##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended July 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.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    63-0775889(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 25531 Commercentre Drive, Suite 120, Lake Forest, CA 92630-8873
  (949) 768-8161
 
  Not Applicable
 
  þ o
 o þ




---



SPARTA, Inc.
   PagePART I FINANCIAL INFORMATIONItem 1Financial Statements (Unaudited)
    
    
    2Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4Controls and Procedures
    
    
    21PART II OTHER INFORMATIONItem 1Legal Proceedings
    
    
    21Item 2Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3Defaults Upon Senior Securities
    
    
    22Item 4Submission of Matters to a Vote of Security Holders
    
    
    22Item 5Other Information
    
    
    23Item 6Exhibits
    
    
    23Signature
    
    
    24Exhibits
    
    
    25EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  - 1 -




---



##### Table of Contents



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




---



##### Table of Contents



SPARTA, Inc.
 CONSOLIDATED BALANCE SHEET
(Unaudited)
 June 30,
    
    December 31,2005
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    25,598,000
    
    
    $
    29,455,000Receivables, net
    
    
    56,404,000
    
    
    
    51,904,000Prepaid expenses
    
    
    1,615,000
    
    
    
    926,000Income taxes receivable
    
    
    496,000
    
    
    
    943,000Total current assets
    
    
    84,113,000
    
    
    
    83,228,000Equipment and improvements, net
    
    
    10,628,000
    
    
    
    10,460,000Intangible assets
    
    
    1,202,000
    
    
    
    26,000Other assets
    
    
    2,862,000
    
    
    
    2,297,000Total Assets
    
    $
    98,805,000
    
    
    $
    96,011,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccrued compensation
    
    $
    15,514,000
    
    
    $
    17,345,000Accounts payable and other accrued expenses
    
    
    8,628,000
    
    
    
    10,849,000Billings in excess of cost
    
    
    3,717,000
    
    
    
    3,731,000Current portion of subordinated notes payable
    
    
    2,662,000
    
    
    
    2,992,000Deferred income taxes
    
    
    2,000,000
    
    
    
    2,000,000Total current liabilities
    
    
    32,521,000
    
    
    
    36,917,000Subordinated notes payable
    
    
    7,207,000
    
    
    
    7,415,000Deferred income taxes
    
    
    952,000
    
    
    
    952,000Commitments and Contingencies (Note G)Stockholders EquityCommon stock, $.01 par value, 25,000,000 shares
authorized; 8,039,864 and 7,465,241 shares issued;
5,288,752 and 5,120,836 shares outstanding
    
    
    80,000
    
    
    
    75,000Additional paid-in capital
    
    
    87,629,000
    
    
    
    73,609,000Retained earnings
    
    
    43,358,000
    
    
    
    34,710,000Treasury stock, at cost
    
    
    (72,942,000
    )
    
    
    (57,667,000
    )Total stockholders equity
    
    
    58,125,000
    
    
    
    50,727,000Total Liabilities and Stockholders Equity
    
    $
    98,805,000
    
    
    $
    96,011,000
  - 3 -




---



##### Table of Contents



SPARTA, Inc.
 CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 Three Months ended June 30,
    
    Six Months ended June, 302005
    
    2004
    
    2005
    
    2004Sales
    
    $
    70,472,000
    
    
    $
    64,668,000
    
    
    $
    135,588,000
    
    
    $
    119,473,000Costs and expenses:Labor costs and related benefits
    
    
    36,506,000
    
    
    
    29,846,000
    
    
    
    71,637,000
    
    
    
    59,986,000Subcontractor costs
    
    
    19,563,000
    
    
    
    23,179,000
    
    
    
    36,309,000
    
    
    
    37,456,000Facility costs
    
    
    3,854,000
    
    
    
    3,062,000
    
    
    
    7,759,000
    
    
    
    6,244,000Travel and general administrative costs
    
    
    3,452,000
    
    
    
    2,595,000
    
    
    
