##### 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 October 2, 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
    
    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




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##### 



SPARTA, Inc.
   PagePART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements (Unaudited)
    
    
    2Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4
    
    Controls and Procedures
    
    
    21PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    21Item 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
    
    
    23SignatureExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I
 
 Item 1     Financial Statements (Unaudited)
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SPARTA, Inc.
 CONSOLIDATED BALANCE SHEET
 (Unaudited)
 September 30
    
    
    December 31,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    39,494,000
    
    
    $
    29,455,000Receivables, net
    
    
    51,160,000
    
    
    
    51,904,000Prepaid expenses
    
    
    1,233,000
    
    
    
    926,000Prepaid income taxes
    
    
    1,752,000
    
    
    
    943,000Total current assets
    
    
    93,639,000
    
    
    
    83,228,000Equipment and improvements, net
    
    
    10,722,000
    
    
    
    10,460,000Intangible assets
    
    
    1,030,000
    
    
    
    26,000Other assets
    
    
    2,983,000
    
    
    
    2,297,000Total Assets
    
    $
    108,374,000
    
    
    $
    96,011,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccrued compensation
    
    $
    22,937,000
    
    
    $
    17,345,000Accounts payable and other accrued expenses
    
    
    6,345,000
    
    
    
    10,849,000Billings in excess of cost
    
    
    3,788,000
    
    
    
    3,731,000Current portion of subordinated notes payable
    
    
    2,542,000
    
    
    
    2,992,000Deferred income taxes
    
    
    2,000,000
    
    
    
    2,000,000Total current liabilities
    
    
    37,612,000
    
    
    
    36,917,000Subordinated notes payable
    
    
    6,592,000
    
    
    
    7,415,000Deferred income taxes
    
    
    952,000
    
    
    
    952,000Commitments and Contingencies (Note G)Stockholders EquityCommon stock, $.01 par value, 25,000,000 shares
authorized; 8,170,182 and 7,465,241 shares issued;
5,269,862 and 5,120,836 shares outstanding
    
    
    82,000
    
    
    
    75,000Additional paid-in capital
    
    
    94,410,000
    
    
    
    73,609,000Retained earnings
    
    
    47,778,000
    
    
    
    34,710,000Treasury stock, at cost
    
    
    (79,052,000
    )
    
    
    (57,667,000
    )Total stockholders equity
    
    
    63,218,000
    
    
    
    50,727,000Total Liabilities and Stockholders Equity
    
    $
    108,374,000
    
    
    $
    96,011,000
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SPARTA, Inc.
 CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 Three Months ended September 30,
    
    
    Nine Months ended September, 302005
    
    
    2004
    
    
    2005
    
    
    2004Sales
    
    $
    70,543,000
    
    
    $
    66,379,000
    
    
    $
    206,131,000
    
    
    $
    185,852,000Costs and expenses:Labor costs and related benefits
    
    
    38,274,000
    
    
    
    31,787,000
    
    
    
    109,911,000
    
    
    
    91,773,000Subcontractor costs
    
    
    18,228,000
    
    
    
    22,463,000
    
    
    
    54,537,000
    
    
    
    59,919,000Facility costs
    
    
    4,028,000
    
    
    
    3,369,000
    
    
    
    11,787,000
    
    
    
    9,613,000Travel and general administrative costs
    
    
    2,758,000
    
    
    
    2,492,000
    
    
    
    8,327,000
    
    
    
    6,730,000Total costs and expenses
    
    
    63,288,000
    
    
    
    60,111,000
    
    
    
    184,562,000
    
    
    
    168,035,000Income from operations
    
    
    7,255,000
    
    
    
    6,268,000
    
    
    
    21,569,000
    
    
    
    17,817,000Interest income
    
    
    (258,000
    )
    
    
    (69,000
    )
    
    
    (648,000
    )
    
    
    (204,000
    )Interest expense
    
    
    98,000
    
    
    
