UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 33-44510
CTA INCORPORATED
(Exact name of registrant a specified in its charter)
COLORADO 84-0797618
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6116 EXECUTIVE BOULEVARD, ROCKVILLE, MD 20852
(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 of
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.[ X ] YES[ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of FEBRUARY 28, 1997, there were outstanding 4,547,781 shares of the
registrant's common stock, par value $.01, which is the only class of common
or voting stock of the registrant. As of that date, the independent appraisal
used to determine the aggregate market value of the common stock held by non-
affiliates of the registrant had not been completed.
PART I
ITEM 1. BUSINESS
CTA designs, manufactures and integrates small communications and
earth-sensing satellites and provides advanced information technology (IT)
services principally to government customers. The convergence of CTA's unique
strengths in space, information systems and communications technologies has
positioned the Company to address space-based telecommunications markets as a
turn-key provider of complete satellite systems and has opened opportunities
for the Company as a wireless data service provider. In addition, the Company
is well-positioned for continued growth in the civil and commercial IT
services markets.
CTA is a leading supplier of small low-earth-orbit (LEO) satellite
systems and an emerging competitor in the market for small geosynchronous
orbit (GEO) satellite systems. CTA has successfully designed, built and
delivered 27 satellites over the past eleven years with seven additional
satellites currently under construction. During the next twelve months, the
Company is scheduled to deliver three commercial satellites, one satellite
for the Air Force and one satellite for NASA.
The Company's satellites perform a variety of commercial, scientific and
military missions, including communications, direct-broadcast and space-based
imaging. CTA satellites have a record of 100% mission success after reaching
orbit. As a complete space systems manufacturer, the Company also designs and
manufactures environmental monitoring sensors, advanced payloads for NASA,
real-time, high-speed processors for meteorological satellite data and
mission control and other specialized ground data and communications systems.
The Company provides its customers with a full range of IT services,
with emphasis on large-scale network integration and management, information
systems security, mainframe to client/server migration, relational database
engineering, electronic data interchange (EDI), and real-time embedded
computer systems. In addition to its strong technical and program management
capabilities, the Company has established a reputation for customer
satisfaction, as reflected in its 100% win rate when recompeting for
contracts for which it is the incumbent and average award fee scores in
excess of 90%. To date, the Company has completed more than $1 billion in
U.S. government IT contracts.
Combining its strengths in space systems and IT, CTA is currently
developing GEMtrak, an automated tracking and cargo status data system for
unpowered mobile assets such as truck trailers, railcars and containers. A
trucking industry source has estimated that there are 4.5 million truck
trailers in the U.S. alone. The Company believes that GEMtrak will reduce
trailer monitoring and rental costs and offer fleet owners marketing and
revenue enhancement opportunities by providing positive cargo
track-and-trace, active manifest control, intrusion sensing and alert, remote
asset status monitoring and enhanced asset utilization.
COMPANY HISTORY
The Company was founded in 1979 as Computer Technology Associates
Incorporated, specializing in consulting services related to the evaluation
of computer systems embedded in larger systems such as spacecraft, missiles
and aircraft. In the mid-1980's, the Company's consulting business expanded
into systems integration of avionics, command and control, and other decision
support systems. The Company established major relationships with U.S.
military operations at the DOD's Cheyenne Mountain Complex, the China Lake
facility of the U.S. Navy (the "Navy"), NASA's Goddard Space Flight Center
(the "GSFC") and the Air Force's Consolidated Space Operations Center. In
1992, the Company's acquisition of CTA Space Systems (CTASS) ended its
eligibility for government programs that assist small businesses, with the
last significant contract awarded under these programs completed in early
1996. Since 1992, the Company has replaced contracts awarded under these
programs with contracts awarded under full and open competition, growing the
share of IT revenues derived from competitive awards from 19% in 1992 to 97%
in 1996.
In the 1990's, the Company targeted U.S. government IT contracts that
have allowed it to broaden the Company's base of skills to include a number
of disciplines equally applicable to the civil federal and state IT markets.
In 1995, the Company established strategic alliances with certain specialized
software companies that enabled it to enter the commercial IT business and
win contracts with commercial customers such as Reynolds Metals and
Allied-Signal.
In 1992, the Company acquired a 79% interest in CTASS to expand its
business of providing IT services related to space systems to providing full
turn-key space systems. In 1994, CTA acquired the remaining minority interest
in CTASS. CTASS is a pioneer of small satellite-based store-and-forward
technology, which it originally developed to interrogate dispersed buoys
equipped with acoustic sensors. In 1993, the Company entered the commercial
GEO communications satellite market with CTASS' award of the contract for the
Indostar turn-key direct-to-home (DTH) system from PT MediaCitra Indostar.
The Indostar program is scheduled to begin service in 1997. The contract
provides for the Company to build a small, three-axis stabilized commercial
communications satellite and a complete facility in Jakarta, including
broadcast and subscriber management software, communications uplinking
systems and hardware/software systems for spacecraft telemetry, tracking and
control. In addition, CTA is arranging for launch and insurance services and
international telecommunications regulatory compliance.
In 1995, the Company combined its skills in space-based communications
and large-scale systems integration to develop GEMnet, a system to be
comprised of the GEMstar satellite and the GEMtrak automatic tracking and
cargo status system. Although the GEMnet project suffered the loss of an
experimental satellite due to a launch failure in 1995, which was partially
covered by insurance, the Company has responded by extending the GEMtrak
system to support multiple wireless data systems, permitting immediate
service while retaining the flexibility to support the system at a later date
with other wireless media, including future LEO satellite constellations.
CORPORATE ORGANIZATION AND STRATEGY
In 1994, the Company established its three principal business segments:
Space and Telecommunications Systems, Information Technology Services and
Mobile Information and Communications Services. The Space and
Telecommunications Systems business principally designs and manufactures
small LEO and GEO satellites and related support systems. The Information
Technology Services business comprises the Company's historical business base
of providing IT services for a variety of customers. The Mobile Information
and Communications Services business unit has been formed to pursue
commercial applications of the Company's proprietary technology in innovative
IT and space-based or wireless solutions to a variety of applications,
including mobile asset tracking and remote fixed asset monitoring.
CTA intends to become a vertically integrated provider of space-based
communications services. By leveraging its unique strengths in space, IT and
communications technologies, the Company seeks to serve the space-based
telecommunications markets as a turn-key provider of complete satellite
systems and pursue opportunities as a wireless data service provider.
SPACE AND TELECOMMUNICATIONS SYSTEMS
CTA is a leading supplier of small LEO satellite systems and an emerging
competitor in the market for small GEO satellite systems. CTA has
successfully designed, built and delivered 27 satellites over the past eleven
years with seven additional satellites currently under construction. During
the next twelve months, the Company is scheduled to deliver three commercial
satellites, one satellite for the Air Force and one satellite for NASA. CTA
satellites have a record of 100% mission success upon reaching orbit. The
Company believes that, due to its focus on small space systems and its
streamlined management overhead, its cost structure is relatively low as
compared to its competitors, and that it is able to deliver completed systems
faster than most of its competitors. The Company has unique small satellite
products and "on the shelf" designs, along with a hardware inventory that
allows rapid delivery, reduces schedule risk and reduces costs. The Company
seeks to continue to develop and prove new technologies as part of U.S.
government satellite systems and then transfer these new technologies to
commercial satellite designs. The Company was one of two prime contractors
selected by NASA for the SSTI and Indostar will be the first small DTH
satellite. The Company designed and demonstrated the world's first LEO
constellation of communications satellites and Company-built satellites for
EarthWatch are expected to be the first commercial high resolution remote
sensing satellites. Other significant space technology innovations include a
low-cost reaction wheel, the first use of the Global Positioning System
("GPS") for small satellite attitude determination, implementation of
commercial battery technology, use of lightweight composites for key
structural components, digital solid state memory and space-borne encryption
technology.
CTA has invested significant resources developing STARbus, a
technologically advanced, multi-purpose satellite bus that can be configured
to support DTH television, high-bandwidth data transmission or voice
communications payloads. Indostar, the first satellite in the STARbus family,
is expected to be launched in mid-1997 to provide DTH television in
Indonesia.
SPACE AND TELECOMMUNICATIONS SYSTEMS--INDUSTRY AND TECHNOLOGY OVERVIEW
Improvements in space technology have resulted in modern communications
satellites with power, capacity, switching capabilities and longevity
significantly greater than those of their predecessors. These improvements in
performance, together with satellites' inherent geographic coverage and
technical advantages, have made satellite-based communications increasingly
competitive with other communications technologies, broadening the market for
satellite services such as telephony, support for cable and network
television, broadband data transmission, paging, DTH broadcasting,
earth-sensing and position location.
Large commercial communications satellites generate six to thirteen
kilowatts of power, weigh 7,000 to 11,000 pounds and typically cost over $100
million. Small commercial communications satellites, in contrast, generate up
to four kilowatts of power, weigh 3,000 pounds or less at launch and
typically cost less than $50 million. The Company believes that smaller
satellites will capture an increasing share of both the commercial and
government satellite market because technological and market changes have
made their advantages more compelling.
COMMERCIAL
Advanced communications technologies, particularly digital signal
compression, have enabled satellite systems to emerge as an economically
attractive solution to the world's rapidly expanding communications needs.
The attractive economics of space-based communications systems, driven by
their expansive geographic coverage, have resulted in substantial growth in
demand for satellites. Via Satellite, a space-industry periodical, forecasts
that over $54 billion will be invested in building and launching commercial
communications satellite systems over the next four years. The Company
believes that demand for smaller satellites will increase even more rapidly,
driven by their lower cost, faster cycle time from contract award to orbit
and sharper mission focus. U.S. government agencies have recently been
reorienting their satellite programs toward the use of small satellites in
response to changing mission requirements and budget pressures, while demand
for real-time information continues to expand. Moreover, a group of small
satellites can deliver the functionality of a single larger one at equivalent
overall cost, but with reduced launch and operational risks, and the added
ability to adapt hardware functionality incrementally in response to changing
user needs by changing the designs of later satellites in the series. In
addition, less developed countries and emerging communications businesses are
beginning to evaluate small satellites as entry level systems that address
immediate communications needs quickly and inexpensively, while providing
flexibility to add capacity and capabilities over time as demand evolves and
technology advances.
GOVERNMENT
Many of the same technological and market changes that make small
satellites more attractive to commercial customers also are occurring in the
government satellite market. The report of the Small Satellite Review Panel
to the Director of Central Intelligence in June 1996 called for a shift in
the architecture of the nation's space reconnaissance assets from one based
on very large-scale systems focused on the threat of the former Soviet Union
across the northern polar region to an array of smaller, less expensive
spacecraft in larger numbers with equivalent or superior total capacity that
can acquire relevant data anywhere in the world. The panel recommended an
array of satellites 20% to 25% of the weight of current reconnaissance
satellites, with 40% to 50% of their capabilities. In addition to lowering
costs, such an array would be more robust, with less operational capability
at risk for any given satellite, and more flexible, with a much greater
capability to rebalance the system from time to time to achieve a different
mix of capabilities.
NASA is also shifting its procurement priorities toward the development
of small satellites that permit incorporation of advanced technologies as
they develop, rather than building a larger spacecraft requiring earlier
design commitments. As a key component of NASA's announced plan to develop
"smaller, faster, cheaper" satellites, NASA's SSTI will develop and apply
advanced miniaturization, design and production technology for spacecraft
design and instrumentation to reduce the size of satellites and the cost of
space missions. The major goals of the SSTI are to increase the capabilities
of small satellites and to reduce the cost and development time of space
missions for science and commercial applications.
As a result of this broadening of national intelligence priorities and
increasing governmental budgetary constraints, CTA expects that U.S.
government expenditures on small satellites will grow from $300 million in
1995 to $900 million in 2000.
SPACE AND TELECOMMUNICATIONS SYSTEMS--BUSINESS STRATEGY
The principal strategies that CTA is pursuing to grow its share of the
small space systems market include:
OFFERING TURN-KEY SATELLITE SYSTEMS. To enhance its competitive
position, CTA is combining its space, communications and IT expertise to
provide full turn-key satellite systems to its commercial customers,
including delivery of the satellite on orbit and the design, procurement and
installation of all of the necessary ground control and communications
equipment. The Company believes that turn-key satellite systems will be
particularly attractive to less-developed countries and emerging
communications businesses that do not otherwise have the experience or
resources to coordinate the launch and support of a satellite.
MARKETING SPACECRAFT BASED ON THE MULTI-PURPOSE STARBUS PLATFORM. CTA
has developed STARbus, a technologically advanced, multi-purpose satellite
bus that can be configured to support DTH television, high-bandwidth data
transmission or voice communications payloads. The Company expects that the
low cost and technical superiority of this flexible design, which is capable
of generating up to 3.5 kilowatts of power, will enable the Company to adapt
it to a variety of payloads and thereby capture additional market share in a
growing segment of commercial communications satellite industry, supporting a
range of missions from both LEO and GEO and supporting video, voice and data
services.