    5,569,000
    
    
    
    4,238,000Total costs and expenses
    
    
    63,375,000
    
    
    
    58,682,000
    
    
    
    121,274,000
    
    
    
    107,924,000Income from operations
    
    
    7,097,000
    
    
    
    5,986,000
    
    
    
    14,314,000
    
    
    
    11,549,000Interest income
    
    
    (218,000
    )
    
    
    (50,000
    )
    
    
    (390,000
    )
    
    
    (135,000
    )Interest expense
    
    
    131,000
    
    
    
    27,000
    
    
    
    218,000
    
    
    
    80,000Income before provision for
taxes on income
    
    
    7,184,000
    
    
    
    6,009,000
    
    
    
    14,486,000
    
    
    
    11,604,000Provision for taxes on income
    
    
    2,846,000
    
    
    
    1,829,000
    
    
    
    5,838,000
    
    
    
    4,122,000Net income
    
    $
    4,338,000
    
    
    $
    4,180,000
    
    
    $
    8,648,000
    
    
    $
    7,482,000Basic earnings per share
    
    $
    0.84
    
    
    $
    0.81
    
    
    $
    1.68
    
    
    $
    1.43Diluted earnings per share
    
    $
    0.75
    
    
    $
    0.74
    
    
    $
    1.51
    
    
    $
    1.31
  - 4 -




---



##### Table of Contents



SPARTA, Inc.
 CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 Six Months ended June 30,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    8,648,000
    
    
    $
    7,482,000Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    1,625,000
    
    
    
    1,182,000Loss on sale of equipment
    
    
    
    
    
    
    7,000Stock-based compensation
    
    
    5,571,000
    
    
    
    5,250,000Tax benefit relating to stock plan
    
    
    1,333,000
    
    
    
    1,176,000Changes in assets and liabilities:Receivables, net
    
    
    (4,500,000
    )
    
    
    (13,151,000
    )Prepaid expenses
    
    
    (689,000
    )
    
    
    (681,000
    )Other assets
    
    
    (565,000
    )
    
    
    (247,000
    )Accrued compensation
    
    
    (1,831,000
    )
    
    
    (6,414,000
    )Accounts payable and other accrued expenses
    
    
    (2,221,000
    )
    
    
    2,325,000Billings in excess of cost
    
    
    (14,000
    )
    
    
    4,337,000Income taxes payable or receivable
    
    
    447,000
    
    
    
    (869,000
    )Net cash from operating activities
    
    
    7,804,000
    
    
    
    397,000Cash flows from investing activities:Purchases of equipment and improvements
    
    
    (1,469,000
    )
    
    
    (1,754,000
    )Purchase of assets
    
    
    (1,500,000
    )
    
    
    Net cash used for investing activities
    
    
    (2,969,000
    )
    
    
    (1,754,000
    )Cash flows from financing activities:Proceeds from issuance of stock
    
    
    7,121,000
    
    
    
    5,441,000Cash purchases of treasury stock
    
    
    (14,146,000
    )
    
    
    (9,883,000
    )Principal payments on subordinated notes payable
    
    
    (1,667,000
    )
    
    
    (1,198,000
    )Net cash used for financing activities
    
    
    (8,692,000
    )
    
    
    (5,640,000
    )Net decrease in cash
    
    
    (3,857,000
    )
    
    
    (6,997,000
    )Cash and cash equivalents at beginning of period
    
    
    29,455,000
    
    
    
    26,711,000Cash and cash equivalents at end of period
    
    $
    25,598,000
    
    
    $
    19,714,000Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    207,000
    
    
    $
    80,000Income taxes
    
    $
    4,064,000
    
    
    $
    3,831,000Non-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
    
    $
    952,000
    
    
    $
    1,079,000
  - 5 -




---



##### Table of Contents



SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note A  Basis of Presentation
    Note B  Revenue Recognition
 Accounting for Performance of Construction-Type and Production-Type
Contracts
   - 6 -




