##### 



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
 April 2, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 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 92630-8874
 (949) 768-8161
 Not Applicable
  þ o
  o o þ
 o þ




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##### 



SPARTA, Inc.
   PagePART I FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    2Consolidated balance sheet  March 31, 2006 (unaudited) and December 31, 2005
    
    3Consolidated statement of income  Three months ended March 31, 2006 and 2005 (unaudited)
    
    4Consolidated statement of cash flows  Three months ended March 31, 2006 and 2005 (unaudited)
    
    5Notes to consolidated financial statements  March 31, 2006 (unaudited)
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    21Item 4.
    
    Controls and Procedures
    
    21PART II OTHER INFORMATION
    
    22Item 1.
    
    Legal Proceedings
    
    22Item 1A.
    
    Risk Factors
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    23Item 5.
    
    Other Information
    
    23Item 6.
    
    Exhibits
    
    23Signatures
    
    
    
    24
 -1-




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##### 



PART I
 
 Item 1 Financial Statements
 -2-




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##### 



SPARTA, Inc.  CONSOLIDATED BALANCE SHEET
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    32,968,000
    
    
    $
    29,254,000Receivables, net
    
    
    57,368,000
    
    
    
    64,891,000Prepaid expenses
    
    
    2,468,000
    
    
    
    1,348,000Prepaid income taxes
    
    
    
    
    
    
    2,112,000Assets of discontinued operations
    
    
    1,759,000
    
    
    
    Total current assets
    
    
    94,563,000
    
    
    
    97,605,000Equipment and improvements, net
    
    
    10,767,000
    
    
    
    10,725,000Intangible assets
    
    
    687,000
    
    
    
    858,000Other assets
    
    
    3,408,000
    
    
    
    3,358,000Total Assets
    
    $
    109,425,000
    
    
    $
    112,546,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccrued compensation
    
    $
    13,514,000
    
    
    $
    20,660,000Accounts payable and other accrued expenses
    
    
    8,462,000
    
    
    
    9,519,000Billings in excess of costs plus earnings
    
    
    4,367,000
    
    
    
    2,620,000Current portion of subordinated notes payable
    
    
    2,659,000
    
    
    
    2,432,000Income taxes payable
    
    
    221,000
    
    
    
    Deferred income taxes
    
    
    2,700,000
    
    
    
    2,700,000Liabilities of discontinued operations
    
    
    795,000
    
    
    
    Total current liabilities
    
    
    32,718,000
    
    
    
    37,931,000Subordinated notes payable
    
    
    5,778,000
    
    
    
    5,993,000Deferred income taxes
    
    
    580,000
    
    
    
    580,000Commitments and Contingencies (Note H)Stockholders EquityCommon stock, $.01 par value, 25,000,000 shares
authorized; 8,616,151 and 8,396,762 shares issued;
5,320,009 and 5,316,493 shares outstanding
    
    
    86,000
    
    
    
    84,000Additional paid-in capital
    
    
    109,916,000
    
    
    
    102,685,000Retained earnings
    
    
    56,013,000
    
    
    
    51,813,000Treasury stock, at cost
    
    
    (95,666,000
    )
    
    
    (86,540,000
    )Total stockholders equity
    
    
    70,349,000
    
    
    
    68,042,000Total Liabilities and Stockholders Equity
    
    $
    109,425,000
    
    
    $
    112,546,000
  -3-




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##### 



SPARTA, Inc.  CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 Three Months ended March 31,2006
    
    
    2005Sales
    
    $
    68,354,000
    
    
    $
    62,432,000Costs and expenses:Labor costs and related benefits
    
    
    37,856,000
    
    
    
    33,095,000Subcontractor costs
    
    
    16,936,000
    
    
    
    16,335,000Facility costs
    
    
    4,068,000
    
    
    
    3,847,000Travel and general administrative costs
    
    
    2,634,000
    
    
    
    1,956,000Total costs and expenses
    
    
    61,494,000
    
    
    
    55,233,000Operating income
    
    
    6,860,000
    
    
    
    7,199,000Interest income
    
    
    (374,000
    )
    
    
    (172,000
    )Interest expense
    
    
    108,000
    
    
    
    87,000Income from continuing operations
before provision for taxes on income
    
    
    7,126,000
    
    
    
    7,284,000Provision for taxes on income
    
    
    2,933,000
    
    
    
    2,984,000Income from continuing operations
    
    
    4,193,000
    
    
    
    4,300,000Discontinued operations (Note F)Income from discontinued operations
of ST SPARTA, Inc. before income taxes
    
    
    12,000
    
    
    
    18,000Provision for taxes on income
    
    
    5,000
    
    
    
    8,000Income from discontinued operations
    
    
    7,000
    
    
    