FOCUSING ON "SMALLER, FASTER, CHEAPER" SATELLITE SYSTEMS. CTA is
focused on lowering the cost, shortening the cycle time from award to launch
and adding advanced technology to enable the Company to win an increasing
share of what the Company believes will be a growing market for smaller
satellites. The Company's strategy is to use "on-the-shelf" designs, maintain
inventory of long lead-time, critical components, use common parts in
multiple designs and build on its record of technical innovation.
PARTICIPATING IN SATELLITE-BASED SERVICES BUSINESSES THROUGH
PARTNERSHIPS WITH COMMERCIAL CUSTOMERS. The Company is participating in and
will seek to expand into space-based communications services in partnership
with commercial satellite service customers such as PT MediaCitra Indostar
and EarthWatch.
SPACE AND TELECOMMUNICATIONS SYSTEMS--CONTRACTS AND PROGRAMS
Some of the Company's key Space and Telecommunications Systems programs
are described below. Total contract values include both realized and
unrealized revenues.
COMMERCIAL
INDOSTAR. In December 1993, the Company was awarded a turn-key $170
million contract by PT MediaCitra Indostar, a private Indonesian firm, to
design, develop, launch and support Indostar, a complete DTH entertainment
and educational, satellite-based television system for Indonesia. The
Indostar satellite will be the first implementation of STARbus, the Company's
three-axis stabilized small GEO platform. As a turn-key provider for the
Indostar program, the Company is performing all systems engineering, handling
both domestic and international regulatory compliance, delivering all ground
systems equipment, constructing the spacecraft, arranging for the launch and
launch insurance and providing continued support through a comprehensive
operations and maintenance program. Indostar is currently scheduled for
completion in early 1997 and for launch in mid-1997. The contract is
fixed-price for the satellite system and a cost-plus contract for launch,
insurance and other services. In 1996, Indostar generated revenues of $45.4
million, or 25.3% of the Company's total revenues.
EARTHWATCH. In January 1995, the Company was awarded a contract for the
development of two satellites, EarlyBird-1 and EarlyBird-2, for EarthWatch.
It is expected that these two 700-pound satellites will form the first
commercial constellation of satellites capable of collecting high-resolution
digital imagery. These satellites are designed to provide three-meter
resolution panchromatic imagery and fifteen-meter resolution multi-spectral
imagery for sale to government and commercial customers. EarlyBird-1 is
scheduled for completion in early 1997 and for launch in mid-1997. EarlyBird-
2 is scheduled for completion in mid-1997. As part of this program, the
Company also is delivering three telemetry, tracking and command ground
stations to be deployed in 1997 in Alaska, Colorado and Europe. The contract
is fixed-price for the satellite system and has a total value of
approximately $8 million, of which $4 million is payable in the form of
preferred equity in EarthWatch. There is also a cost-plus contract for launch
support and other services.
GOVERNMENT
NASA
SSTI "CLARK." In June 1994, NASA awarded the Company a contract to
develop the SSTI "Clark" satellite. The 690-pound Clark satellite employs
technologies not currently in general use on board small satellites,
including an advanced attitude control system ("ACS") and solar arrays using
new designs and materials. Key missions of this satellite will include high
resolution imaging, mapping and monitoring of pollutants in the atmosphere
and measuring the radiation of solar flares in space. The Clark satellite is
scheduled for completion in early 1997 and launch in late 1997. The Clark
contract is a cost-plus-award-fee contract and has a total value of $51
million.
NASA CODE 740. In June 1995, NASA awarded the Company a multi-year
contract to support the GSFC Code 740 with hardware, software, ACS
development, integration and launch support for Small Explorer Satellites
("SMEX"), Get Away Special ("GAS"), Hitchhiker and Spartan spacecraft. Under
this contract, CTA acts as the prime contractor providing overall program
management, electrical design and fabrication and ACS design. For the SMEX
program, the Company is developing the design, fabrication, ACS and software
for the Transition Region and Coronal Explorer ("TRACE"), which will observe
the sun's corona. For the GAS and Hitchhiker programs, the Company's central
activities include the development of the mechanical fabrication and launch
preparation for STS-77 and STS-78, which will deploy MightySat-1. For SPARTAN
missions, the Company's major functions include the fabrication, integration
and test support for mission 207, post-launch support for mission 206,
planning support for the new mission 201-4 and system concept and design for
SPARTAN Lite and SPARTAN 400. The Code 740 contract is a cost-plus-award-fee
contract, has a total value of $77 million and is scheduled for completion in
2000.
AIR FORCE SPACE DIVISION SPACE TEST PROGRAM. Under its Space Division
Space Test Program, the Air Force procures experimental satellites for the
three main branches of the DOD. This program has resulted in several key
opportunities for CTA, including:
STEP. In May 1990, the Company received an award as a subcontractor to
TRW to produce up to six satellite buses for the Air Force's STEP, a program
in which the Air Force launches and operates standardized satellites on
behalf of various branches of the DOD. The Company recently completed its
work on the fifth satellite in this series, a 900-pound satellite, that was
delivered in July 1996 and is scheduled for launch in mid-1997. The STEP
contract is a fixed-price contract and has a total value of $36 million.
TSX-5. In July 1996, following the final STEP satellite, the Air Force
recompeted STEP and the Company was awarded the prime contract to develop and
launch the TSX-5 satellite, the successor to the STEP series. The 735-pound
TSX-5 will perform a series of missions in orbit, including the collection
and high-speed transmission of Earth imagingdata and radiation measurements.
The TSX-5 satellite is scheduled for completion and for launch in the second
half of 1998. The TSX-5 contract is a fixed-price-incentive-fee contract and
has a total value of $25 million.
MIGHTYSAT-1. In April 1995, the Air Force Phillips Laboratory awarded
the Company a contract to build MightySat-1, a 150-pound satellite designed
to conduct experiments. Construction of MightySat-1 was completed in
September 1996 and the satellite is scheduled for launch on the Space Shuttle
in 1997. The MightySat-1 contract is a fixed-price contract and has a total
value of $3 million.
REMOTE SENSING BUOYS. The Company has developed three classes of
cost-effective, earth-based systems with remote sensing, data gathering and
dissemination capability: (i) an air-deployed geobuoy sensor system, which is
launched from an aircraft, penetrates the surface of Arctic ice and reports
seismic signals detected by the system's geophone to monitoring aircraft,
(ii) an advanced ocean meteorological drifting buoy with a state-of-the-art
sonic anemometer, improved temperature and barometric sensors and simplified
buoy flotation for reduced drag and (iii) a series of buoys designed for
deployment on the surface of fragmented Arctic ice.
SPACE AND TELECOMMUNICATIONS SYSTEMS--COMPETITION
The space systems manufacturing industry includes both foreign and U.S.
commercial and governmental entities and is becoming increasingly
competitive. The Company's satellites, space instruments and sensors,
advanced electronics products, ground systems and software each face
competition from at least several manufacturers. The Company's competitors
include Ball, Hughes, Lockheed Martin, Loral, Matra Marconi, Orbital
Sciences, Spectrum Astro, TRW and other international companies. The primary
competitive factors in the space systems manufacturing industry include price
and technology. Additionally, vendor financing is emerging as an important
competitive factor in commercial customers' selection of a satellite systems
manufacturer. Further, the Company's communications satellites face
competition from alternative technologies, including fiber optic cable
technology, which could reduce demand for the services of the Company's
customers and thus for the Company's communications products.
INFORMATION TECHNOLOGY SERVICES
The Company provides its customers with a full range of IT services,
with emphasis on large-scale network integration and management, information
systems security, mainframe to client/server migration, relational database
engineering, EDI and real-time embedded computer systems. CTA continues to
establish marketing alliances with a number of small software providers to
combine software applications for specialized areas such as manufacturing
process control and large-scale electronic document management and
composition with CTA's core competency in large-scale systems integration and
its recognized program management skills enabling it to offer complete
turn-key systems solutions to commercial customers. The Company is one of the
industry leaders in the rapidly growing market for federal and state
government Year 2000 Conversions based on its unique combination of direct
Year 2000 Conversion experience and use of automated tools. To date,
substantially all of the Company's IT revenues have been derived from
contracts with the U.S. government.
INFORMATION TECHNOLOGY SERVICES--INDUSTRY OVERVIEW
GOVERNMENT
The U.S. government is the largest single buyer of IT services in the
world. Federal Sources, an independent market research firm, estimates that
the government IT support services market in 1996 will be $9 billion, growing
at a rate of 6% per annum.
The Year 2000 Conversion market developed because billions of lines of
legacy computer code, some of it dating from as early as the 1960s, were not
written to address the now-imminent century date change, and still compute
the passage of time with reference only to the last two digits of the years
in question. A large proportion of mainframe computers rely on computer code
that utilizes two-digit fields instead of four digit fields to distinguish a
calendar year. The Gartner Group, a market research firm, estimates that the
U.S. federal and state government market for Year 2000 Conversion will exceed
$30 billion over the next four years.
COMMERCIAL
Within the broad market for IT services, the Company specifically
provides professional services (including consulting, custom software
development, and software and database maintenance) and systems integration.
INPUT, a market research firm, estimates that the professional services
segment of the IT services market was $26 billion in the U.S. in 1995, which
represents an increase of 13% over 1994, and that the systems integration
segment of the IT services market was $12 billion in 1995, which represents
an increase of 11% over 1994. INPUT estimates that the overall commercial IT
services market will grow at an average annual rate of 14% over the next five
years.
INFORMATION TECHNOLOGY SERVICES--BUSINESS STRATEGY
The principal strategies that CTA is pursuing to expand its IT services
business include:
INCREASING PENETRATION OF EXISTING CUSTOMER BASE. CTA's focus on
customer satisfaction and technical excellence have made its existing IT
customer base a promising field for future IT services expansion. Due to its
long-term incumbent position as a key systems integrator for some of the
nation's most complex information networks, the Company has gained a unique
and profound understanding of those systems that the Company believes provide
it with a substantial advantage in terms of cost, technical expertise and
demonstrated past performance in competing for future awards. The Company
believes that its Year 2000 Conversion initiative will provide CTA with
similar competitive advantages with respect to a wide range of new customers
as a result of the in-depth knowledge of the architecture of its Year 2000
Conversion customers' legacy systems that the Company will gain in the course
of performing the necessary conversion work.
TARGETING "NEAREST NEIGHBOR" MARKETS. The Company continually seeks to
transfer its IT technical and marketing expertise developed over many years
of successful competition in the DOD market to the U.S. civil agencies that
have similar IT systems needs, such as NASA, the FAA and the FBI and to
market its experience supporting federal government functions to state
government and commercial customers.
PENETRATING NEW MARKETS BY LEVERAGING CORE COMPETENCIES. CTA seeks out
and exploits opportunities to market the expertise it has gained in past IT
assignments to new customers. CTA's experience in federal and state
government Year 2000 Conversions and its expertise in information systems
security measures have proven to be key factors differentiating the Company
in competitive bidding situations and could serve to establish a relationship
with an expanded base of customers that can be used for marketing the
Company's expertise in additional areas such as large-scale client/server
migration and electronic document management.
ESTABLISHING MARKETING ALLIANCES TO OFFER COMPLETE SOLUTIONS. CTA
continues to establish marketing alliances with a number of small software
providers to combine software applications for specialized areas, such as
manufacturing process control and large-scale document composition and
management, with CTA's core competency in large-scale systems integration and
its recognized program management skills to offer complete, turn-key systems
solutions to commercial customers.
ACQUIRING STRATEGIC IT SERVICES BUSINESSES. The Company intends to
pursue acquisitions that will expand the Company's commercial IT services
customer base and provide specialized capabilities that enhance the Company's
penetration of the commercial IT services market.
INFORMATION TECHNOLOGY SERVICES--CONTRACTS AND PROGRAMS
Some of the Company's key IT contracts and programs are described below.
Total contract values include both realized and unrealized revenues.
U.S. GOVERNMENT--DOD
RANGE SYSTEMS MANAGEMENT. In 1993, the Company was awarded the Range
Instrumentation Development ("RID") contract, pursuant to which the Company
supports a wide variety of aircraft range system activities for the Naval Air
Weapons Center (NAWC) at China Lake, California , including software
development, test and evaluation, system integration and fabrication of
electronic threat simulators. The RID contract is a cost-plus-award-fee
contract (with an average award fee score of in excess of 90%), has a total
value of $88 million and is scheduled for completion in October 1998.
AVIONICS SYSTEMS INTEGRATION. The Company participates in the design,
development, fabrication, modification and testing of hardware for the NAWC,
performing a wide range of support activities. These activities include
systems engineering, systems analysis, software development, configuration
management, verification and validation, maintenance and operation services
for various naval aircraft and the development and maintenance of large-scale
hybrid simulators (which integrate computer simulations with actual aircraft
avionics). The Company has performed this work since its first NAWC contract,
awarded in 1985. In 1995, this contract was recompeted under a program
reserved for small businesses and the Company successfully teamed with a
small business contractor, which was awarded the prime contract. The current
NAWC contract is a cost-plus-award-fee contract (with an average award fee
score in excess of 90%), has a total value of $33 million and is scheduled
for completion in March 2000.