---



##### Table of Contents



SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
    Note C  Income Taxes
  - 7 -




---



##### Table of Contents



SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note D  Computation of Earnings Per Share
 Three months ended June 30,
    
    Six months ended June, 302005
    
    2004
    
    2005
    
    2004Basic EPSNet income
    
    $
    4,338,000
    
    
    $
    4,180,000
    
    
    $
    8,648,000
    
    
    $
    7,482,000Weighted average
shares outstanding
    
    
    5,176,699
    
    
    
    5,183,906
    
    
    
    5,156,486
    
    
    
    5,220,034Per share amounts
    
    $
    0.84
    
    
    $
    0.84
    
    
    $
    1.68
    
    
    $
    1.43Diluted EPSNet income
    
    $
    4,338,000
    
    
    $
    4,180,000
    
    
    $
    8,648,000
    
    
    $
    7,482,000Weighted average
shares outstanding
    
    
    5,176,699
    
    
    
    5,183,906
    
    
    
    5,156,486
    
    
    
    5,220,034Stock options
    
    
    510,802
    
    
    
    427,433
    
    
    
    497,565
    
    
    
    416,376Restricted stock
    
    
    60,937
    
    
    
    61,613
    
    
    
    60,937
    
    
    
    61,6135,748,438
    
    
    
    5,672,952
    
    
    
    5,714,988
    
    
    
    5,698,023Per share amounts
    
    $
    0.75
    
    
    $
    0.74
    
    
    $
    1.51
    
    
    $
    1.31
 Note E  Accounting for Stock-Based Compensation
  - 8 -




---



##### Table of Contents



SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Net incomeAs reported
    
    $
    4,338,000
    
    
    $
    4,180,000
    
    
    $
    8,648,000
    
    
    $
    7,482,000Add after-tax stock-based
compensation expense
included in determining
net income
    
    
    701,000
    
    
    
    352,000
    
    
    
    1,279,000
    
    
    
    660,000Deduct after-tax stock-based
compensation expense as
if the fair value method had
been used
    
    
    (733,000
    )
    
    
    (490,000
    )
    
    
    (1,282,000
    )
    
    
    (833,000
    )Pro forma net income
    
    $
    4,306,000
    
    
    $
    4,042,000
    
    
    $
    8,645,000
    
    
    $
    7,309,000Basic EPSAs reported
    
    $
    0.84
    
    
    $
    0.81
    
    
    $
    1.68
    
    
    $
    1.43Pro forma
    
    
    0.83
    
    
    
    0.78
    
    
    
    1.68
    
    
    
    1.40Diluted EPSAs reported
    
    
    0.75
    
    
    
    0.74
    
    
    
    1.51
    
    
    
    1.31Pro forma
    
    
    0.76
    
    
    
    0.71
    
    
    
    1.53
    
    
    
    1.28
 Note F  Stockholders Equity
   - 9 -




---



##### Table of Contents



SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Note G  Commitments and Contingencies
   Note H  Recent Accounting Pronouncements
 Share Based Payments. Accounting for Stock-Based
Compensation, Accounting for Stock Issued to Employees
 - 10 -




---



##### Table of Contents



SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Accounting
Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim Financial Statements
 Note I  Asset Purchase
  - 11 -




---



##### Table of Contents



Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
   Operating Results(amounts in thousands, except percentages)Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Sales
    
    $
    70,472
    
    
    $
    64,668
    
    
    $
    135,588
    
    
    $
    119,473Sales by business area, as a
percentage of total sales:Ballistic Missile Defense (BMD)
    
    
    45
    %
    
    
    47
    %
    
    
    45
    %
    
    
    46
    %Other Dept of Defense (DoD)
    
    
    52
    %
    
    
    50
    %
    
    
    51
    %
    
    
    51
    %Non-DoD
    
    
    3
    %
    
    
    3
    %
    
    
    4
    %
    
    
    3
    %Gross profit (1)
    
