add after-tax stock-based
compensation expense
included in determining
net income
    
    
    575,000
    
    
    
    308,000Deduct after-tax stock-based
compensation expense as
if the fair value method had
been used
    
    
    (912,000
    )
    
    
    (627,000
    )Pro forma net income
    
    $
    3,973,000
    
    
    $
    2,983,000Basic EPSAs reported
    
    $
    0.84
    
    
    $
    0.64Pro forma
    
    
    0.77
    
    
    
    0.58Diluted EPSAs reported
    
    
    0.76
    
    
    
    0.58Pro forma
    
    
    0.71
    
    
    
    0.54
 Note E  Stockholders Equity For the three months ended March 31, 2005, proceeds from the issuance of common stock,
primarily as the result of exercises of stock options, totaled $2.2 million. In addition, the
Company repurchased a total of 215,908 common shares at their current fair value totaling
approximately $7.8 million. Of this
total, the Company repurchased $6.7 million for cash, and $1.1 million by delivery of promissory
notes. The promissory notes provide for principal payments over periods ranging from two to five
years, plus interest at the lesser of the prime rate, the Federal Reserve discount rate (3.75% at
March 31, 2005) or 10%. Treasury stock is shown at cost, and consisted of 2,560,313 shares and 2,344,405 shares of
common stock at March 31, 2005 and December 31, 2004, respectively. Repurchase of outstanding
stock by the Company in exercise of its right of repurchase upon termination of employment (as
defined) are made at estimated fair value. In connection with its right to repurchase the
stockholdings of individuals who terminate their association with the Company, the Company
recognized stock compensation expense of $368,000 and 0 for the quarters ended March 31, 2005 and
2004, respectively. The stock price is calculated quarterly by the Company using a formula
approved by the Board of Directors (which the Company believes estimates fair value). The stock
price formula is evaluated annually by reference to discounted cash flow analysis, market multiple
analysis, comparable transaction analysis and other financial valuation techniques. - 7 -




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SPARTA, INC.Notes to Consolidated Financial Statements
(Unaudited) Certain employees are eligible to participate in a program whereby they may exercise
certain stock options by delivery of a note payable to the Company. The notes are full recourse,
are secured by the underlying shares of common stock, bear interest at prime plus 0.5%, and are
repaid through payroll deductions over a period of less than one year. At March 31, 2005 and
December 31, 2004, the outstanding principal balances of these notes were $358,000 and $618,000,
respectively, and are included as a reduction of additional paid-in capital. Note F  Commitments and Contingencies The Company has no material investigations, claims, or lawsuits arising out of its business,
nor any known to be pending. The Company is subject to certain legal proceedings and claims that
arise in the ordinary course of its business. In the opinion of management, the ultimate outcome
of such matters will not have a material impact on the Companys financial position, results of
operations or cash flows. During 2004, the U.S. government terminated for its convenience several task orders on one
contract. The contract value of the terminated task orders totaled approximately $22 million;
however, approximately $9 million of the total termination amount was incurred prior to the
effective date of the termination and has been, or is expected to be, paid to the Company. As of
March 31, 2005, the Company had accounts receivable totaling approximately $1.9 million for costs
incurred on the terminated task orders. These costs were incurred prior to the effective date of
the termination. During the first quarter of 2005, the government agreed to reimburse the Company
for substantially all of these costs, and in April, 2005, the Company received a partial
reimbursement of $1.5 million for costs incurred on the terminated task orders. The Company is
continuing to negotiate with the government regarding settlement of the remaining costs and
believes that this termination will not have a material effect on the Companys financial condition
or results of operations. Note G  Recent Accounting Pronouncements In December, 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R)
[SFAS 123(R)], Share Based Payments.SFAS 123(R) replaces SFAS 123, Accounting for Stock-Based
Compensation,and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS 123(R) requires that the compensation cost related to all
share-based payment transactions (including employee stock options) be recognized in the financial
statements. Share-based compensation costs must be measured based on the fair value of the equity
or liability instruments issued. The Company anticipates adopting SFAS 123(R) at the beginning of
the first annual reporting period beginning after December 15, 2005. The Company has not
determined the transition method that will be selected to implement this statement or the impact
that adopting this statement will have on the Companys financial position and/or results of
operations. Note H  Subsequent Event On April 8, 2005, the Company acquired the assets of McAfee Research, a division of McAfee,
Inc., for $1.5 million in cash. McAfee Research conducts advanced computer and network security
research focused on a variety of different technologies; such business is complementary to the
Companys existing information assurance business. The acquisition will be accounted for by the
purchase method. The Company has not completed allocating the purchase price to the assets
acquired or determined the impact of the acquisition on the Companys financial position and/or
results of operations. - 8 -