NETWORK MANAGEMENT. In 1993, the Air Force's Electronic Systems Center
at Hanscom Air Force Base in Bedford, Massachusetts awarded CTA the Technical
Engineering and Management Support IV ("TEMS IV") contract pursuant to which
the Company provides technical engineering and management support to various
DOD command and control system procurement programs, including the Integrated
Tactical Warning and Attack Assessment System, during all phases of the
procurement cycle. The TEMS IV contract is a time-and-materials contract, has
a total value of $54 million and is scheduled for completion in June 1998.
INFORMATION SYSTEMS SECURITY. The Company, as a subcontractor to SAIC,
is a member of the team awarded the Center for Information Systems Security
contract in 1995 by the Defense Information Systems Agency. Under this
five-year omnibus security engineering contract, the Company will continue to
provide technical support to information systems security activities within
the DOD and other U.S. government departments and agencies. Activities under
this contract include designing and implementing the measures necessary to
detect, document and counter a wide range of threats to on-line and stored
information. The Information Systems Security contract is a
time-and-materials contract, has a total value of $8 million and is scheduled
for completion in July 2000.
AIR FORCE WARNING SYSTEM INTEGRATION. Under the Air Force Warning
System Integration contract, the Company provided engineering support at the
Air Force Electronic Systems Center for the procurement, installation and
testing of systems comprising the national attack warning/attack assessment
network. This contract was a sole source, three-year contract awarded in 1993
as a follow-on to the Company's system design and analysis contract awarded
in 1987. The Air Force Warning System Integration contract was a
time-and-materials contract, had a total value of $22 million and was
completed in 1996.
DEIS. In 1995, CTA won a subcontract from Unisys to provide a variety
of services, including business process re-engineering, systems development
and installation and support for the Defense Information System Agency of the
DOD. Under this program, called the Defense Enterprise Integration Services
("DEIS") program, CTA is currently performing engineering and integration
services to implement the Cheyenne Mountain Training and Simulation System,
assisting the Space and Warning Systems Center in the planning, scheduling,
conduct and reporting of software testing and providing support to Air Force
Space Command for the Command, Control, Communications and Computer Upgrade
program. The DEIS contract is a time-and-materials contract, has a total
value of $16 million and is scheduled for completion in November 2000. In
1996, CTA won a follow-on DEIS contract as a subcontractor to Computer
Sciences Corporation (CSC). This contract is also a time-and-materials
contract and is scheduled for completion in August 2001.
U.S. GOVERNMENT--CIVILIAN AGENCIES
NASA. For NASA, the Company provides services under several contracts
related to the design, development, integration and testing of space systems.
(i) Since 1988, the Company has provided a wide range of systems
engineering services to the GSFC as a subcontractor to CSC under the Systems
Engineering and Analysis ("SEAS") contract. These services included Hubble
Space Telescope ground system testing, communications standards development,
prototyping and business process re-engineering. In 1992, NASA exercised its
option under the SEAS contract to have CTA continue to provide these services
to GSFC. The SEAS contract is a time-and-materials contract, had a total
value of $17 million and is scheduled for completion in July 1997.
(ii) In 1994, NASA awarded two contracts, the Earth Observing System
Data and Information ("EOS/DIS") and the Tropical Rainfall Measurement
Mission ("TRMM") contracts, under which CTA acts as subcontractor to support
research, development andoperations of major ground systems. The EOS/DIS
contract, under which CTA is a subcontractor to Intermetrics, Inc., is a
cost-plus-award-fee contract, has a total value of $14 million and is
scheduled for completion in June 2004. The TRMM contract, under which CTA is
a subcontractor to General Sciences Corporation, is a cost-plus-fixed-fee
contract, has a total value of $1.3 million and is scheduled for completion
in 1998.
(iii) Since 1994, the Company has acted as subcontractor on a
McDonnell Douglas contract to provide Space Shuttle payload analysis and
integration, and design, development and testing of NASA-wide management
information systems. This contract is a cost-plus-award-fee contract, has a
total value of $4 million and is scheduled for completion in 1997.
FEDERAL AVIATION ADMINISTRATION. For the FAA, the Company provides
services related to the design, development, integration and test of the U.S.
air traffic control ("ATC") system and has been supporting the FAA automation
programs since 1982. Currently, the Company is performing on the following
programs for the FAA:
(i) providing engineering support to the FAA as a subcontractor to TRW
under the AUA Technical Assistance contract in implementing its programs to
replace the ATC system. This contract is a time-and-materials contract, has a
total value of $40 million and is scheduled for completion in December 2002.
(ii) providing support to the FAA as a subcontractor to TRW under the
ASD SETA contract for the overall architectural design and evolution of the
National Airspace System. This contract is a time-and-materials contract, has
a total value of $17 million and is scheduled for completion in
September 2001.
(iii) assisting the FAA, as a subcontractor to TRW under the Weather
Technical Assistance contract in the areas of program engineering, hardware
and software engineering, program and project management, system test and
evaluation, system implementation and human factors. This contract is a
cost-plus-fixed-fee contract, has a total value of $3 million and is
scheduled for completion in March 2000.
(iv) providing engineering and management support services to the FAA as
a subcontractor to SRC under the ANN Technical Assistance contract. This
contract is a cost-plus-award-fee contract, has a total value of $5 million
and is scheduled for completion in September 2000.
DEPARTMENT OF JUSTICE. In February 1994, the DOJ awarded the Company a
contract to assist the FBI in its program to streamline, consolidate and
automate its Criminal Justice Information System, which serves over 80,000
law enforcement users. Under this seven-year contract, CTA is assisting the
FBI in virtually every aspect of the engineering process, from procurement of
new information systems to the re- engineering of the processes that this
system supports. The DOJ contract is a combined fixed-price and cost-plus
contract, has a total value of $40 million and is scheduled for completion in
September 2001.
TREASURY DEPARTMENT. Under a contract awarded in 1995, CTA provides
system engineering and technical analysis support to the Treasury Department,
primarily for the Internal Revenue Service's computer-based information
processing system modernization effort. CTA's support functions include
engineering services and telecommunication and security services. In the
longer term, CTA will be developing and assessing advanced user interface
concepts, technologies and prototypes (such as hypertext and speech
recognition) and assessing and recommending tools and environments to support
future software development. This contract is a time-and-materials contract,
has a total value of $40 million and is scheduled for completion in
June 2000.
GENERAL SERVICES ADMINISTRATION. The Company performs under two
contracts with the GSA.
(i) The Company provides support for the Federal Supply Service's
central offices, its eleven regional offices and its various commodity
centers and depots. CTA's support implementations of electronic commerce. The
Federal Supply Service contract was atime-and-materials contract, with a
total value of $27 million and was completed in September 1996. The Company
was awarded the follow-on contract to the original Federal Supply Service
contract that was awarded to the Company in 1992. This contract has a total
value of $31 million and is scheduled for completion in September 2001.
(ii) Under a contract awarded in 1994, the Company provides business
applications software support to U.S. government agencies within the GSA's
Eastern Zone. Services provided by the Company under this contract include
field software support, softwaremaintenance, software testing, software
independent verification and validation, software configuration management,
software documentation development and user training. The Eastern Zone
contract is a time-and-materials contract, has a total value of $32 million
andis scheduled for completion in September 1997. The Company revised its
estimates of the full contract value and profitability of its Eastern Zone
contract with the GSA, resulting in a reduction in revenues and operating
profit for the year ended December 31, 1996 of $2.6 million, reflecting the
Company's current estimate of the contract's profit at completion. The
$2.6 million reduction in revenues is net of claims of $1.5 million filed by
the Company against the U.S. government related to this contract.
STATE GOVERNMENT AND COMMERCIAL
YEAR 2000 CONVERSION. The Company is one of the industry leaders in
federal and state government Year 2000 Conversions with a completed contract
for the Department of Veterans Affairs Austin Automation Center, which the
Company believes is the only completed U.S. government agency Year 2000
Conversion to date, and ongoing projects with the GSA, the Air Force and the
Colorado River Authority. CTA has expanded its position with the award of a
$22 million contract from the State of Nebraska for Year 2000 Conversion of
all of the State's mainframe application software and databases and a $25
million contract from the State of Kansas. CTA has developed a partnership
with Viasoft Inc., a leading provider of date change conversion software
tools, and is applying Viasoft's state-of-the-art tools to the Year 2000
Conversion problem. In addition, CTA's existing contracts with GSA, the
Department of Veterans Affairs and the Navy allow other federal agencies to
employ CTA for Year 2000 Conversions without lengthy competitions. To support
its Year 2000 Conversion efforts, the Company is planning to establish
conversion centers that will enable the Company to perform these conversions
in a manner that will minimize disruptions for its customers.
SYSTEMS ENGINEERING. In June 1996, the Company was awarded a contract
by USAA, a San Antonio, Texas-based insurer, to provide technical and
engineering support to the USAA Information Technology Division. The
Company's functions include (i) program control, including resource
forecasting and tracking and scheduling, (ii) systems engineering, including
configuration management, systems requirements management and test planning
and execution, (iii) procurement support, including the development of
procurement strategies, evaluation criteria and requests for proposals and
(iv) development of cost estimates for USAA procurement. The USAA contract is
a time-and-materials contract, and is scheduled for completion in March 2000.
EMERGING COMMERCIAL PROGRAMS. Through alliances with specialized
software companies such as Manugistics Group, Inc. and Xyvision, Inc., the
Company has initiated the development of its commercial IT business.
Commercial contracts that have been awarded to the Company through these
alliances include a contract with Reynolds Metals Corporation to provide a
fully integrated automated production scheduling system to be used to
coordinate production activities at Reynolds Metals' Listerfield, Alabama
aluminum plant and a contract with Allied Signal Inc. to produce documents
using standard generalized mark-up language and document composition
technology.
INFORMATION TECHNOLOGY SERVICES--COMPETITION
The IT services industry in which the Company operates is highly
fragmented with no single company or small group of companies in a dominant
position. The Company's competitors include large, diversified firms with
substantially greater financial resources and larger technical staffs than
the Company, such as BDM, Cap Gemini, CSC, EDS, Lockheed Martin, PRC, SAIC,
as well as firms that receive preferences under government programs for small
businesses. The firms that compete with the Company include consulting firms,
computer services firms, applications software companies and accounting
firms, as well as the computer service arms of computer manufacturing
companies and defense and aerospace firms. In addition, the internal staffs
of client organizations, non-profit federal contract research centers and
universities are, in effect, competitors of the Company.
The primary competitive factors in the information services industry
include technical, management and marketing competence, as well as price. The
Company competes for commercial work by identification of unique market
niches in which the Company believes it has superior technical products. The
Company expects to compete successfully based on the quality of its products
and services, its emphasis on client satisfaction, the technical expertise of
its staff and the price at which its products and services are delivered.
Such expectation is based on the judgment and experience of the Company's
senior management.
MOBILE INFORMATION AND COMMUNICATIONS SERVICES
As part of its strategy to leverage its expertise in information systems
and small satellite technologies to enter into selected value-added wireless
service opportunities, CTA is currently developing GEMtrak, an automated
tracking and cargo status data system for unpowered mobile assets such as
truck trailers, railcars and containers.
The COMMERCIAL CARRIER JOURNAL's Census of the Professional Truck Fleet
Market estimates that there are 4.5 million truck trailers in the U.S. alone.
Carriers recently have turned to wireless information systems to provide
better information about customer deliveries. However, existing systems do
not currently enable carriers to track their trailers or provide readily
available information to customers concerning unpowered mobile assets.
GEMtrak, in contrast, has been designed to serve as an automated data
collection and cargo oversight system that reduces the errors and delays that
can occur through a system dependent on physical trailer counts and
communications between drivers and operation centers. The Company believes
that by providing carriers with more accurate and timely information about
trailer location, availability and status, GEMtrak will reduce trailer
monitoring and rental costs, and offer fleet owners marketing and revenue
enhancement opportunities.
The Company has completed the development of the hardware and software
required to operate the system and provide the information management reports
to be used by the trailer fleet operators, and the GEMtrak system is
currently being beta tested by two different carriers. The Company expects to
initiate several pilot programs over the next six to nine months under which
several hundred units will be placed in service in each of several national
trucking company fleets, with full commercial roll-out scheduled for the
second half of 1997.
The Company anticipates that the GEMtrak system will face competition
from numerous existing and potential alternative communications products and
services provided by various companies including American Mobile Satellite,
HighwayMaster, Orbcomm, Qualcomm and StarSys.