    10,000Net income
    
    $
    4,200,000
    
    
    $
    4,310,000Earnings per share:Basic:Income from continuing operations
    
    $
    0.79
    
    
    $
    0.83Income from discontinued operations
    
    
    
    
    
    
    $
    0.79
    
    
    $
    0.83Diluted:Income from continuing operations
    
    $
    0.73
    
    
    $
    0.76Income from discontinued operations
    
    
    
    
    
    
    $
    0.73
    
    
    $
    0.76Weighted average common equivalent shares:Basic
    
    
    5,322,822
    
    
    
    5,170,517Diluted
    
    
    5,729,591
    
    
    
    5,675,232
  -4-




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##### 



SPARTA, Inc.  CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 Three Months ended March 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    4,200,000
    
    
    $
    4,310,000Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    912,000
    
    
    
    719,000Loss on sale of equipment
    
    
    49,000
    
    
    
    Stock-based compensation
    
    
    3,902,000
    
    
    
    3,865,000Changes in assets and liabilities:Receivables, net
    
    
    5,874,000
    
    
    
    (1,405,000
    )Prepaid expenses
    
    
    (1,181,000
    )
    
    
    (177,000
    )Other assets
    
    
    (55,000
    )
    
    
    (256,000
    )Accrued compensation
    
    
    (6,439,000
    )
    
    
    (4,610,000
    )Accounts payable and other accrued expenses
    
    
    (994,000
    )
    
    
    (2,745,000
    )Billings in excess of costs plus earnings
    
    
    1,771,000
    
    
    
    1,604,000Income taxes receivable/payable
    
    
    2,333,000
    
    
    
    2,229,000Net cash provided by operating activities
    
    
    10,372,000
    
    
    
    3,534,000Cash flows from investing activities:Purchases of equipment and improvements
    
    
    (855,000
    )
    
    
    (686,000
    )Net cash used for investing activities
    
    
    (855,000
    )
    
    
    (686,000
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    2,780,000
    
    
    
    2,220,000Excess tax benefit from stock-based compensation
    
    
    551,000
    
    
    
    468,000Purchases of treasury stock
    
    
    (8,388,000
    )
    
    
    (6,707,000
    )Principal payments on subordinated notes payable
    
    
    (726,000
    )
    
    
    (689,000
    )Net cash used for financing activities
    
    
    (5,783,000
    )
    
    
    (4,708,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,734,000
    
    
    
    (1,860,000
    )Cash and cash equivalents at beginning of period
    
    
    29,254,000
    
    
    
    29,455,000Cash and cash equivalents at end of period
    
    $
    32,988,000
    
    
    $
    27,595,000Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    108,000
    
    
    $
    87,000Income taxes
    
    $
    57,000
    
    
    $
    294,000Non-cash investing and financing activities:Issuance of subordinated notes payable in connection
with purchases of treasury stock
    
    $
    738,000
    
    
    $
    1,129,000Receipt of notes receivable in exchange for exercise of
stock options
    
    $
    69,000
    
    
    $
    39,000
  -5-




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##### 



SPARTA, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note A  Basis of Presentation
    Note B  Income Taxes
  Note C  Computation of Earnings Per Share
 Three months ended March 31,2006
    
    
    2005Basic EPSNet income
    
    $
    4,200,000
    
    
    $
    4,310,000Weighted average
shares outstanding
    
    
    5,322,822
    
    
    
    5,170,517Per share amounts
    
    $
    0.79
    
    
    $
    0.83Diluted EPSNet income
    
    $
    4,200,000
    
    
    $
    4,310,000Weighted average
shares outstanding
    
    
    5,322,822
    
    
    
    5,170,517Stock options
    
    
    384,019
    
    
    
    480,306Restricted stock
    
    
    22,750
    
    
    
    24,4095,729,591
    
    
    
    5,675,232Per share amounts
    
    $
    0.73
    
    
    $
    0.76
 -6-




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##### 



SPARTA, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note D  Share-Based Compensation
  Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation
    1997 Stock Plan
  -7-




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##### 



SPARTA, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Key AssumptionsExpected volatility factor
    
    
    6.9% - 9.1
    %Expected option term (in years)Short-term options
    
    
    0.125All other options
    
    
    3.0Risk-free interest rate
    
    
    4.2% - 4.8
    %Expected annual dividend yield
    
    
    
  Three Months Ended March 31, 2006Weighted AverageStock options subject to SFAS123(R)
    
    Number of Shares
    
    
    Exercise PriceOutstanding at January 1, 2006
    
    
    
    
    
    $
    Granted
    
    
    8,552
    
    
    
    42.31Forfeited or Expired
    
    
    
    
    
    
    Exercised
    
    
    (1,807
    )
    