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Item 2Managements Discussion and Analysis of Financial Condition and Results of
Operations Results of Operations The Companys fiscal year is the 52 or 53-week period ending on the Sunday closest to December
31. Fiscal year 2005 comprises the 52-week period ending January 1, 2006, whereas fiscal year 2004
comprised the 53 week period ended January 2, 2005. The first quarter of fiscal 2005 comprised 13
weeks, whereas the corresponding first quarter in 2004 comprised 14 weeks. The following tables present certain key operating data for the periods indicated: Operating Results(amounts in thousands, except percentages)Three months ended March 31,2005
    
    
    2004Sales
    
    
    $
    65,116
    
    
    $
    54,805Sales by business area, as a
percentage of total sales:Ballistic Missile Defense (BMD)
    
    
    
    46
    %
    
    
    45
    %Other Dept of Defense (DoD)
    
    
    
    50
    %
    
    
    52
    %Non-DoD
    
    
    
    4
    %
    
    
    3
    %Gross profit (1)
    
    
    $
    7,690
    
    
    $
    5,920Gross profit as a % of costs (1)
    
    
    
    13.4
    %
    
    
    12.1
    %Income from operations
    
    
    $
    7,217
    
    
    $
    5,563Net income
    
    
    $
    4,310
    
    
    $
    3,302
   (1)
    
    Under SEC regulations, data derived from consolidated financial information but
not required by GAAP to be presented in the financial statements are considered non-GAAP
financial measures. Gross profit, as defined by the Company, and gross profit as a
percentage of costs are non-GAAP financial measures. The Company defines gross profit as
sales less contract costs. Contract costs are all costs that are allowable for and
allocable to contracts under government procurement regulations. As such, gross profit
excludes certain operating expenses that are unallowable under government procurement
regulations. Management considers gross profit, and gross profit as a percentage of costs,
to be key measures of the Companys contract performance. They should also be considered
in conjunction with income from operations, net income, and other measures of financial
performance. The following presents a reconciliation of gross profit to income from
operations (amounts in thousands): Three months ended March 31,2005
    
    
    2004Gross profit
    
    $
    7,690
    
    
    $
    5,920Less unallowable expenses
    
    
    (473
    )
    
    
    (357
    )Income from Operations
    
    $
    7,217
    
    
    $
    5,563
 The Companys sales for the three-month period ended March 31, 2005 increased 19%, from
$54.8 million for the first quarter of 2004 to $65.1 million for the first quarter of 2005. The
most significant contributor to the Companys revenue growth was BMD programs, where revenues
increased 20%, from $24.9 million for the three-month period ended March 31, 2004 to $29.7 million for the
corresponding period in 2005. In addition to continuing its work on BMD systems engineering and
technical analysis, the Company has generated growth in its BMD business base through penetration
of other BMD program elements. Revenue on other DoD programs increased 16% from $28.4 million for
the first quarter of 2004 to $32.9 million for the first quarter of 2005. The increase in other
DoD - 9 -