    $
    7,987
    
    
    $
    6,606
    
    
    $
    15,677
    
    
    $
    12,526Gross profit as a % of costs (1)
    
    
    12.8
    %
    
    
    11.4
    %
    
    
    13.1
    %
    
    
    11.7
    %Income from operations
    
    $
    7,097
    
    
    $
    5,986
    
    
    $
    14,314
    
    
    $
    11,549Net income
    
    $
    4,338
    
    
    $
    4,180
    
    
    $
    8,648
    
    
    $
    7,482
 
 (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 include all costs that are allowable for and
allocable to contracts under government procurement regulations. Government contractors
frequently incur certain operating costs, which are not reimbursable under the governments
procurement regulations. The Company believes that eliminating such costs in presenting
gross profit provides a clearer picture of the Companys performance on its contracts.
Management considers gross profit, and gross profit as a percentage of costs, to be key
measures of the Companys contract performance. They should also be considered in
conjunction with income from operations, net income, and other measures of financial
performance. The following presents a reconciliation of gross profit to income from
operations (amounts in thousands): Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Gross profit
    
    $
    7,987
    
    
    $
    6,606
    
    
    $
    15,677
    
    
    $
    12,526Less unallowable expenses
    
    
    (890
    )
    
    
    (620
    )
    
    
    (1,363
    )
    
    
    (977
    )Income from Operations
    
    $
    7,097
    
    
    $
    5,986
    
    
    $
    14,314
    
    
    $
    11,549
 - 12 -




---



##### Table of Contents



- 13 -




---



##### Table of Contents



Backlog
     - 14 -




---



##### Table of Contents



June 30,
    
    December 31,
    
    June 30,2005
    
    2004
    
    2004Annualized funded contract backlog
    
    $
    129,200
    
    
    $
    102,200
    
    
    $
    111,500Annualized unfunded contract backlog
    
    
    70,900
    
    
    
    79,200
    
    
    
    61,600Total annualized contract backlog
    
    
    200,100
    
    
    
    181,400
    
    
    
    173,100Expected 12-month value of future
funding on proposals with high
probability of winning procurement
    
    
    54,500
    
    
    
    45,900
    
    
    
    42,300Total annualized Company-defined backlog
    
    $
    254,600
    
    
    $
    227,300
    
    
    $
    215,400Total multi-year contract backlog
    
    $
    503,100
    
    
    $
    569,700
    
    
    $
    459,300Expected value of future funding on
proposals with high probability of
winning procurement
    
    
    130,300
    
    
    
    139,800
    
    
    
    120,600Total multi-year Company-defined backlog
    
    $
    633,400
    
    
    $
    709,500
    
    
    $
    579,900Annualized Company-defined backlog
(by business area):BMD
    
    $
    111,600
    
    
    $
    98,100
    
    
    $
    98,300Other DoD
    
    
    135,000
    
    
    
    122,100
    
    
    
    111,800Non-DoD
    
    
    8,000
    
    
    
    7,100
    
    
    
    5,300Total annualized Company-defined backlog
    
    $
    254,600
    
    
    $
    227,300
    
    
    $
    215,400
   - 15 -




---



##### Table of Contents



- 16 -




---



##### Table of Contents



Liquidity and Capital Resources
  Balance atJune 30,
    
    December 31,
    
    June 30,2005
    
    2004
    
    2004Cash and cash equivalents
    
    $
    25,598,000
    
    
    $
    29,455,000
    
    
    $
    19,714,000Stockholders equity
    
    $
    58,125,000
    
    
    $
    50,727,000
    
    
    $
    48,733,000Subordinated notes payable
    
    $
    9,869,000
    
    
    $
    10,407,000
    
    
    $
    6,912,000Borrowings under line of credit
    
    
    
    
    
    
    
    
    
    
    Number of days sales in
receivables (year-to-date average)
    
    
    61
    
    
    
    60
    
    
    