    
    42.25Outstanding at March 31, 2006
    
    
    6,745
    
    
    $
    42.35Exercisable at March 31, 2006
    
    
    2,471
    
    
    $
    42.39
  -8-




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##### 



SPARTA, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Three Months Ended March 31, 2006Weighted AverageNumber of
    
    
    Grant-Date FairNonvested stock options subject to SFAS 123(R)
    
    Shares
    
    
    ValueNonvested at January 1, 2006
    
    
    
    
    
    $
    Granted
    
    
    8,552
    
    
    
    3.22Vested
    
    
    (4,278
    )
    
    
    0.66Forfeited
    
    
    
    
    
    
    Nonvested at March 31, 2006
    
    
    4,274
    
    
    $
    5.77
   Three Months Ended March 31, 2006Weighted AverageStock options subject to APB 25
    
    Number of Shares
    
    
    Exercise PriceOutstanding at January 1, 2006
    
    
    2,490,869
    
    
    $
    30.80Granted
    
    
    
    
    
    
    Forfeited or Expired
    
    
    (31,949
    )
    
    
    33.44Exercised
    
    
    (128,831
    )
    
    
    22.70Outstanding at March 31, 2006
    
    
    2,330,089
    
    
    $
    31.21Exercisable at March 31, 2006
    
    
    774,389
    
    
    $
    24.05
   -9-




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##### 



SPARTA, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Three Months Ended March 31, 2006Number of
    
    
    Weighted AverageNonvested stock options subject to APB 25
    
    Shares
    
    
    Exercise Price ($)Nonvested at January 1, 2006
    
    
    1,594,352
    
    
    $
    34.71Granted
    
    
    
    
    
    
    Vested
    
    
    (6,702
    )
    
    
    25.90Forfeited
    
    
    (31,949
    )
    
    
    33.44Nonvested at March 31, 2006
    
    
    1,555,701
    
    
    $
    34.78
   Stock Compensation Plan
   Three Months Ended March 31, 2006Weighted AverageNumber of
    
    
    Grant-Date FairShares of Restricted Stock
    
    Shares
    
    
    ValueOutstanding at January 1, 2006
    
    
    60,937
    
    
    $
    14.60Granted
    
    
    1,880
    
    
    
    42.53Disbributed
    
    
    (7,489
    )
    
    
    19.80Forfeited
    
    
    (1,217
    )
    
    
    19.20Outstanding at March 31, 2006
    
    
    54,111
    
    
    $
    14.75Vested, undistributed at March 31, 2006
    
    
    33,875
    
    
    $
    6.64
  -10-




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##### 



SPARTA, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Three Months Ended March 31, 2006Weighted AverageGrant-Date FairNonvested Shares of Restricted Stock
    
    Number of Shares
    
    
    ValueNonvested at January 1, 2006
    
    
    28,441
    
    
    $
    24.14Granted
    
    
    1,880
    
    
    
    42.53Vested
    
    
    (8,868
    )
    
    
    19.16Forfeited
    
    
    (1,217
    )
    
    
    19.20Nonvested at March 31, 2006
    
    
    20,236
    
    
    $
    28.33
  Note E  Stockholders Equity
    -11-




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##### 



SPARTA, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Note F  Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets
  Three months ended March 31,2006
    
    
    2005Sales
    
    $
    2,823,000
    
    
    $
    2,684,000Costs and expenses
    
    
    (2,811,000
    )
    
    
    (2,666,000
    )Income before income taxes
    
    
    12,000
    
    
    
    18,000Income tax expense
    
    
    (5,000
    )
    
    
    (8,000
    )Income from discontinued operations
    
    $
    7,000
    
    
    $
    10,000
 Note G  Accounts Receivable
  March 31,
    
    
    December 31,2006
    
    
    2005Billed
    
    $
    33,691,000
    
    
    $
    33,729,000Unbilled
    
    
    24,560,000
    
    
    
    32,035,00058,251,000
    
    
    
    65,764,000Less allowances for unallowable contract costs
    
    
    (883,000
    )
    
    
    (873,000
    )$
    57,368,000
    
    
    $
    64,891,000
 -12-




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##### 



SPARTA, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note H  Commitments and Contingencies
  Note I  Recent Accounting Pronouncements
 Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards
 -13-




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##### 



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 March 31,2006
    
    
    2005Sales
    
    $
    68,354
    
    
    $
    62,432Sales by business area, as a
percentage of total sales:Ballistic Missile Defense (BMD)
    
    
    44
    %
    
    
    48
    %Other Dept of Defense (DoD)
    
    
    53
    %
    
    
    49
    %Non-DoD
    
    
    3
    %
    
    
    3
    %Operating Income
    
    $
    6,860
    
    
    $
    7,199Operating Margin
    
    
    10.0
    %
    
    
    11.5
    %Income from Continuing Operations
    
    $
    4,193
    
    
    $
    4,300Income from Discontinued Operations
    
    $
    7
    
    
    $
    10Net income
    
    $
    4,200
    
    
    $
    4,310
    -14-




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Backlog
    -15-




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##### 



March 31,
    
    
    December 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2005(amounts in thousands)Annualized funded contract backlog
    