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revenues was primarily due to revenue growth on training and range management programs for the
U.S. Army, on engineering support programs for the U.S. Army and U.S. Air Force, and on a variety
of defense-related composite production programs. In addition, other DoD revenues increased due to
increased revenue on programs for a variety of intelligence agencies as a result of the
governments increased focus on intelligence in response to the terrorist attacks of September 11.
Non-DoD revenues increased 58% from $1.6 million in 2004 to $2.5 million in 2005 as the result of
an increase in revenues on a commercial composite manufacturing program. The gross profit rate (gross profit as a percentage of contract costs) increased from 12.1% in
the first quarter of 2004 to 13.4% in the first quarter of 2005. The increase in the gross profit
rate is primarily attributable to the mix of contract types, as the Company has continued to
experience a decline in the percentage of revenues derived from cost reimbursable contracts.
During the first quarter of 2005, time and material and fixed price contracts comprised 54% of
total sales, compared with 47% of total sales in the corresponding period in 2004. The Company
generally earns higher profit rates on time and material and fixed price contracts than it does on
cost reimbursable contracts, due to the greater risk associated with such contract types. The Company earned net interest income during the first quarters of 2005 and 2004. The
increase in net interest income during the first quarter resulted from higher cash and investment
balances. Both the Companys investments in cash equivalents and the Companys long-term debt are
at floating rates. Accordingly, the change in average short- and medium-term interest rates from
2004 to 2005 had a minimal effect on net interest. The Companys effective income tax rate was 41% during the first quarters of both 2005 and
2004. Backlog Annualized funded contract backlog represents all current contracts on which the Company
expects to perform during the next 12 months and for which the customer has appropriated funds for
payment of goods and services. Annualized unfunded contract backlog includes the expected value
during the next 12 months of future incremental funding on existing contracts. Multi-year contract
backlog represents the total funded and unfunded contract backlog, without regard to when the
relevant contract work will be performed. As a result of U.S. Government funding practices, the
Company expects that most of its funded backlog will be performed within the next 12 months. The Company has historically used an additional metric for assessing expected future business
performance. In addition to funded and unfunded contract backlog, as defined above, the Company
has historically included the expected value of future incremental funding on certain proposals
where the Company expects a high probability of winning the procurement. The Company believes that
this metric, denoted Company-defined backlog in the following table, is more indicative of its
expected future revenues. For example, as of December 31, 2003, 2002 and 2001, annualized
Company-defined backlog comprised 81%, 86% and 88% of sales for fiscal 2004, 2003 and 2002,
respectively. Although the annualized Company-defined backlog has historically been indicative of its future
revenues, there can be no assurance that this will continue. The Companys backlog is typically
subject to variations from year to year as contracts are completed, major existing contracts are
renewed, or major new contracts are awarded. Additionally, all U.S. Government contracts included
in backlog, whether or not funded, may be terminated at the convenience of the U.S. Government.
Moreover, U.S. Government contracts are conditioned upon the continuing availability of
Congressional appropriations. New - 10 -




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Presidential Administrations, changes in the composition of
Congress, and disagreement or significant delay between Congress and the Administration in reaching
a defense budget accord can all significantly affect the timing of funding on the Companys
contract backlog. Delays in contract funding resulting from these factors may have a significant
adverse effect on the Companys financial position and/or results of operations. The following table compares the Companys contract backlog and Company defined backlog at the
dates indicated: March 31,
    
    
    
    December 31,
    
    
    
    March 31,2005
    
    
    
    2004
    
    
    
    2004Annualized funded contract backlog
    
    
    $
    111,600
    
    
    
    $
    102,200
    
    
    
    $
    125,800Annualized unfunded contract backlog
    
    
    
    62,300
    
    
    
    
    79,200
    
    
    
    
    48,200Total annualized contract backlog
    
    
    
    173,900
    
    
    
    
    181,400
    
    
    
    
    174,000Expected 12-month value of future
funding on proposals with high
probability of winning procurement
    
    
    
    72,000
    
    
    
    
    45,900
    
    
    
    
    40,800Total annualized Company-defined
backlog
    
    
    $
    245,900
    
    
    
    $
    227,300
    
    
    
    $
    214,800Total multi-year contract backlog
    
    
    $
    534,000
    
    
    
    $
    569,700
    
    
    
    $
    457,700Expected value of future funding on
proposals with high probability of
winning procurement
    
    
    
    157,500
    
    
    
    
    139,800
    
    
    
    
    121,900Total multi-year Company-defined
backlog
    
    
    $
    691,500
    
    
    
    $
    709,500
    
    
    
    $
    579,600Annualized Company-defined backlog
(by business area):BMD
    
    
    $
    97,400
    
    
    
    $
    98,100
    
    
    
    $
    96,300Other DoD
    
    
    
    141,000
    
    
    
    
    122,100
    
    
    
    
    112,500Non-DoD
    
    
    
    7,500
    
    
    
    
    7,100
    
    
    
    
    6,000Total annualized Company-defined
backlog
    
    
    $
    245,900
    
    
    
    $
    227,300
    
    
    