U.S. GOVERNMENT CONTRACTING
TYPES OF CONTRACTS. The Company's services are provided primarily
through three types of contracts: fixed-price, time-and-material and
cost-reimbursable contracts. Fixed-price contracts require the Company to
perform services under the contract at a stipulated price. Time-and-material
contracts reimburse the Company for the number of labor hours expended at
established hourly rates negotiated in the contract and the cost of materials
incurred. Cost-reimbursable contracts reimburse the Company for all actual
costs incurred in performing the contract, to the extent that such costs are
within a specified maximum and allowable under the terms of the contract,
plus a fee or profit.
The following table shows the approximate percentage of revenue by
contract type recognized by the Company during the indicated periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C> <C> <C>
TYPE OF CONTRACT 1994 1995 1996
Fixed-price 10% 28% 31%
Time-and-materials 54% 26% 29%
Cost-reimbursable 36% 46% 40%
100% 100% 100%
Total
</TABLE>
The Company's fixed-price contracts include firm fixed-price ("FFP") and
fixed-price incentive ("FPI") contracts. The Company assumes greater
financial risks and has potentially greater profit margins on FFP contracts
than on FPI contracts because full responsibility is placed on the Company in
FFP contracts to provide stipulated services for a firm price. An FPI
contract provides for an adjustment to profit based upon how effectively the
Company controls costs. Under an FPI contract, the Company and the customer
agree to share any overrun or underrun realized when the final cost is
different than the established target cost. In the case of an overrun, the
Company and the customer share up to the established ceiling price at which
point the Company bears the total risk. Both of these types of contracts
provide the incentive of higher profits when costs are controlled, along with
the associated risk of lower profits when target costs are exceeded or
ultimately a loss when costs exceed the ceiling price. For the year ended
December 31, 1996, 6.7% of the Company's contract revenues derived from
fixed-price contracts were FPI and the remainder FFP.
GOVERNMENT CONTRACT REQUIREMENTS. Many of the government programs in
which the Company participates as a contractor or subcontractor may extend
for several years, but they are normally funded on an annual basis. The
Company's U.S. government contracts and subcontracts are subject to
modification, curtailment and termination in the event of changes in
government funding. Accordingly, all of the Company's contracts and
subcontracts involving the U.S. government may be terminated at any time by
the U.S. government, without cause, for the convenience of the U.S.
government. If a U.S. government contract is terminated for convenience, the
Company would be entitled to receive compensation for the services provided
or costs incurred at the time of termination and a negotiated amount of the
profit on the contract.
Among the factors that could materially adversely affect the Company's
U.S. government contracting business are budgetary constraints, changes in
fiscal policies or available funding, reduction of defense or aerospace
spending, changes in U.S. government programs or requirements, curtailment of
the U.S. government's use of technology services firms, the adoption of new
laws or regulations, technological developments and general economic
conditions. In addition, increased competition and U.S. government budget
constraints in the defense area, and in areas not related to defense, may
limit future growth in Company revenues from U.S. government agencies and
contractors.
The Company's costs and revenues under government contracts are subject
to adjustment as a result of annual audits performed by the DCAA on behalf of
the DOD. Audits of the Company by the DCAA and other agencies have been
completed for all years through 1991 without material adjustment.
RESEARCH AND DEVELOPMENT
The Company's research and development programs seek to develop new
products and services that will improve the Company's ability to meet the
current and future needs of its customers. Through its research and
development programs, CTA continues to broaden its capability and skills, as
exemplified by its innovations in small satellite technologies such as a
low-cost reaction wheel, the use of GPS for attitude determination, the
adaptation of commercial battery technology, the development of composite
structures, the development of Digital Solid State Memory and the use of
space-borne encryption. Also in the satellite arena, CTA has developed a new
generation of lightweight satellites, the most stable gravity gradient
satellite, the first LEO constellation of communications satellites, the
first commercial imaging remote sensing satellites and the first small DBS
satellite.
The Company's research and development programs are funded through a
combination of Independent Research and Development ("IRAD") and Contract
Research and Development ("Contract R&D"):
IRAD. IRAD refers to research and development costs that are not
sponsored by, or required in performance of, a contract or grant. IRAD
projects are designed to enhance the performance and effectiveness of the
Company's day-to-day engineering operations. The Company has developed tools
and methodologies for efficient software development including automated code
generators that may have future commercial applications. To date, product
development related revenues have not been significant. No other party has an
interest in any future revenues derived from potential IRAD products. The
Company's selling, general and administrative expenses include IRAD of $1.0
million, $2.6 million and $0.9 million for 1996, 1995 and 1994, respectively.
The significant increase in 1995 stems from IRAD work performed related to
the Company's Indostar contract.
CONTRACT R&D. Contract R&D projects are specifically contracted for and
funded by the federal government. The primary purpose of Contract R&D
programs is to advance scientific and technical knowledge and to apply that
knowledge to achieve specific goals of the agency providing the funding. The
Company is currently performing Contract R&D for the Advanced Research
Projects Agency ("ARPA"), an agency of the DOD. The Company-funded
development of ProcessTOOLS is being augmented by ARPA for the application of
ProcessTOOLS to ARPA's Agile Manufacturing and Maritech Programs. The Company
expended $0.9 million and $3.0 million in 1996 and 1995, respectively. No
expenditures were made in 1994. The Company intends to pursue additional
funding sources in the future. Certain future Contract R&D programs may
provide that the Company expend non-reimbursable funds as a condition of
sharing the benefits of the research with the sponsoring agency or customer.
The Company expended no such funds in 1996, 1995 or 1994.
Under the terms of most Contract R&D programs, the Company generally has
interests in any future revenues derived from products eventually arising
from the research, depending in part on the terms and conditions of the
individual Contract R&D program. To the extent that Contract R&D programs
with the U.S. government lead to a marketable product or process, the Company
generally will own the right to such product or process and may acquire
patent protection, subject to the government's right to use such product or
process on a royalty-free basis. No such revenue from any such product or
process has been realized to date.
BACKLOG
The Company's total backlog was approximately $547 million, $511 million
and $453 million at December 31, 1996, 1995 and 1994, respectively. The
Company's backlog is comprised of the unrealized portions of the Company's
U.S. government contracts, U.S. government-related contracts and commercial
contracts. Backlog for government and government-related contracts consists
of either funded or unfunded backlog. Funded backlog consists of the dollar
portion of contracts that is currently appropriated by the government client
or other clients and allocated to the contract by the purchasing government
agency or otherwise authorized for payment by the client upon completion of a
specified portion of work. Unfunded backlog consists of the total unrealized
award value of the contract less the contract value funded by the customer,
and includes multi-year incrementally funded contracts, delivery orders, and
task orders which remain at the customers' discretion to fund. Unfunded
government backlog comprised approximately 73% of total backlog at December
31, 1996, as compared to approximately 79% of total backlog at December 31,
1995. Commercial and other backlog comprised approximately 13% of total
backlog at December 31, 1996 as compared to approximately 9% of total backlog
at December 31, 1995.
The total backlog at December 31, 1994, 1995, and 1996, for the Company
and for each of the Space and Telecommunications Systems and IT businesses is
set forth below:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995 1996
THE COMPANY
<S> <C> <C> <C>
Government:
Funded............. $66 $61 $75
Unfunded........... 367 406 399
Commercial and Other.. 20 44 73
Total................ $453 $511 $547
SPACE AND TELECOMMUNICATIONS SYSTEMS
Government:
Funded............. $11 $9 $13
Unfunded........... 25 80 75
Commercial and Other.. 20 44 29
Total................ $56 $133 $117
INFORMATION TECHNOLOGY SERVICES
Government
Funded............. $55 $52 $62
Unfunded........... 342 326 324
Commercial and Other.. 0 0 44
Total................ $397 $378 $430
</TABLE>
The RID contract and the NASA Code 740 contract represented
approximately 10% and 11%, respectively, of total backlog at December 31,
1996. Approximately $28 million or 5% of total backlog at December 31, 1996
was related to the Indostar contract. The Company expects that approximately
30% of the Company's total backlog as of December 31, 1996 will result in
revenues in the year ending December 31, 1997.
Although unfunded backlog can include up to the stated award value of
the contract including renewals or extensions that have been priced but still
remain at the discretion of the customer whether to fund, the Company, to be
conservative, often recognizes only a portion of stated award values on
multi-year contracts into its backlog records. Because many of the Company's
contracts are multi-year contracts, total backlog may include revenues
expected to be realized several years into the future. The unfunded backlog
may not be an indicator of future contract revenues or earnings because there
is no assurance that the unfunded portion of the Company's backlog will be
funded. In addition, most of the contracts included in backlog are subject to
termination for the convenience of the government customer.
INTERNATIONAL OPERATIONS
The Company recognized revenues from PT MediaCitra Indostar of $45.4
million (25.3% of total revenues) for the year ended December 31, 1996 as
compared to $58.1 million (26.8% of total revenues) in 1995 and $7.9 million
(5.5% of total revenues) in 1994.
The Company's future growth is dependent, in part, on continuing to
increase its sales to foreign customers and its expansion into additional
foreign markets. The Company expects that sales to foreign customers will be
an increasing portion of the Company's business, and while management
believes that the Company's experience serving the domestic market translates
into an ability to serve foreign customers, no assurance can be given that
the Company's efforts will succeed.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters in Rockville, Maryland
under a lease expiring in 1999. The Company currently owns a 6.75% fixed
ownership interest in the partnership that owns the corporate headquarters
building. In addition, the Company has principal leased facilities in
Ridgecrest, California; Colorado Springs, Colorado; McLean, Virginia and
Bedford, Massachusetts. The Company believes that these properties are
adequate to serve the Company's present business operations. The Company
believes that if it were unable to renew the leases on any of its facilities,
other suitable facilities would be available to meet the Company's needs.
ITEM 3. LEGAL
On October 10, 1996, Thomas van der Heyden ("Plaintiff"), an employee of
the Company, filed suit against the Company in the Circuit Court of Maryland
for Montgomery County. In his complaint, Plaintiff alleges breach of
contract, breach of fiduciary duty, tortious interference with contractual
and business relationships, fraud, and breach of duty of good faith and fair
dealing, all in connection with a Profit Sharing Agreement dated July 6, 1993
("Profit Sharing Agreement") between van der Heyden and the Company.
Specifically, the complaint alleges that the Company failed and refused to
make payments purportedly due and owing to him under the Profit Sharing
Agreement with respect to the Indostar contract, failed to reimburse him for
expenses relating to his employment, and made certain misrepresentations to
him which caused him to modify his then-existing profit sharing arrangement
with the Company to his detriment and interfered with his ability to develop
new business. The Profit Sharing Agreement provides for the Plaintiff to
receive 25% of the profit (as defined therein) on the Indostar contract.
The Company intends to vigorously defend itself against Plaintiff's
claims. However, as the litigation is in its earliest stages, the Company is
unable to predict the outcome or its potential effect on the Company's
financial condition or results of operations. On October 18, 1996, the
Company obtained a stay of the proceeding on the grounds that the Profit
Sharing Agreement provides that all disputes regarding the Profit Sharing
Agreement are to be decided by arbitration. There can be no assurance, that
such litigation, if adversely determined, would not have a material adverse
effect on the Company's financial condition or results of operations.
The Company is currently involved in certain legal proceedings
incidental to the ordinary course of its business. The Company does not
believe that any liabilities relating to the legal proceedings to which it is
a party are likely to be, individually or in the aggregate, material to its
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the stock of the
Company or its subsidiaries. However, the Company has maintained a limited
market ("Limited Market") as described below to provide liquidity for its
Common Stock.
THE LIMITED MARKET
Since its inception, the Company has pursued a policy of remaining
essentially employee owned and, therefore, there has never been a public
market for the Common Stock. Prior to September 1992, the Company has
offered to repurchase shares from shareholders on several occasions primarily
for contribution to the Company's Employee Stock Ownership Plan ("ESOP"). In
order to provide liquidity for its shareholders, however, the Company
established a Limited Market through an agreement with Capitol Securities
Management, Inc. ("Capitol") whereby Capitol maintains the Limited Market.
From September 1992 through December 1996, the Company has conducted five
trades in the Limited Market, one each in 1992, 1993 and 1995 and two in
1994. There were no trades conducted in 1996 as the Company had filed a
Registration Statement for an initial public offering. The Registration
Statement was subsequently withdrawn.
It is anticipated that the Limited Market will continue to permit
existing shareholders to sell shares of Common Stock on at least one
predetermined date each year (the "Trade Date"). Such sales will be made at
the prevailing Formula Price to employees, consultants and directors of the
Company who have been approved by the Board of Directors or the Stock Option
Committee of the Board of Directors, pursuant to the 1991 Plan, as being
entitled to purchase up to a specified number of shares of Common Stock. In
addition, the Company will be authorized, but not obligated, to purchase
shares of Common Stock in the Limited Market to satisfy its requirements
(including for sale to the trustees of the Company's ESOP), but only if and
to the extent that the number of shares offered for sale by shareholders
exceeds the number of shares sought to be purchased by authorized buyers.