    44,000
    
    
    
    316,000
    
    
    
    124,000Income before provision for
taxes on income
    
    
    7,415,000
    
    
    
    6,293,000
    
    
    
    21,901,000
    
    
    
    17,897,000Provision for taxes on income
    
    
    2,995,000
    
    
    
    2,393,000
    
    
    
    8,833,000
    
    
    
    6,515,000Net income
    
    $
    4,420,000
    
    
    $
    3,900,000
    
    
    $
    13,068,000
    
    
    $
    11,382,000Basic earnings per share
    
    $
    0.84
    
    
    $
    0.75
    
    
    $
    2.50
    
    
    $
    2.17Diluted earnings per share
    
    $
    0.77
    
    
    $
    0.69
    
    
    $
    2.28
    
    
    $
    2.00
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SPARTA, Inc.
 CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 Nine Months ended September 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    13,068,000
    
    
    $
    11,382,000Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    2,615,000
    
    
    
    1,816,000Loss on sale of equipment
    
    
    
    
    
    
    11,000Stock-based compensation
    
    
    7,337,000
    
    
    
    6,666,000Tax benefit relating to stock plan
    
    
    3,423,000
    
    
    
    2,497,000Changes in assets and liabilities:Receivables, net
    
    
    744,000
    
    
    
    (12,593,000
    )Prepaid expenses
    
    
    (307,000
    )
    
    
    (443,000
    )Prepaid income taxes
    
    
    (809,000
    )Other assets
    
    
    (686,000
    )
    
    
    (173,000
    )Accrued compensation
    
    
    5,591,000
    
    
    
    (371,000
    )Accounts payable and other accrued expenses
    
    
    (4,504,000
    )
    
    
    1,489,000Billings in excess of cost
    
    
    57,000
    
    
    
    3,841,000Income taxes payable
    
    
    
    
    
    
    (2,075,000
    )Net cash from operating activities
    
    
    26,529,000
    
    
    
    12,047,000Cash flows from investing activities:Purchases of equipment and improvements
    
    
    (2,380,000
    )
    
    
    (2,438,000
    )Purchase of long-lived assets
    
    
    (1,500,000
    )
    
    
    Net cash used for investing activities
    
    
    (3,880,000
    )
    
    
    (2,438,000
    )Cash flows from financing activities:Proceeds from issuance of stock
    
    
    10,048,000
    
    
    
    8,395,000Cash purchases of treasury stock
    
    
    (20,256,000
    )
    
    
    (16,348,000
    )Principal payments on subordinated notes payable
    
    
    (2,402,000
    )
    
    
    (1,827,000
    )Net cash used for financing activities
    
    
    (12,610,000
    )
    
    
    (9,780,000
    )Net increase (decrease) in cash
    
    
    10,039,000
    
    
    
    (171,000
    )Cash and cash equivalents at beginning of period
    
    
    29,455,000
    
    
    
    26,711,000Cash and cash equivalents at end of period
    
    $
    39,494,000
    
    
    $
    26,540,000Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    306,000
    
    
    $
    116,000Income taxes
    
    $
    6,225,000
    
    
    $
    6,110,000Non-cash investing and financing activities:Issuance of subordinated notes payable in connection
with purchases of treasury stock
    
    $
    1,129,000
    
    
    $
    4,877,000Receipt of notes receivable in exchange for exercise of
stock options
    
    $
    1,096,000
    
    
    $
    1,194,000
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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
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SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
    Note C  Income Taxes
  -7-




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SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note D  Computation of Earnings Per Share
 Three months ended September 30,
    
    
    Nine months ended September, 302005
    
    
    2004
    
    
    2005
    
    
    2004Basic EPSNet income
    
    $
    4,420,000
    
    
    $
    3,900,000
    
    
    $
    13,068,000
    
    
    $
    11,382,000Weighted average
shares outstanding
    
    
    5,287,193
    
    
    
    5,200,637
    
    
    