    $
    214,800
 The annualized Company-defined contract backlog increased from $227.3 million at the end
of 2004 to $245.9 million as of March 31, 2005, an increase of 8%. Other DoD annualized contract
backlog increased $18.9 million, or 16%, during the first quarter of 2005, primarily in
intelligence programs for the national and military intelligence communities and in modeling and simulation support for the
U.S. Armys Future Combat System (FCS) program. In addition, other DoD company-defined backlog
includes $8.3 million in backlog arising from the acquisition of McAfee Research division. BMD
annualized contract backlog decreased $0.7 million or 1% during the first quarter of 2005. Two of
the Companys contracts under the Missile Defense Agencys (MDA) Scientific Engineering and
Technical - 11 -




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Assistance (SETA) program are approaching completion. As noted in the following
paragraph, the Company has received extensions of these contracts for periods ranging from three to
six months, however, the Company expects that these contracts will be subject to recompete during
2005. Non-DoD annualized contract backlog increased $0.4 million, or 6% during the first quarter
of 2005. In the first quarter of 2005, the Company had five significant competitive contract/task-order
wins, five significant sole-source contract add-ons or extensions, and two significant competitive
contract/task-order losses. In the Missile Defense Sector, the Technical and Acquisition Support
Operation (TASO) won a competitive contract from U.S. Army Aviation Missile Research, Development
and Engineering Center for the Science and Technology Enterprise Management System. This is a $1
million, two-year contract. The Advanced Systems Technology Operation (ASTO) won two sole-source
contract extensions for the Ballistic Missile Defense System SETA program with the MDA. One was
for $12.8 million over six months for the MDA Systems Engineering Office. The other was an
increase of $3.2 million over three months for the MDA Battle Control Office. In addition, the
Systems Acquisition Support Operation (SASO) was notified that MDA had exercised a contract option
for the Force Structure Integration and Deployment program. This option has a value of $12.9
million over a period of one year. In the National Systems Security Sector, the Military Systems Operation (MSO) and the Applied
Communication Technology Operation (ACTO) won a competitive contract from the Office of Naval
Intelligence for their Command, Control, Communications and Computers Intelligence Surveillance,
Reconnaissance and Information Operations program. This contract has a value of $18 million over a
period of five years. The Information Systems Security Operation (ISSO) won a competitive contract
from the U.S. Air Force for their Telemetry, Tracking and Control Information Assurance program.
This contract has a value of $2.6 million over a period of one year. As a subcontractor to Harris
Corporation, ISSO won a competitive contract for the National Security Agencys Rebuilding Analysis
Development and Integration program. This subcontract has a value of $1 million over an 18-month
period. ISSO also won a sole-source add-on for the National Security Agencys KG-30 Family
Replacement System Engineering and Simulator Development Support program. The value of this add-on
is $1.2 million over four years. MSO won a sole-source add-on for the Army Space and Missile
Defense Commands Laser Neutralization Systems Hunter-Killer Assessment Support program. This
program is to prepare the Companys ZEUSÔ system for deployment and to provide maintenance
support in the theater. This contract add-on has a value of $1.3 million over a period of six
months. In support to the Boeing and Science Applications International Corporation Lead System
Integrator team for the Armys FCS program, SPARTA won a competitive $4.9 million task order for
six months to initiate the building of an End-To-End Simulation Model for the FCS Network. This
task order is currently supported by six Operations including the Space and Missile Defense
Operation (SMDO), the Defense Programs Operation (DPO), the Defense Systems and Technology
Operation (DSTO), TASO, ASTO, and ISSO. This simulation project is expected to continue into the
next government fiscal year that begins on October 1, 2005. In the Missile Defense Systems Sector, SASO, as a subcontractor to APARIQ, Inc., lost a
competitive contract for the Defense Advanced Research Project Agencys Automated Attack Center
Demonstration program. This was a $2.9 million contract over a period of four years. In the Hardware Systems Sector, the Composite Products Operation (CPO), as a subcontractor to
AeroViroment, lost a competitive contract to manufacture composite wing sets for the Air Force
Raven Unmanned Air Vehicle program. This was a six-month $1.5 million contract. - 12 -




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Liquidity and Capital Resources The following tables sets forth, for the periods indicated, selected financial information: Balance atMarch 31,
    
    
    
    December 31,
    
    
    
    March 31,2005
    
    
    
    2004
    
    
    
    2004Cash and cash equivalents
    
    
    $
    27,595,000
    
    
    
    $
    29,455,000
    
    
    
    $
    15,495,000Stockholders equity
    
    
    $
    53,754,000
    
    
    
    $
    50,727,000
    
    
    