In the event that the aggregate number of shares offered for sale by the
sellers is greater than the aggregate number of shares sought to be purchased
by authorized buyers and the Company, offers to sell will be treated in the
following manner: Offers to sell 1,000 shares or less of Common Stock or up
to the first 1,000 shares if more than 1,000 shares of Common Stock are
offered by any seller will be accepted first. Offers to sell shares in
excess of 1,000 shares of Common Stock will be accepted on a pro-rata basis
based on the number of shares owned by those shareholders wanting to sell
shares. If, however, there are insufficient purchase orders to support the
primary allocation of 1,000 shares of Common Stock or less per seller, then
the purchase orders will be allocated equally among all of the proposed
sellers up to the total number of shares offered for sale. Subject to
applicable legal or contractual restrictions and the availability of funds,
the Company currently intends to purchase sufficient shares on each Trade
Date so that each shareholder wishing to sell shares will be able to sell at
least 1,000 shares. Such restrictions include those contained in the
Colorado Corporation Code which limit repurchases of Common Stock to the
Company's available surplus and restrictions in contracts, currently in
existence or which may be entered into, such as the Company's credit
agreement, which might restrict the Company's ability to buy back Common
Stock in the future under certain circumstances. The Company does not
currently have available the funds to purchase shares in the Limited Market
and is not currently making such purchases until such time as it has
completed one or more financing alternatives it is currently pursuing.
To the extent that the aggregate number of shares sought to be purchased
exceeds the aggregate number of shares offered for sale, the Company may, but
is not obligated to, sell authorized but unissued shares of Common Stock in
the Limited Market. All sellers in the Limited Market, other than the
Company, pay Capitol a commission generally equal to 1.5 percent of the
proceeds from such sales. No commission is paid by purchasers in the Limited
Market.
Prior to each Trade Date, Capitol will receive sell orders from
shareholders and buy orders from authorized purchasers and the Company. On
each Trade Date, Capitol will match sellers and buyers of the Company's
Common Stock (including, to the extent applicable, the Company) according to
the proration rules described above. Capitol will then forward payments to
sellers, minus the commission, and will issue in book-entry form, the shares
of Common Stock to the purchasers. Capitol will not buy or sell shares of
Common Stock for its own account or as an agent for the Company.While the
Company established the Limited Market to attempt to provide liquidity to
shareholders, there can be no assurance that there will be sufficient
liquidity to permit shareholders to resell their shares in the Limited
Market.
All persons who purchase shares of Common Stock in the Limited Market
will be required to enter into Stock Restriction Agreements with the Company.
Such agreements provide that, if the purchaser is an employee, consultant or
director of the Company, upon the purchaser's termination of employment or
affiliation with the Company, the Company will have the right to repurchase
all of the shares purchased pursuant to that agreement which such person owns
of record or beneficially owns at the time of such termination, generally at
the prevailing Formula Price at the time of such termination; provided,
however, that to the extent such Formula Price is less than the price paid by
such purchaser for any of his shares, the Company will not repurchase such
shares without the shareholder's consent. Such repurchase, if elected by the
Company, will be effected within one year following such termination. The
Stock Restriction Agreements also afford the Company a right of first refusal
with respect to the shares of Common Stock in the event that the holder
desires to sell or transfer his or her shares other than in the Limited
Market.
THE FORMULA
The purchase price of the shares of Common Stock, other than certain
shares issuable upon exercise of previously granted options, will be at the
formula price described below (the "Formula Price"). The Formula Price is
established by the Board of Directors of the Company based on the performance
of the Company as measured by certain factors listed below as well as certain
other factors also listed below which are determined based on the
recommendation of an independent appraiser. The Formula Price will be
redetermined at least annually. The price is determined according to the
following formula (the "Formula"): the price per share is equal to the
product of (i) a number representing one minus the discount for the limited
liquidity of the stock ("D") and (ii) a fraction, the denominator of which is
the number of outstanding shares and share equivalents ("Wi") and the
numerator of which is the sum of (A) the book value of the Company at the end
of the applicable period ("BV") and (B) a number which is the product of (a)
5.08 ("K") and (b) a number equal to the product of (I) a market index ("MI")
based on certain comparable companies, (II) the after tax profits from
operations for the last 12 month period ("P") and (III) a fraction, the
denominator of which is 2 and the numerator of which is the sum of (A) the
change in contract margin ("CM"), which is a number equal to the contract
margin for the last 12 months divided by the contract margin for the prior 12
month period, where contract margin is the contract fee as a percentage of
contract cost adjusted for program reserves and allowances and (B) the change
in revenue growth ("R"), which is a number equal to a fraction, the numerator
of which is revenue for the last 12 months and the denominator of which is
the revenue for the prior 12 month period times the change in the consumer
price index for that period. The Formula Price of the Common Stock expressed
as an equation, is as follows:
Formula Price = D((BV+K(MI)(P)((CM+R)/2))/Wi)
The "discount factor" is a number which is intended to reflect the
discount for the limited liquidity of the Common Stock and the "market index"
is a number which is intended to reflect existing securities market
conditions. Both of these factors are established annually by the Board of
Directors based upon the recommendation of an independent appraisal firm.
The 5.08 multiplier is a constant representing the factor necessary to
equalize the initial stock price calculated by the Formula to the appraised
price for the Common Stock on the date the Formula was adopted. The
remainder of the factors will be based on the Company's historical financial
data.
The latest available Formula Price was $9.49 as of December 31, 1995.
PROCEDURES FOR DETERMINING FORMULA PRICE
The Formula Price is used to determine the Offering Price at which the
Common Stock will be sold and will trade in the Limited Market. The Formula
was adopted by the Board of Directors on November 15, 1991, with the advice
of the Company's independent appraiser. The Board of Directors believes the
Formula will result in a fair market value for the Common Stock within a
broad range of financial criteria.
Annually, the Company provides audited financial statements and other
data as requested by the independent appraiser. The independent appraiser
analyzes that data and recommends two factors of the Formula: the market
index ("MI") and the discount factor ("D"). Based on this recommendation,
the Board of Directors will determine the Formula Price. An independent
appraisal is used by the Board of Directors to validate that the Formula has
resulted in a price which fairly and reasonably reflects the fair market
value of the Common Stock.
Prior to the adoption of the Formula, the Company established a price
for the Common Stock based solely on an independent appraisal. Such
appraisal was required on an annual basis for purposes of valuing the assets
contained in the Company's ESOP and for determining the price at which the
ESOP could purchase shares of Common Stock.
PRICE RANGE OF COMMON STOCK
The following table sets forth the price per share (after giving effect
for all years presented for a 10 for 1 split of the Company's common stock in
April 1994) at which the Common Stock was appraised by the Company's
independent appraiser, Legg Mason Wood Walker, Inc., for the last nine years.
The 1992, 1993 and both 1994 appraisal prices were also the prices at which
shares were sold in the Limited Market for each of the following periods
ending on the dates set forth below.
<TABLE>
<CAPTION>
EFFECTIVE DATE OF APPRAISAL PRICE PER SHARE
<S> <C>
December 31, 1995 $9.490
December 31, 1994 $9.390
June 30, 1994 $8.970
December 31, 1993 $8.727
December 31, 1992 $7.165
December 31, 1991 $6.005
December 31, 1990 $4.176
December 31, 1989 $4.100
December 31, 1988 $4.030
December 31, 1987 $2.800
December 31, 1986 $1.775
</TABLE>
Report of Independent Appraiser
Legg Mason Wood Walker, Inc. ("Legg Mason") was engaged by the Company
to act as an independent appraiser for the Company. Legg Mason was selected
because it is a nationally recognized investment banking firm that has
extensive experience in the valuation of securities of all types, including
closely-held and seldom traded securities. In 1993, the Company paid Legg
Mason a placement agent fee of $525,000 in connection with the Company's
issuance of $15 million in new subordinated debt in a private placement.
In connection with the Board's determination of the Formula Price, Legg
Mason was asked to recommend to the Board of Directors (i) the discount
factor ("D") to reflect the limited liquidity of the Company's Common Stock
and (ii) the market index ("MI") to reflect existing securities market
conditions and provide to the Board of Directors an assessment as to whether
the Formula Price calculated was within a range which Legg Mason considered
reasonable.
Legg Mason has not yet issued their current appraisal report, pending
the outcome of the various financing alternatives being pursued by the
Company.
DIVISION OF MARKET REGULATION
The Company has had discussions with the staff of the Division of Market
Regulation concerning the operation of the Limited Market in compliance with
the Securities Exchange Act of 1934. While the Commission has not formally
indicated to the Company any specific concerns regarding the operation of the
Limited Market, they may do so in the future. If the Commission should raise
specific concerns with the Company in the future, the Company will take
requisite action to address the Commission's concerns.
HOLDERS OF COMMON STOCK
As of February 28, 1997, there were approximately 350 common
stockholders of the Company.
DIVIDENDS
It is the current policy of the Company to retain all earnings to
provide funds for the Company's growth. Therefore, the Company has no
current intention of paying cash dividends on the Common Stock. The Company
has not made any distributions to its shareholders since 1988.In December
1993, the Company entered into a note purchase agreement to secure $15
million in subordinated debt. Under the provisions of this agreement, the
Company is prohibited from paying dividends. The agreement expires after
1998. The Company's bank credit agreement also prohibits the payment of
dividends.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the years
in the five year period ended December 31, 1996 and as of December 31, 1992,
1993, 1994, 1995 and 1996 have been derived from the consolidated financial
statements of the Company. The consolidated financial statements for the five
years ended December 31, 1992 through 1996 have been audited by Ernst & Young
LLP, independent auditors. The data (in thousands) should be read in
conjunction with the consolidated financial statements, related notes, and
other financial information included elsewhere in this document.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992(1) 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Contract revenues. $115,109 $125,072 $143,071 $217,007 $179,703
Cost of contract
revenues......... 97,680 109,102 121,675 196,656 170,706
Selling, general and
administrative
expenses.........
8,574 7,169 8,950 9,798 9,194
Other expenses.... 1,259 1,492 833 318 12,355
Operating profit
(loss)........... 7,596 7,309 11,613 10,235 (12,552)
Interest expense.. 461 992 3,627 4,116 4,235
Income (loss) before
income
taxes............ 7,135 6,317 7,986 6,119 (16,787)
Provision (benefit) for
income taxes.....
3,252 2,779 3,434 2,448 (5,750)
Income (loss) from
continuing
operations....... 3,883 3,538 4,552 3,671 (11,037)
Income (loss) from
discontinued
operations, net of
income
taxes(2)......... 490 1,012 (93) (1,725) 0
Net income (loss). $4,373 $4,550 $4,459 $1,946 $(11,037)
Earnings (loss) per
share:
Continuing
operations..... $0.82 $0.75 $0.95 $0.78 $(2.49)
Discontinued
operations..... 0.10 0.22 (0.02) (0.37) 0.00
Earnings (loss) per
share........ $0.92 $0.97 $0.93 $0.41 $(2.49)
Weighted average number
of shares
outstanding...... 4,750 4,689 4,783 4,709 4,438
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents...... $ 269 $ 1,390 $ 3,902 $ 235 $ 16
Working capital... 16,332 24,987 20,638 19,713 13,721
Total assets...... 60,015 74,346 89,816 91,530 92,690
Short-term debt... 10,917 5,524 15,750 17,074 28,335
Long-term debt.... 7,670 20,418 17,765 17,431 18,510
Total stockholders'
equity...........
19,704 24,417 27,950 28,773 17,793
</TABLE>
(1) In July 1992, the Company acquired a 79% interest in CTASS for $10.3
million, $4.9 million of which was paid in cash with the remainder financed
by the selling shareholders at an imputed interest rate of 8.5% per annum.
Principal payments on the acquisition notes of $3.0 million and $2.4 million
were paid in July 1993 and July 1994, respectively. In July 1994, the Company
acquired the remaining CTASS common stock for $2.5 million, payable 50% in
cash and 50% in Common Stock. The Company paid the cash portion with payments
of $500,000, $375,000 and $375,000 in 1994, 1995 and 1996, respectively, and
the Common Stock portion with issuances of 57,293 shares in 1994, 39,936
shares in 1995 and 39,515 shares in 1996. The number of shares of Common
Stock issued as payment were based on the then current fair market value of
the Common Stock. The consolidated financial statements of the Company
reflect the results of operations of CTASS since July 1992.
(2) During 1995, the Company discontinued the operations of its Simulation
Systems Division, which manufactured aircraft flight simulators for sale or
lease, and sold its assets to a company principally owned by one of the
Company's principal stockholders. Results of operations have been restated
for the sale of the Simulation Systems Division. See "Certain Transactions"
and Note 13 to the Consolidated Financial Statements. The assets of the
division consisted primarily of a cockpit flight simulator and various fixed
assets, which together had an aggregate book value of $3.1 million, net of
accumulated depreciation.These assets were sold in September 1995 for two
notes secured by the assets with an aggregate principal amount of $2.2
million, bearing interest at the Company's borrowing rate and a 15% minority
interest in the entity acquiring the division, which has been assigned a
value of $0.2 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this document.