    5,222,297
    
    
    
    5,236,082Per share amounts
    
    $
    0.84
    
    
    $
    0.75
    
    
    $
    2.50
    
    
    $
    2.17Diluted EPSNet income
    
    $
    4,420,000
    
    
    $
    3,900,000
    
    
    $
    13,068,000
    
    
    $
    11,382,000Weighted average
shares outstanding
    
    
    5,287,193
    
    
    
    5,200,637
    
    
    
    5,222,297
    
    
    
    5,236,082Stock options
    
    
    461,942
    
    
    
    413,219
    
    
    
    485,980
    
    
    
    419,981Restricted stock
    
    
    28,441
    
    
    
    27,840
    
    
    
    28,441
    
    
    
    27,8405,777,576
    
    
    
    5,641,696
    
    
    
    5,736,718
    
    
    
    5,683,903Per share amounts
    
    $
    0.77
    
    
    $
    0.69
    
    
    $
    2.28
    
    
    $
    2.00
  Note E  Accounting for Stock-Based Compensation
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SPARTA, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net incomeAs reported
    
    $
    4,420,000
    
    
    $
    3,900,000
    
    
    $
    13,068,000
    
    
    $
    11,382,000Add after-tax stock-based
compensation expense
included in determining
net income
    
    
    872,000
    
    
    
    653,000
    
    
    
    2,136,000
    
    
    
    1,313,000Deduct after-tax stock-based
compensation expense as
if the fair value method had
been used
    
    
    (829,000
    )
    
    
    (725,000
    )
    
    
    (2,080,000
    )
    
    
    (1,558,000
    )Pro forma net income
    
    $
    4,463,000
    
    
    $
    3,828,000
    
    
    $
    13,124,000
    
    
    $
    11,137,000Basic EPSAs reported
    
    $
    0.84
    
    
    $
    0.75
    
    
    $
    2.50
    
    
    $
    2.17Pro forma
    
    
    0.84
    
    
    
    0.74
    
    
    
    2.51
    
    
    
    2.13Diluted EPSAs reported
    
    
    0.77
    
    
    
    0.69
    
    
    
    2.28
    
    
    
    2.00Pro forma
    
    
    0.78
    
    
    
    0.69
    
    
    
    2.32
    
    
    
    2.00
 Note F  Stockholders Equity
    -9-




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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-




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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
  Note J  Bank Line of Credit
  -11-




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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 September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Sales
    
    $
    70,543
    
    
    $
    66,379
    
    
    $
    206,131
    
    
    $
    185,852Sales by business area, as a
percentage of total sales:Ballistic Missile Defense
(BMD)
    
    
    42
    %
    
    
    48
    %
    
    
    44
    %
    
    
    47
    %Other Dept of Defense (DoD)
    
    
    55
    %
    
    
    49
    %
    
    
    53
    %
    
    
    50
    %Non-DoD
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %Income from operations
    
    $
    7,255
    
    
    $
    6,268
    
    
    $
    21,569
    
    
    $
    17,817Operating margin
    
    
    10.3
    %
    
    
    9.4
    %
    
    
    10.5
    %
    
    
    9.6
    %Net income
    
    $
    4,420
    
    
    $
    3,900
    
    
    $
    13,068
    
    
    $
    11,382
    -12-




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Backlog
   -13-




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September 30,
    
    
    December 31,
    
    
    September 30,2005
    
    
    2004
    
    
    2004Annualized funded contract backlog
    
    $
    98,900
    
    
    $
    102,200
    
    
    $
    95,400Annualized unfunded contract backlog
    
    
    108,000
    
    
    
    79,200
    
    
    
    79,200Total annualized contract backlog
    
    
    206,900
    
    
    
    181,400
    
    
    
    174,600Expected 12-month value of future
funding on proposals with high
probability of winning procurement
    
    
    59,200
    
    
    
    45,900
    
    
    