    $
    44,985,000Subordinated notes payable
    
    
    $
    10,847,000
    
    
    
    $
    10,407,000
    
    
    
    $
    7,490,000Borrowings under line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of days sales in
receivables
(year-to-date average)
    
    
    
    62
    
    
    
    
    60
    
    
    
    
    65Current ratio
    
    
    
    2.8
    
    
    
    
    2.4
    
    
    
    
    2.8
 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 may be augmented, if 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 2, 2007. 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, 2005. 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, 2005. - 13 -




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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 March 31, 2005, 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 2005 the Companys cash balances declined $1.9 million compared
with the prior year end. Operating activities generated $4.0 million in cash during the first quarter of 2005. The
Company generated $4.3 million in net income during the quarter. Non-cash expenses totaled $4.6
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 also generated cash flow (in the form
of a reduction in its income tax liabilities) of $0.5 million as a result of the income tax benefit
relating to its stock compensation plans. However, offsetting these increases to cash flow, the
Company used $5.4 million in cash for working capital during the first quarter of 2005, principally
to reduce accrued compensation. Although first quarter sales increased 19% in comparison with the corresponding period in
2004, accounts receivable declined slightly from $48.2 million at December 31, 2004 to $48.0
million at March 31, 2005. Average year-to-date DSO of 62 days as of March 31, 2005 is an increase
of 2 days from 60 days as of December 31, 2004, but a decrease from 65 days as of March 31, 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. Through the three months ended March 31, 2005 the Companys capital expenditures totaled
approximately $0.7 million. The Company currently does not expect a significant change in its
level of capital expenditures. In connection with the aforementioned stock repurchase policies; during the three months ended
March 31, 2005, the Company repurchased a total of 215,908 common shares totaling approximately
$7.8 million. Of the year-to-date total, $1.1 million was repurchased in exchange for promissory
notes - 14 -




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and $6.7 million was repurchased for cash. Year-to-date principal payments on promissory
notes as of the end of the first quarter of 2005 totaled $0.7 million. Proceeds from the issuance
of common stock, primarily as the result of exercises of stock options, totaled $2.2 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. The Companys significant contractual obligations relate to subordinated promissory notes and
operating lease commitments. As of March 31, 2005 the Company has no significant commercial
commitments, nor significant commitments for capital expenditures. As of March 31, 2005
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
    
    
    $
    10,847
    
    
    
    $
    2,918
    
    
    
    $
    6,202
    
    
    
    $
    1,525
    
    
    
    $
    202Operating Leases
    
    
    
    29,473
    
    
    
    
    7,223
    
    
    
    
    18,024
    
    
    
    
    4,226
    
    
    
    
    0Total Contractual Obligations
    
    
    $
    40,320
    
    
    
    $
    10,141
    
    
    
    $
    24,226
    
    
    
    $
    5,751
    
    
    
    $
    202
 Recent Accounting Pronouncements In December, 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R)
[SFAS 123(R)], Share Based Payments.SFAS 123(R) replaces SFAS 123, Accounting for Stock-Based
Compensation,and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS 123(R) requires that the compensation cost related to all
share-based payment transactions (including employee stock options) be recognized in the financial
statements. Share-based compensation costs must be measured based on the fair value of the equity
or liability instruments issued. The Company anticipates adopting SFAS 123(R) at the beginning of
the first annual reporting period beginning after December 15, 2005. The Company has not
determined the transition method that will be selected to implement this statement or the impact
that adopting this statement will have on the Companys financial position and/or results of
operations. 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. During 2004, the U.S. government terminated for
its convenience several task orders on one contract. The contract value of the terminated task
orders totaled approximately $22 million; however, approximately $9 million of the total
termination amount was incurred prior to the effective date of the termination and has been, or is
expected to be, paid to the Company. As of March 31, 2005, the Company had accounts receivable
totaling approximately $1.9 million for costs incurred on the terminated task orders. These costs
were incurred prior to the effective date of the termination. During the first quarter of 2005,
the government agreed to reimburse the
Company for substantially all of these costs, and in April, 2005, the Company received a partial
reimbursement of $1.5 million for costs incurred on the terminated task orders. The Company is -15-