RESULTS OF OPERATIONS
The following tables set forth certain items in the Company's Statements
of Operations as a percentage of contract revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Contract revenues........................... 100.0% 100.0% 100.0%
Cost of contract revenues................... 85.0 90.6 95.0
Selling, general and administrative expenses 6.3 4.5 5.1
Other expenses.............................. 0.6 0.2 6.9
Operating profit (loss)..................... 8.1 4.7 (7.0)
Interest expense............................ 2.5 1.9 2.3
Income (loss) before income taxes........... 5.6 2.8 (9.3)
Provision (benefit) for income taxes........ 2.4 1.1 (3.2)
Income (loss) from continuing operations.... 3.2 1.7 (6.1)
Income (loss) from discontinued operations, net of
income taxes....................... (0.1) (0.8) 0.0
Net income (loss)........................... 3.1% 0.9% (6.1)%
</TABLE>
The following tables set forth certain items in the Company's Statements
of Operations by business segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
(In thousands of dollars)
Contract revenues:
<S> <C> <C> <C>
Information Technology Services... $107,450 $109,361 $99,963
Space and Telecommunications
Systems......................... 35,621 70,675 58,820
Launch Support.................. _ 36,971 20,920
Mobile Information and Communications
Services......... _ _ _
$143,071 $217,007 $179,703
Operating profit (loss):
Information Technology Services... $10,600 $5,883 $3,057
Space and Telecommunications
Systems......................... 1,846 4,128 (3,719)
Launch Support.................. _ 1,559 109
Mobile Information and Communications
Services......... - (1,017) (8,616)
Other expenses (833) (318) (3,383)
$11,613 $10,235 $(12,552)
</TABLE>
1996 COMPARED WITH 1995
CONTRACT REVENUES. Contract revenues decreased 20.8% to $179.7 million
in 1996 from $217.0 million in 1995, as a result of a $9.4 million decrease
in IT revenues and a $27.9 million decrease in Space and Telecommunications
Systems revenues.
IT contract revenues decreased 8.6% to $100.0 million in 1996 from
$109.4 million in 1995. An increase in IT revenue of $3.6 million on the RID
contract, $3.4 million on the Nebraska contract and $1.3 million on the
Maritech contract was more than offset by the decrease of $11.2 million on
the NAWC and NAWC follow-on contracts and $6.5 million on the Eastern Zone
contract. Revenues from contracts awarded in full and open competition
increased to $96.9 million or 96.9% of IT revenues in 1996 from $89.1 million
or 81.4% in 1995.
In the first quarter of 1996, the Company completed its five-year prime
contract with the NAWC at China Lake, California, the last of the Company's
significant contracts awarded during its period of eligibility for small
business awards, which ended in 1992. This contract represented $20.4 million
in revenues in 1995. Although it was ineligible to rebid for this contract as
the prime contractor, the Company is a major subcontractor to the small
business prime contractor who was awarded the NAWC follow-on contract in
April 1996, from which the Company receives approximately 45% of the contract
revenues. In 1996, the Company received revenues of $5.1 million from the
original NAWC contract and $4.1 million in revenues from the follow-on
contract.
The Company revised its estimates of the full contract value and
profitability of its Eastern Zone contract with the GSA, resulting in a
reduction in revenues and operating profit in 1996 of $2.6 million,
reflecting the Company's current estimate of the contract's profit at
completion. The Eastern Zone contract incurred significant start-up costs
related to the establishment of nine new facilities required for contract
performance and to difficulties encountered in cost-effective staffing of the
personnel required under the contract. The use of subcontract personnel to
fill critical positions resulted in cost overruns.
The Company initially expected that future contract performance over the
full contract term at originally anticipated staffing levels would result in
profit sufficient to offset early program losses. However, revenues on the
contract have not been sufficient to offset these losses and the Company no
longer anticipates sufficient future contract value to recover its start-up
costs. The Company has submitted claims against the U.S. government seeking
recovery of $1.5 million of the overrun. The Company has recorded these
claims as an unbilled receivable, against which it has certain reserves.
Additionally, the Company has implemented program controls to reduce future
costs which it believes will serve to minimize any potential cost overruns
during the remainder of the contract.
Total Space and Telecommunications Systems contract revenues in 1996
decreased 25.9% to $79.7 million from $107.6 million in 1995. Space and
Telecommunications Systems contract revenues, exclusive of Launch Support,
decreased 16.8% to $58.8 million in 1996 from $70.7 million in 1995. This
decrease in revenues is primarily due a decrease of $16.1 million on the SSTI
program and $3.3 million on the Comet contract, which was offset by an
increase of $7.2 million on the NASA Code 740 contract. Launch Support
contract revenues decreased 43.4% to $20.9 million in 1996 from $37.0 million
in 1995, due to $14.2 million in lower revenue on the Indostar program and
$2.6 million on the SSTI program, offset by an increase of $0.8 million on
the TSX-5 contract.
The Company increased reserves for estimates of costs at program
completion on the Indostar program that resulted in a $2.8 million reduction
in revenues and operating profit. The Company increased these reserves to
reflect the risks inherent in the integration and test phases of this
program. Indostar represents the Company's first GEO satellite effort and
the integration and test phase are believed by management to represent a
critical element in the remaining portion of the program. In establishing
these additional reserves, the Company assessed identifiable cost, schedule
and technical risk elements. The Company believes its reserves are adequate
to cover potential risks that could arise prior to the expected program
completion in mid-1997. There can be no assurance, however, that these
reserves will be adequate to cover these risks. The addition of these
reserves resulted in the reversal of $2.8 million of previously recorded
program profit, leaving $0.8 million in program profit from inception to
December 31, 1996.
The Mobile Information Communications Services business recorded no
revenues in 1996 or 1995.
COST OF CONTRACT REVENUES. Cost of contract revenues decreased to
$170.7 million, or 95.0% of contract revenues, in 1996 from $196.7 million,
or 90.6% of contract revenues, in 1995. This increase in cost of contract
revenues as a percentage of contract revenues resulted primarily from a
reduction in revenues related to reserves added to estimates at completion on
the Indostar program and reduction in revenues related to changes in the
estimated contract value on the Eastern Zone contract, as well as the
replacement of expiring high-margin contracts with new contracts bid at lower
margins. New contracts awarded to the Company reflect lower margins
consistent with the more highly competitive environment in which the Company
now competes. As the Company has replaced its older backlog of higher margin
contracts previously awarded under various small business programs with
federal contracts awarded in full and open competition, the cost of contract
revenues as a percentage of contract revenues has increased. Without giving
effect to the reduction in revenues due to the Indostar contract and the
Eastern Zone contract, the cost of contract revenues as a percentage of
contract revenues for 1996 was 92.2%.
SG&A. Selling, general and administrative expenses ("SG&A") for 1996
decreased 6.2% to $9.2 million, or 5.1% of contract revenues, from $9.8
million, or 4.5% of contract revenues, in 1995. Slightly higher than
anticipated costs in preparing and submitting bids in the 1995 period and
improved cost control in 1996 accounted for the change.
OTHER EXPENSES. Other expenses increased to $12.4 million in 1996 from
$0.3 million in 1995. The increase is due primarily to the write-off in the
fourth quarter of 1996 of the Company's investment in GEMnet of $6.4 million
and $0.9 million related to the Company's unsuccessful initial public
offering. Lower expenses in 1995 resulted from a reversal of certain amounts
in reserves in 1995 set aside in 1994 and from the allocation of the receipt
of insurance proceeds related to the loss of the Company's GEMstar satellite
due to a launch failure in 1995.
OPERATING PROFIT (LOSS). The Company had an operating loss of $12.6
million in 1996 compared to an operating profit of $10.2 million in 1995.
INTEREST EXPENSE. Interest expense increased to $4.2 million in 1996
from $4.1 million in 1995 due to higher average balances on the Credit
Facility due to increased capital expenditures and the development of
GEMtrak.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company had a $5.8 million
tax benefit for 1996 compared to a $2.4 million tax provision for 1995.
INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of the foregoing,
the Company had a loss from continuing operations of $11.0 million in 1996
compared to income from continuing operations of $3.7 million in 1995.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. During 1995, the Company
discontinued the operations of its Simulation Systems Division, which
manufactured aircraft flight simulators for sale or lease. The loss from
discontinued operations in 1995 was $1.7 million, net of tax benefits of $1.2
million.
NET INCOME (LOSS). The Company had a net loss of $11.0 million for
1996 compared to net income $1.9 million for 1995.
1995 COMPARED WITH 1994
CONTRACT REVENUES. Contract revenues increased 51.7% to $217.0 million
in 1995 from $143.1 million in 1994, as a result of a $1.9 million increase
in IT revenues and a $72.0 million increase in Space and Telecommunications
Systems revenues.
IT contract revenues increased 1.8% to $109.4 million in 1995 from
$107.5 million in 1994. Revenues from contracts awarded in full and open
competition increased to $89.1 million or 81.4% of IT revenues in 1995 from
$66.3 million or 61.7% in 1994.
Total Space and Telecommunications Systems contract revenues in 1995
increased 202.2% to $107.6 million from $35.6 million in 1994. Space and
Telecommunications Systems contract revenues, exclusive of Launch Support,
increased 98.4% to $70.7 million in 1995 from $35.6 million in 1994. This
increase in revenues is primarily due to $19.7 million from the Indostar
program, $16.6 million from the NASA SSTI program and $4.3 million from the
EarthWatch satellite program. Launch Support contract revenues were $37.0
million in 1995, the first year in which the Company recognized revenues
related to launch activities.
The Mobile Information Communications Services business recorded no
revenues in 1995 or 1994.
COST OF CONTRACT REVENUES. Cost of contract revenues increased to
$196.7 million, or 90.6% of contract revenues, in 1995 from $121.7 million,
or 85.0% of contract revenues, in 1994. This increase in cost of contract
revenues as a percentage of contract revenues resulted from approximately $1
million in start-up costs with no related revenues recorded by the Mobile
Information and Communications Services business and lower margins on $37.0
million in Launch Support for the Indostar and SSTI programs and on new
contracts awarded in 1995. Other factors contributing to a decrease in
contract margin include higher than anticipated start-up costs on the
Company's Eastern Zone contract and the NASA Code 740 contract, as well as
the replacement of expiring high-margin contracts with new contracts bid at
lower margins.
SG&A. SG&A increased to $9.8 million, or 4.5% of contract revenues, in
1995 from $9.0 million, or 6.3% of contract revenues, in 1994 due primarily
to increased bid and proposal expenditures.
OTHER EXPENSES. Other expenses decreased to $0.3 million in 1995 from
$0.8 million in 1994.
OPERATING PROFIT (LOSS). Operating profit declined 11.9% to $10.2
million in 1995 from $11.6 million in 1994.
INTEREST EXPENSE. Interest expense increased to $4.1 million in 1995
from $3.6 million in 1994. This increase resulted primarily from higher
balances on the line of credit under the Credit Facility due to increased
investment in space-related technologies, including the GEMnet program, and
to higher average interest rates during 1995.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes
declined to $2.4 million in 1995 from $3.4 million in 1994 as a result of a
reduction in the Company's effective tax rate.
INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of the foregoing,
income from continuing operations in 1995 decreased 19.4% to $3.7 million
from $4.6 million in 1994.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. During 1995, the Company
discontinued the operations of its Simulation Systems Division, which
manufactured aircraft flight simulators for sale or lease. Loss from
discontinued operations in 1995 was $1.7 million, net of tax benefits of $1.2
million, as compared to an operating loss for the Simulation Systems Division
of $0.1 million in 1994. The $1.7 million after-tax loss recorded in 1995
consisted of a loss from operations of $1.2 million and a loss from disposal
of $0.5 million. The assets of the division consisted primarily of a cockpit
flight simulator and various fixed assets, which had an aggregate book value
of $3.1 million, net of accumulated depreciation. These assets were sold in
September 1995 for two notes secured by the assets with an aggregate
principal amount of $2.2 million, bearing interest at the Company's borrowing
rate and a 15% minority interest in the entity acquiring the division, which
has been assigned a value of $0.2 million.
NET INCOME (LOSS). Net income in 1995 decreased 56.4% to $1.9 million
from $4.5 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net income (loss) was ($11.0 million), $1.9 million, and
$4.5 million in 1996, 1995 and 1994, respectively. Its cash flow provided by
(used in) operating activities was $(5.6 million), $2.4 million and $1.4
million in 1996, 1995 and 1994, respectively. The principal factors
accounting for the provision (use) of cash in operating activities in 1996
was the net loss of $11.0 million and an increase in accounts receivable and
other net assets of $6.6 million, offset by $5.6 million of depreciation and
amortization expense and the $6.4 million write-off of the investment in
GEMnet. The principal factors accounting for the provision (use) of cash in
operating activities in 1995 were a $0.7 million loss on the disposal of the
Simulation Systems Division, $3.2 million of depreciation and amortization
expense, $1.0 million provision for receivable allowances, $1.1 million of
accrued interest and changes in working capital accounts using $4.0 million
of cash. The principal factors accounting for the provision (use) of cash in
1994 were $2.2 million of depreciation and amortization expense, $1.0 million
accrued interest, $0.7 million other non-cash expenses and changes in working
capital accounts using $6.8 million of cash.