    48,500Total annualized Company-defined backlog
    
    $
    266,100
    
    
    $
    227,300
    
    
    $
    223,100Total multi-year contract backlog
    
    $
    621,000
    
    
    $
    569,700
    
    
    $
    596,000Expected value of future funding on
proposals with high probability of
winning procurement
    
    
    154,300
    
    
    
    139,800
    
    
    
    140,800Total multi-year Company-defined backlog
    
    $
    775,300
    
    
    $
    709,500
    
    
    $
    736,800Annualized Company-defined backlog
(by business area):BMD
    
    $
    120,800
    
    
    $
    98,100
    
    
    $
    92,100Other DoD
    
    
    136,000
    
    
    
    122,100
    
    
    
    100,900Non-DoD
    
    
    9,300
    
    
    
    7,100
    
    
    
    6,100Total annualized Company-defined backlog
    
    $
    266,100
    
    
    $
    227,300
    
    
    $
    223,100
  -14-




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Liquidity and Capital Resources
  Balance atSeptember 30,
    
    
    December 31,
    
    
    September 30,2005
    
    
    2004
    
    
    2004Cash and cash equivalents
    
    $
    39,494,000
    
    
    $
    29,455,000
    
    
    $
    26,540,000Stockholders equity
    
    $
    63,218,000
    
    
    $
    50,727,000
    
    
    $
    46,982,000Subordinated notes payable
    
    $
    9,134,000
    
    
    $
    10,407,000
    
    
    $
    11,160,000Borrowings under line of credit
    
    
    
    
    
    
    
    
    
    
    Number of days sales in
receivables
(year-to-date average)
    
    
    60
    
    
    
    60
    
    
    
    62Current ratio
    
    
    2.5
    
    
    
    2.3
    
    
    
    2.5
 Overview
  -16-




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-17-




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Cash Flow Information
        -18-




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Payments Due by Period(amounts in thousands)Total
    
    
    Current
    
    
    1-3 years
    
    
    4-5 years
    
    
    After 5 yearsSubordinated Promissory Notes
    
    $
    9,134
    
    
    $
    2,542
    
    
    $
    5,295
    
    
    $
    1,297
    
    
    $
    0Operating Leases
    
    
    44,064
    
    
    
    7,639
    
    
    
    21,266
    
    
    
    5,783
    
    
    
    9,376Total Contractual Obligations
    
    $
    53,198
    
    
    $
    10,181
    
    
    $
    26,561
    
    
    $
    7,080
    
    
    $
    9,376
 Effects of Federal Funding for Defense Programs
   Recent Events
  -19-




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Recent Accounting Pronouncements
 Share Based Payments. Accounting for Stock-Based
Compensation, Accounting for Stock Issued to Employees
  Accounting
Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim Financial Statements
 Forward-Looking Statements
  -20-




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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
  
 Part II            OTHER INFORMATION
 
 Item 1 Legal Proceedings
  -21-




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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 Maximum Number (orTotal Number of
    
    Approximate DollarShares Purchased as
    
    Value) of SharesPart of Publicly
    
    that May Yet BeTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Shares Purchased
    
    per Share
    
    Programs
    
    Plans or ProgramsJuly
(7/4/05  7/31/05)
    
    
    72,700
    
    
    
    40.87
    
    
    
    62,073
    
    
    
    August
(8/1/05  8/28/05)
    
    
    47,920
    
    
    
    40.96
    
    
    
    23,618
    
    
    $
    2,489,000September
(8/29/05  10/2/05)
    
    
    28,584
    
    
    
    40.96
    
    
    
    
    
    
    
    Total
    
    
    149,204
    
    
    
    40.92
    
    
    
    85,691
    
    
    $
    2,489,000
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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: January 18, 2006
    
    By:
    
    /s/ David E. SchreimanDavid E. Schreiman
Vice President and
Chief Financial Officer
 -24-




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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 2002.Exhibit 31.2
    
    Certification of Chief Financial
Officer Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.Exhibit 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-