    63Current ratio
    
    
    2.6
    
    
    
    2.3
    
    
    
    2.7
 Overview
    - 17 -




---



##### Table of Contents



Cash Flow Information
     - 18 -




---



##### Table of Contents



Payments Due by Period(amounts in thousands)Total
    
    Current
    
    1-3 years
    
    4-5 years
    
    After 5 yearsSubordinated Promissory Notes
    
    $
    9,869
    
    
    $
    2,662
    
    
    $
    5,691
    
    
    $
    1,434
    
    
    $
    82Operating Leases
    
    
    28,206
    
    
    
    7,170
    
    
    
    17,767
    
    
    
    3,269
    
    
    
    0Total Contractual Obligations
    
    $
    38,075
    
    
    $
    9,832
    
    
    $
    23,458
    
    
    $
    4,703
    
    
    $
    82
 Recent Accounting Pronouncements
 Share Based Payments. Accounting for Stock-Based
Compensation, Accounting for Stock Issued to Employees
  - 19 -




---



##### Table of Contents



Accounting
Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim Financial Statements
 Effects of Federal Funding for Defense Programs
   Forward-Looking Statements
  - 20 -




---



##### Table of Contents



Item 3 Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4 Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 Part II OTHER INFORMATION
 
 Item 1 Legal Proceedings
  - 21 -




---



##### Table of Contents



Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 Total Number of Shares
    
    Maximum Number (orTotal
    
    
    
    
    
    Purchased as Part of
    
    Approximate Dollar Value)Number of
    
    Average
    
    Publicly
    
    of Shares that May Yet BeShares
    
    Price Paid
    
    Announced Plans or
    
    Purchased Under the PlansPeriod
    
    Purchased
    
    per Share
    
    Programs
    
    or ProgramsApril
(4/4/05  5/1/05)
    
    
    93,234
    
    
    
    37.05
    
    
    
    2,642,000
    
    
    
    May
(5/2/05  5/29/05)
    
    
    44,451
    
    
    
    40.80
    
    
    
    910,000
    
    
    $
    2,533,000June
(5/30/05  7/3/05
    
    
    53,114
    
    
    
    40.87
    
    
    
    
    
    
    
    Total
    
    
    190,799
    
    
    
    38.98
    
    
    
    3,552,000
    
    
    $
    2,533,000
     
 Item 3 Defaults Upon Senior Securities
  
 Item 4 Submission of Matters to a Vote of Security Holders
  - 22 -




---



##### Table of Contents



(1)
    
    The election of the following directors by the votes set forth below:
 Number of Votes of Common StockFor
    Against/WithheldWayne R. Winton
    
    
    3,615,418
    
    
    
    26,942Robert C. Sepucha
    
    
    3,642,210
    
    
    
    150Carl T. Case
    
    
    3,521,625
    
    
    
    120,735William E. Cook
    
    
    3,642,210
    
    
    
    150Rockell N. Hankin
    
    
    3,642,210
    
    
    
    150R. Stephen McCarter
    
    
    3,461,754
    
    
    
    180,606Gen. John L. Piotrowski (USAF Ret.)
    
    
    3,642,210
    
    
    
    150Gerald A. Zionic
    
    
    3,634,704
    
    
    
    7,656
 (2)
    
    The ratification, by the votes set forth below, of the appointment of
PricewaterhouseCoopers LLP as the Companys independent registered public accounting
firm for the year ending December 31, 2005:
 For:
    
    
    3,479,109Against:
    
    
    96,481Abstain:
    
    
    66,770
  
 Item 5 Other Information
  
 Item 6 Exhibits
 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.
 - 23 -




---



##### Table of Contents



Signature
  SPARTA, INC.(Registrant) Date: August 12, 2005
    By:
    /s/  David E. SchreimanDavid E. SchreimanVice President and
Chief Financial Officer - 24 -




---



##### Table of Contents



EXHIBIT
INDEX
 Exhibits
 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.
 - 25 -