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continuing to negotiate with the government regarding settlement of the remaining costs and
believes that this termination will not have a material effect on the Companys financial condition
or results of operations. The Company does not anticipate any additional termination of programs
or contracts in 2005. 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 January 2, 2005, 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 3Quantitative and Qualitative Disclosures about Market Risk Refer to item 7A in the Companys Annual Report on Form 10-K for the fiscal year ended January 2, 2005. 
 Item 4Controls 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 3, 2005. Exchange Act Rule 13a-15(e) defines disclosure controls and
procedures to mean controls and procedures of a company that are designed to ensure that
information required to be disclosed by the company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the Commissions rules and forms. The definition further states that disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that the
information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the companys management, including its principal
executive and principal financial officers, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure. Based on the results of this evaluation,
management believes that such controls and procedures are operating effectively. - 16 -




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(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 IIOTHER INFORMATION 
 Item 1Legal 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 2Unregistered Sales of Equity Securities and Use of Proceeds (a) and (b) Not Applicable (c) Issuer Purchases of Equity Securities Maximum Number (orTotal
    
    
    
    
    
    
    
    
    Total Number of Shares
    
    
    
    Approximate Dollar Value)Number of
    
    
    
    Average
    
    
    
    Purchased as Part of Publicly
    
    
    
    of Shares that May Yet BeShares
    
    
    
    Price Paid
    
    
    
    Announced Plans or
    
    
    
    Purchased Under the Plans orPeriod
    
    
    Purchased
    
    
    
    per Share
    
    
    
    Programs
    
    
    
    ProgramsJanuary (1/3/05 - 1/30/05)
    
    
    
    57,427
    
    
    
    
    34.72
    
    
    
    
    1,299,000
    
    
    
    
    February (1/31/05 - 2/27/05)
    
    
    
    47,246
    
    
    
    
    36.79
    
    
    
    
    728,000
    
    
    
    $
    2,642,000March(2/28/05 - 4/3/05
    
    
    
    111,235
    
    
    
    
    36.90
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    215,908
    
    
    
    
    36.29
    
    
    
    
    2,027,000
    
    
    
    $
    2,642,000
 As previously discussed, the Company maintains a voluntary stock repurchase program which
enables its stockholders to offer shares for sale to the Company on designated dates, usually
February 21, May 21, August 21 and November 21. Such repurchase programs are generally announced
approximately 30 days prior to the designated date, in conjunction with the calculation of the
stock price. See Market For Registrants Common Equity, Related Stockholder Matters And Issuer
Purchases Of Equity Securities  Lack of Public Market; Internal Repurchase Program in the
Companys Annual Report on Form 10-K for the fiscal year ended January 2, 2005. The Company has a self-imposed limit on the number of shares that the Company will repurchase
in connection with each stock repurchase date. In addition, repurchases may also be limited by
applicable legal restrictions. Accordingly, upon expiration of the repurchase program, there is
typically a delay in finalizing the repurchase due to the time necessary to perform the required
calculations, notify stockholders of the number of shares that the - 17 -




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Company will accept for
repurchase, collect stock certificates, and prepare payment documentation. The stock repurchases
for January in the above table represent the final stock repurchases from the November 21, 2004
stock repurchase date. During the first quarter of 2005, the Company announced a voluntary stock repurchase program
with an expiration date of February 21, 2005. Total funds committed to this repurchase program
aggregated $3,370,000, of which $728,000 were expended in February 2005, with the balance expended
in April 2005. Stock repurchases, other than those related to the voluntary stock repurchase program, result
primarily from the Companys exercise of its right of first refusal upon the termination of a
stockholders employment with the Company. See Market For Registrants Common Equity, Related
Stockholder Matters And Issuer Purchases Of Equity Securities  Repurchase Rights of the Company,
Restrictions on Transferability in the Companys Annual Report on Form 10-K for the fiscal year
ended January 2, 2005. 
 Item 3Defaults Upon Senior Securities Not Applicable 
 Item 4Submission of Matters to a Vote of Security Holders Not Applicable 
 Item 5Other Information Not Applicable 
 Item 6Exhibits Exhibit 31.1
    
    Certification of Chief Executive Officer Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification of Chief Financial Officer Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 - 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: May 10, 2005
    
    By:
    
    /s/David E. SchreimanDavid E. SchreimanVice President andChief Financial Officer
 - 19 -




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EXHIBIT INDEX Exhibit No.
    
    DescriptionExhibit 31.1
    
    Certification of Chief Executive Officer Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification of Chief Financial Officer Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 - 20 -