    $
    123,400
    
    
    $
    78,100
    
    
    $
    111,600Annualized unfunded contract backlog
    
    
    68,200
    
    
    
    110,700
    
    
    
    62,300Total annualized contract backlog
    
    
    191,600
    
    
    
    188,800
    
    
    
    173,900Expected 12-month value of future
funding on proposals with high
probability of winning procurement
    
    
    80,900
    
    
    
    84,800
    
    
    
    72,000Total annualized Company-defined
backlog
    
    $
    272,500
    
    
    $
    273,600
    
    
    $
    245,900Total multi-year contract backlog
    
    $
    621,300
    
    
    $
    535,200
    
    
    $
    534,000Expected value of future funding on
proposals with high probability of
winning procurement
    
    
    296,500
    
    
    
    302,700
    
    
    
    157,500Total multi-year Company-defined
backlog
    
    $
    917,800
    
    
    $
    837,900
    
    
    $
    691,500Annualized Company-defined backlog
(by business area):BMD
    
    $
    131,300
    
    
    $
    128,000
    
    
    $
    97,400Other DoD
    
    
    133,700
    
    
    
    137,800
    
    
    
    141,000Non-DoD
    
    
    7,500
    
    
    
    7,800
    
    
    
    7,500Total annualized Company-defined
backlog
    
    $
    272,500
    
    
    $
    273,600
    
    
    $
    245,900
  -16-




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##### 



-17-




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##### 



Liquidity and Capital Resources
  Balance atMarch 31,
    
    
    December 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2005Cash and cash equivalents
    
    $
    32,988,000
    
    
    $
    29,254,000
    
    
    $
    27,595,000Stockholders equity
    
    $
    70,349,000
    
    
    $
    68,042,000
    
    
    $
    53,754,000Subordinated notes payable
    
    $
    8,437,000
    
    
    $
    8,425,000
    
    
    $
    10,847,000Borrowings under line of credit
    
    
    
    
    
    
    
    
    
    
    Current ratio
    
    
    2.9
    
    
    
    2.6
    
    
    
    2.8
 Overview
     -18-




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##### 



Cash Flow Information
      -19-




---



##### 



Payments Due by Period(amounts in thousands)Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    More than 5 yearsSubordinated Promissory Notes
    
    $
    8,437
    
    
    $
    2,659
    
    
    $
    4,827
    
    
    $
    951
    
    
    $
    Operating Leases
    
    
    52,410
    
    
    
    9,833
    
    
    
    27,738
    
    
    
    6,390
    
    
    
    8,449Total Contractual Obligations
    
    $
    60,847
    
    
    $
    12,492
    
    
    $
    32,565
    
    
    $
    7,341
    
    
    $
    8,449
 Effects of Federal Funding for Defense Programs
   Recent Accounting Pronouncements
 Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards
 -20-




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##### 



Forward-Looking Statements
  
 Item 3 Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4 Controls and Procedures
 (a)
    
    Evaluation of Disclosure Controls and Procedures
  (b)
    
    Changes in Internal Controls
  -21-




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##### 



PART II OTHER INFORMATION
 
 Item 1 Legal Proceedings
  
 Item 1A Risk Factors
  
 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 Maximum Number (orTotal Number of
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    Shares Purchased as
    
    
    Value) of SharesNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    that May Yet BeShares
    
    
    Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    Plans or ProgramsJanuary
(1/2/06  1/29/06)
    
    
    77,949
    
    
    
    42.14
    
    
    
    62,606
    
    
    
    February
(1/30/06  2/26/06)
    
    
    97,056
    
    
    
    42.45
    
    
    
    27,271
    
    
    $
    3,367,000March
(2/27/06  4/2/06)
    
    
    40,868
    
    
    
    42.53
    
    
    
    
    
    
    
    Total
    
    
    215,873
    
    
    
    42.35
    
    
    
    89,877
    
    
    $
    3,367,000
   -22-




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##### 



Item 3 Defaults Upon Senior Securities
  
 Item 4 Submission of Matters to a Vote of Security Holders
  
 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-




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##### 



Signature
  SPARTA, INC.(Registrant)Date: May 15, 2006
    By:
    /s/  David E. SchreimanDavid E. SchreimanVice President and Chief Financial Officer
(Principal Accounting Officer) -24-




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##### 



Exhibit Index
 ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive
Officer Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of
200231.2
    
    Certification of Chief Financial
Officer Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of Chief Executive
Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.32.2
    
    Certification of Chief Financial
Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
 -25-