Cash used in investing activities totaled $6.2 million, $5.2 million and
$6.4 million in 1996, 1995 and 1994, respectively. The changes from period to
period primarily relate to fluctuations in the acquisition of furniture and
equipment and costs incurred for software development for sale to commercial
customers. Additions to furniture and equipment were $6.5 million, $4.3
million and $5.1 million in 1996, 1995 and 1994, respectively. Software
development expenditures were $0.1 million in 1996 and $0.8 million in each
of the years 1995 and 1994.
Cash provided by (used in) financing activities was $11.5 million, $(0.9
million) and $7.5 million in 1996, 1995 and 1994, respectively. Financing was
primarily provided by borrowings under the Credit Facility and offset by the
repayment of acquisition notes and the purchase of treasury stock for the
employee stock purchase plan. The Company's net borrowings under the Credit
Facility were $12.0 million, $1.3 million and $12.1 million for 1996, 1995
and 1994, respectively. Net purchases of treasury stock were $0.5 million,
$2.0 million and $3.8 million in 1996, 1995 and 1994, respectively.
In December 1993, the Company and its subsidiaries entered into an
agreement with a bank for a revolving credit facility providing the
availability to borrow up to $30,000,000 which includes a facility for
letters of credit up to $10,000,000. The revolving line of credit expired on
December 9, 1996 but has been extended until June 9, 1997. The current
arrangement provides an additional credit facility of $4,500,000 that is
reduced or eliminated upon collection of certain amounts on the Indostar
contract, completion of one or more private equity placements or at specified
dates through June 9, 1997.
The average daily loan balances under the Credit Facility were
$22.1 million, $14.2 million, and $13.6 million for 1996, 1995 and 1994,
respectively. The weighted average interest rate was 6.8%, 7.6%, and 6.1% for
1996, 1995 and 1994, respectively. At December 31, 1996, $28.3 million was
outstanding under the Credit Facility and there was one letter of credit
outstanding totaling $0.1 million.
The Company's cash flow during 1996 and the first quarter of 1997 has
been adversely impacted by a combination of operating losses and a
significant increase in accounts receivable not billable until certain
contract milestones are reached. The Company expects its liquidity to improve
substantially in the second quarter of 1997 upon completion of testing and
customer acceptance of its Indostar-1 direct broadcast satellite for a
commercial customer in Indonesia. A delay in satisfaction of contract
milestones or approval for payment by the customer could have a material
adverse effect on the Company's liquidity.
The Company has been unable to comply with certain of the original
financial covenants of its bank credit facility and subordinated debt
agreements since March 31, 1996, due to operating losses incurred. The
Company and its bank have agreed to modifications of the covenants through
the original maturity of the credit facility on December 9, 1996 and have
since agreed to extensions of the credit facility through June 9, 1997 at
negotiated terms that include, among other things, a waiver of the financial
covenants at December 31, 1996, relaxed covenants for the quarter ending
March 31, 1997 and a higher effective interest rate. The Company and the
holders of its subordinated debt have agreed to waivers of the financial
covenants through December 31, 1997 in exchange for a higher interest rate,
the extent of which is based on whether the Company raises new equity by June
30, 1997. The Company believes it has good relationships with its lenders and
that the lenders will continue to work with the Company as it seeks to
improve its financial condition. While the Company anticipates that it will
be able to enter into a new credit facility that includes a long term
revolving credit commitment, the inability of the Company to renew its
existing credit facility or to obtain a replacement credit facility on the
same or similar terms could have a material adverse effect on the Company's
liquidity, financial condition and results of operations.
The Company is pursuing various financing alternatives, including
raising additional equity capital, and, if necessary, would consider other
alternatives such as disposal of assets. The Company's future business
requirements and growth plans will require significant additional capital.
While the Company believes that working capital, cash flow from operations,
and available bank borrowings will provide adequate funds for continued
operations and any increased interest costs with respect to borrowings
through the end of 1997, additional sources of capital will be required to
continue to fund the Company's future business requirements and growth plans,
including its strategic initiatives of expanding its Space and
Telecommunications Systems and its Mobile Information and Communications
Services businesses. Accordingly, the Company expects that it will need to
incur indebtedness or raise additional equity capital to fund its anticipated
growth. There can be no assurance that the Company will be able to obtain
such financing on favorable terms or at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included under Item 14(a) of
this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
directors and executive officers of the Company as of December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
C.E. Velez 56 President, Chief Executive Officer and Chairman
of the Board
Ricardo de Bastos 59 President-Space and Telecommunications Systems
and Director
Raymond V. McMillan 63 President- Information Technology Services and
Director
George S. Sebestyen(3) 65 President-CTASS
Gregory H. Wagner 48 Executive Vice President, Chief Financial Officer
and Treasurer
Terry J. Piddington 53 Executive Vice President
Emanuel J. Fthenakis(1)(3)
68 Director
Harvey D. Kushner(1)
66 Director
George W. Morgenthaler(2)
69 Director
James M. Papada, III(2)
48 Director
Arturo Silvestrini(2)
66 Director
John L. Slack(2) 58 Director
John W. Townsend, Jr.(1)(3)
73 Director
</TABLE>
___________
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3) Resigned subsequent to December 31, 1996.
___________
Dr. C.E. "Tom" Velez, a founder of the Company, has been President and
Chairman of the Board since the Company's organization in 1979. Prior to
founding the Company, Dr. Velez was employed by Martin Marietta Aerospace for
three years as Director, Software Engineering Research and Development, and
was previously employed at the NASA Goddard Space Flight Center for 12 years
in various positions including Chief of the Systems Development and Analysis
Branch. Dr. Velez is also a director of Constellation and EarthWatch.
Ricardo de Bastos has been Executive Vice President of the Company since
April 1996 and as a Director of the Company since August 1996. Prior to
joining CTA, he was employed for more than 36 years by Astro Space which has
been a division of RCA, General Electric and Martin Marietta and is currently
a division of Lockheed Martin. From 1991 through 1993, Mr. de Bastos was
Director of Commercial Business Development at General Electric AstroSpace.
From 1994 to 1995, he was Vice President, Business Development and Advanced
Programs at Martin Marietta AstroSpace. From 1996 until joining CTA, he was
Executive Vice President with the Lockheed Martin AstroSpace Commercial
Company.
Raymond V. McMillan has been a Director of the Company since August 1996
and President of Information Technology Services since April 1996 and before
that had been Executive Vice President of the Company since February 1991.
From 1988 to 1991, he was a Vice President of the Company. From 1984 to 1987,
he was a Brigadier General in the Air Force responsible for management of the
integration and test of the DOD's Integrated Tactical Warning and Attack
Assessment System.
George S. Sebestyen was President of CTASS, a company he founded in
1978. Prior to 1978, Dr. Sebestyen was Vice President and General Manager of
the Navy Systems and Advanced Projects Division of the Boeing Aerospace
Company.
Gregory H. Wagner has been Executive Vice President and Chief Financial
Officer and Treasurer of the Company since November 1992. From 1988 to 1992,
he was Vice President of Finance of the Company. Mr. Wagner was previously
employed with Martin Marietta Aerospace for ten years in various positions,
most recently as Director of Business Management.
Terry J. Piddington has been Executive Vice President of the Company
since February 1987. From 1985 to 1987, he was a Vice President of the
Company's Systems Engineering Services Division.
Emanuel J. Fthenakis was a Director of the Company from August 1992
until January 1997. From 1971 to 1991, he was employed by Fairchild
Industries, serving as CEO from 1985 to 1991 and Chairman of the Board from
1986 to 1991. Mr. Fthenakis has been President of CEF Corporation since its
inception in August 1977. Since 1991, the Company has had a consulting
agreement with CEF Corporation.
Harvey D. Kushner has been a Director of the Company since July 1989.
Mr. Kushner formed Kushner Management Planning Corporation in 1988 which is a
professional services firm advising in management, business and technology
development. From 1987 to 1988, he was an officer of Atlantic Research
Corporation. Prior to 1987, Mr. Kushner had been employed by the ORI Group
for 33 years, having served as Chairman of the Board of Directors, Chief
Executive Officer, and President for 20 years.
George W. Morgenthaler has been a Director of the Company since
August 1991. From 1986 to the present, he has served on the faculty of the
University of Colorado at Boulder as Professor, Aerospace Engineering
Sciences. He previously served four years as Department Chairman and
Associate Dean of the College of Engineering and Applied Science. From 1960
to 1986, he was with Martin Marietta; his last position was as Vice President
of Energy, Technology and Special Products. He is on the Board of Directors
of Dynamic Materials Corp., a NASDAQ company.
James M. Papada, III has been a Director of the Company since August
1996. Since prior to 1991, he has been a senior partner in the corporate
department of the law firm of Stradley, Ronon, Stevens & Young, a limited
liability partnership in Philadelphia, Pennsylvania, specializing in merger
and acquisition transactions. He is also the Chairman of the Board of
Technitrol, Inc., a multi-national, diversified manufacturing company listed
on the New York Stock Exchange. He is also a Director of ParaChem Southern,
Inc., a manufacturer of specialty chemical products. From February 1983 until
December 1987, Mr. Papada was President and Chief Operating Officer of Hordis
Brothers, Inc., a privately held glass fabricator.
Arturo Silvestrini has been a Director of the Company since August 1991.
Since November 1991 he has been President and CEO of Earth Observation
Satellite Corporation. From 1965 to 1991, he was with Computer Sciences
Corporation, most recently as Senior Vice President for European operations.
John L. Slack has been a Director of the Company since August 1991. From
1977 to 1980, he was Vice President, Command and Information Systems of
Martin Marietta. In 1985, he began a systems engineering and professional
services firm. Mr. Slack is currently a Director, President and CEO of DBA
Systems, Inc.
John W. Townsend, Jr. was a Director of the Company from August 1991
until January 1997. From 1987 to 1990, he was Director of the National
Aeronautics and Space Administration's Goddard Space Flight Center. He was
formerly a member of the advisory board of Loral Corporation. Since 1990, Mr.
Townsend has acted as a self-employed consultant.
Executive officers are reviewed annually by the Board of Directors and
serve at the pleasure of the Board.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation
for 1996, 1995 and 1994 of the Company's Chief Executive Officer and the four
other most highly compensated executive officers in 1996 (the "Executive
Officer Group") for services rendered in all capacities to the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
Other
Annual Restricted All Other
NAME AND PRINCIPAL Compensation Stock Awards Option Compensation
POSITION(S) YEAR Salary ($) Bonus ($) ($)(2) ($) Awards(#) ($)(3)
<S> <C> <C> <C> <C> <C> <C> <C>
C.E. Velez 1996 276,743 -- 1,870 -- 29,505 5,700
(1)President, Chief 1995 253,454 -- 1,691 -- -- 6,300
Executive Officer and 1994 243,600 93,200 926 -- -- 4,500
Chairman of the Board
Ricardo de Bastos(4) 1996 134,616 -- 1,441 125,000 51,342 338,960(5)
President-Space and 1995 -- -- -- -- -- --
Telecommunications 1994 -- -- -- -- -- --
Systems and Director
George S. Sebestyen 1996 198,846 -- 3,227 -- 21,075 5,700
President-CTASS 1995 191,219 -- 3,008 -- -- 169,300(6)
1994 181,002 31,500 -- -- -- 24,583
Raymond V. McMillan 1996 182,779 -- 2,815 -- 89,494 12,180
President-Informa- 1995 166,385 -- 2,616 -- -- 16,915
tion Technology 1994 157,500 41,504 599 -- 20,000 14,207
Services
Gregory H. Wagner 1996 167,900 -- 856 -- 42,914 5,700
Executive Vice 1995 150,007 -- 768 -- -- 27,085
President, Chief 1994 147,000 62,595 558 -- -- 8,864
Financial Officer and
Treasurer
</TABLE>
___________
(1) Dr. Velez currently has outstanding certain loans from the Company. See
Item 13. "Certain Relationships and Related Transactions."
(2) Represents long term disability premiums and group life insurance
premiums for amounts in excess of $50,000.
(3) Includes amounts of the Company's contributions allocated to
participants' accounts pursuant to the Company's 401(k) plan and ESOP, other
relocation reimbursements and miscellaneous cash payments pursuant to the
Company's cafeteria plan.
(4) Mr. de Bastos joined the Company in April 1996 at an annual salary of
$200,000.
(5) Includes $125,000 (after tax) and relocation expense of $131,003 paid in
connection with hiring.
(6) Includes payment of $160,000 pursuant to the award of a commercial
contract.
OPTION GRANTS DURING 1996
The following table sets forth information concerning options granted in
fiscal 1996 to each member of the Executive Officer Group.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR ($/SH) DATE VALUE($)(1)
<S> <C> <C> <C> <C> <C>
C.E. Velez 29,505 11.62% 9.49 3/31/01 112,709
Ricardo de Bastos 25,000 9.84% 9.49 12/31/06 95,500
26,342 10.37% 9.49 6/30/06 100,626
George S. Sebestyen 21,075 8.30% 9.49 3/31/01 80,506
Raymond V. McMillan 20,000 7.87% 9.49 12/31/06 76,400
25,000 9.84% 9.49 3/31/00 95,500
25,000 9.84% 9.49 1/31/01 95,500
19,494 7.67% 9.49 3/31/01 74,467
Gregory H. Wagner 25,000 9.84% 9.49 12/31/06 95,500
17,914 7.05% 9.49 3/31/01 68,431
</TABLE>
____________
(1) The Company uses the Black-Scholes model to estimate the fair value of
options, assuming a risk-free interest rate equal to the 90 day U.S. Treasury
Bill rate, expected lives of 5 to 10 years, an expected volatility factor of
.23 and no expected dividends.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of
stock options during fiscal 1996 and the number and value of unexercised
stock options held at year end by each member of the Executive Officer Group.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money Options
Options at FY-End at
Shares (#) FY-End ($)(1)
Acquired on Value Exercisable/ Exercisable/
NAME Exercise(#) Realized($) UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
C.E. Velez -- -- 0/29,505 0/0
Ricardo de -- -- 8,781/42,561 0/0
Bastos
George S. -- -- 0/21,075 0/0
Sebestyen
Raymond V. -- -- 5,000/106,494 14,120/2,824
McMillan
Gregory H. 73,000 457,122 0/42,914 0/0
Wagner
</TABLE>
___________
(1) There was no public trading market for the Common Stock on December 31,
1996. Accordingly, solely for purposes of this table, the values in this
column have been calculated on the basis of an estimated market price of
$7.00 per share, less the aggregate exercise price of the options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with regard to the
beneficial ownership of the Common Stock as of December 31, 1996 by (i) each
person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director, each executive
officer and each member of the Executive Officer Group and (iii) all current
directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
Shares Beneficially Percent Beneficially
NAME OF BENEFICIAL OWNER OWNED (1) OWNED(2)
<S> <C> <C>
5% Stockholders:
C.E. Velez 2,550,000 56.0%
ESOP 514,720 11.3
B.A. Claussen 499,796(3) 11.0
Terry J. Piddington 241,707 5.3
Directors and executive officers:
C.E. Velez 2,550,000 56.0
Terry J. Piddington 241,707 5.3
George S. Sebestyen 136,744 3.0
Gregory H. Wagner 74,400 1.6
Raymond V. McMillan 22,918(4) *
John W. Townsend, Jr. 14,225(5) *
George W. Morgenthaler 10,028(6) *
John L. Slack 4,435 *
Harvey D. Kushner 4,073(7) *
Ricardo de Bastos 8,781(8) *
Emanuel J. Fthenakis 0 *
James M. Papada, III 737 *
Arturo Silvestrini 526 *
All current directors and
executive
officers as a group (13 persons
as of December 31, 1996)
3,068,574 67.4%
</TABLE>
___________
* Less than 1%.
(1) Except as otherwise indicated, the persons in this table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them, subject to community property laws where
applicable andsubject to the information contained in the footnotes to this
table. Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or group to acquire them as of December 31, 1996 are
treated as outstanding only for purposes of determining the number of and
percent owned by such person or group. All share amounts are exclusive of
shares beneficially owned through the ESOP.
(2) The number of shares of Common Stock deemed outstanding as of December
31, 1996 was 4,552,648 shares.
(3) Includes non-qualified options to purchase 100,000 shares of Common
Stock granted under the 1991 Plan, which are currently exercisable as of
December 31, 1996.
(4) Includes non-qualified options to purchase 6,000 shares of Common Stock
granted under the 1991 Plan which are currently exercisable as of
December 31, 1996.
(5) Includes non-qualified options to purchase 3,508 shares of Common Stock
granted under the 1991 Plan which are currently exercisable as of
December 31, 1996.
(6) Includes non-qualified options to purchase 3,935 shares of Common Stock
granted under the 1991 Plan which are currently exercisable as of
December 31, 1996.
(7) Includes non-qualified options to purchase 822 shares of Common Stock
granted under the 1991 Plan which are currently exercisable as of December
31, 1996.
(8) Includes non-qualified options to purchase 8,781 shares of Common Stock
granted under the 1991 Plan which are currently exercisable as of December
31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1995, the Company discontinued the operations of its Simulation
Systems Division, which manufactured aircraft flight simulators for sale or
lease. The assets of the division consisted primarily of a cockpit flight
simulator and various fixed assets, which had an aggregate value of $3.1
million, net of accumulated depreciation. These assets were sold on
September 1, 1995 to a company principally owned by Mr. Claussen, one of the
Company's principal stockholders, for two notes secured by the assets with an
aggregate principal amount of $2.2 million, bearing interest at the Company's
borrowing rate which has ranged between 6.00% and 7.75% per annum, and a 15%
minority interest in the entity purchasing the division, which has been
assigned a value of $0.2 million. In March 1991, the Company made a loan to
Mr. Claussen of $368,623 for the purchase of his new residence. The interest
rate on this loan varied from 4.69% to 7.75% per annum and equaled the
interest rate on the Company's revolving line of credit under the Credit
Facility. Mr. Claussen paid all outstanding principal and accrued interest on
the loan in January 1996.
Between May 1993 and July 1995, the Company made loans aggregating
$500,000 to Dr. Velez for the purchase and construction of a new residence,
evidenced by a revolving promissory note due August 2000 bearing interest at
the same rates applicable to the Company under its Credit Facility, which
have ranged between 6.00% and 7.75% per annum. Interest on this loan is
payable annually in July of each year and has been paid in cash and, in 1996,
with the consent of the Company, in the form of a $43,000 promissory note due
February 19, 1997, bearing interest at the same rate as the revolving
promissory note. Both notes are secured by a pledge of shares of Common Stock
owned by Dr. Velez. At the direction of the Board of Directors on March 10,
1997, both notes were consolidated into one note, payable on demand, on or
before August 2000, with interest payable in annual installments from the
date of the note at the same rates paid by the Company.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(A) CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES: PAGE
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Financial Statement Schedules:
Schedule II - Valuation and Qualifying
Accounts and Reserves F-28
All other schedules for which provision is made in
the applicable accounting regulations of the SEC
are not required under the related instructions or
are inapplicable and therefore have been omitted.
Exhibits:
(23a) Consent of Ernst & Young LLP F-29
14(B) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the
fourth quarter of 1996.
14(C) FINANCIAL DATA SCHEDULE
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CTA INCORPORATED
We have audited the accompanying consolidated balance sheets of CTA
INCORPORATED and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CTA
INCORPORATED and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/Ernst & Young LLP
Washington, D.C.
March 26, 1997
F-1
<PAGE>
CTA INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.... $ 235 $ 16
Accounts receivable (Notes 1
and 3)...................... 58,586 62,327
Other current assets
(Note 4)................. 3,697 4,228
Recoverable income taxes
(Note 10).................... 2,521 3,537
---------- ---------
Total current assets........... 65,039 70,108
---------- ---------
Furniture and equipment (Notes 1
and 4)......................... 21,301 26,148
Accumulated depreciation and
amortization................. (14,517) (16,073)
---------- ---------
6,784 10,075
---------- ---------
Costs in excess of net assets
acquired (Note 1)............... 5,633 5,048
Other assets (Notes 1, 4, 6
and 10)........................ 6,812 7,459
GEMnet investment (Note 5)...... 7,262 --
---------- --------
Total assets.................... $ 91,530 $ 92,690
---------- --------
---------- --------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable--line of credit
(Note 7)....................... $ 16,324 $ 28,335
Accounts payable.............. 13,910 15,718
Accrued expenses (Note 4)..... 4,804 4,041
Excess of billings over costs
and contract prepayments...... 4,603 6,159
Other current liabilities..... 293 757
Acquisition notes payable--
current (Note 2).............. 750 --
Deferred income taxes (Note 10) 4,642 1,377
---------- ----------
Total current liabilities....... 45,326 56,387
---------- ----------
Subordinated notes payable
(Note 7)...................... 15,000 15,000
Other long-term liabilities..... 2,431 3,510
Commitments and contingencies
(Notes 7 and 12).............. -- --
Stockholders' equity (Note 9):
Preferred stock, $1.00 par value,
1,000,000 shares authorized
and none issued........... -- --
Common stock, $.01 par value,
20,000,000 shares authorized
and 5,000,000 issued....... 50 50
Capital in excess of par value 9,023 7,993
Retained earnings............. 25,587 14,550
---------- -----------
34,660 22,593
Notes receivable from employees -- (698)
Treasury stock, at cost
(660,554 shares in 1995 and
447,352 shares in 1996)... (5,887) (4,102)
---------- -----------
Total stockholders' equity...... 28,773 17,793
---------- -----------
Total liabilities and
stockholders' equity.......... $ 91,530 $ 92,690
---------- -----------
---------- -----------
</TABLE>
See accompanying notes.
F-2
<PAGE>
CTA INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Contract revenues................ $143,071 $217,007 $179,703
Cost of contract revenues........ 121,675 196,656 170,706
Selling, general and
administrative expenses........ 8,950 9,798 9,194
Other expenses................... 833 318 12,355
------- ------- -------
Operating profit (loss).......... 11,613 10,235 (12,552)
Interest expense................. 3,627 4,116 4,235
------- ------- -------
Income (loss) before income taxes 7,986 6,119 (6,787)
Income taxes (benefit) (Note 10). 3,434 2,448 (5,750)
------- ------- -------
Income (loss) from continuing
operations..................... 4,552 3,671 (11,037)
Loss from discontinued operations,
net of income taxes (Note 13)... (93) (1,725) --
------- -------- -------
Net income (loss)................ $ 4,459 $ 1,946 $(11,037)
------- -------- -------
------- -------- -------
Earnings (loss) per share:
Continuing operations.......... $ .95 $ .78 $ (2.49)
Discontinued operations........ (.02) (.37) --
------- -------- -------
Earnings (loss) per share........ $ .93 $ .41 $ (2.49)
------- -------- -------
------- -------- -------
Weighted average shares
outstanding...................4,783,333 4,709,268 4,437,543
--------- --------- --------
--------- --------- --------
</TABLE>
See accompanying notes.
F-3
<PAGE>
CTA INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK NOTES
------------ CAPITAL IN RECEIVABLE TREASURY STOCK
PAR EXCESS OF RETAINED FROM --------------
SHARES VALUE PAR VALUE EARNINGS EMPLOYEES SHARES COST
------ ----- --------- -------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1,
1994..... 5,000,000 $ 50 $ 8,098 $ 19,182 $ -- 474,190 $2,913
Purchase of
treasury
stock.... -- -- -- -- -- 397,573 3,486
Sale of
treasury
stock.... -- -- 121 -- -- (74,304) (528)
Issuance of
stock for
acquisition
(Note 2)... -- -- 156 -- -- (57,293) (344)
Exercise of
stock
options -- -- 18 -- -- (31,800) (142)
Sale of
treasury
stock to ESOP
(Note 8).... -- -- 109 -- -- (40,000) (240)
Sale of
treasury
stock to
401(k) plan
(Note 8).... -- -- 218 -- -- (70,000) (306)
Purchase of
treasury
stock from
ESOP (Note 8) -- -- -- -- -- 30,000 269
Compensatory
issuance
of common
stock to
employees/
directors.. -- -- 202 -- -- (74,181) (445)
Net income.. -- -- -- 4,459 -- -- --
------ ----- ----- ----- ------ ------ ------
Balance at
December 31,
1994..... 5,000,000 50 8,922 23,641 -- 554,185 4,663
Purchase of
treasury
stock..... -- -- -- -- -- 73,842 684
Exercise of
stock
options... -- -- (46) -- -- (39,500) (283)
Issuance of
stock for
acquisition
notes
payable
(Note 2)... -- -- 89 -- -- (39,936) (286)
Purchase of
treasury
stock from
ESOP(Note 8) -- -- -- -- -- 138,100 1,296
Compensatory
issuance
of common
stock to
employees/
directors.. -- -- 58 -- -- (26,137) (187)
Net income.. -- -- -- 1,946 -- -- --
------- ----- ----- ----- ----- ------ ------
Balance at
December 31,
1995...... 5,000,000 50 9,023 25,587 -- 660,554 5,887
Purchase of
treasury
stock..... -- -- -- -- -- 62,684 590
Sale of
treasury
stock..... -- -- 8 -- -- (3,913) (28)
Exercise of
stock
options... -- -- (1,452) -- -- (224,670) (1,935)
Tax benefit of
non-qualified
stock options
exercised... -- -- 377 -- -- -- --
Issuance of
stock for
acquisition
notes
payable
(Note 2)... -- -- 30 -- -- (39,515) (345)
Issuance of
stock to
employees
for notes
receivable. -- -- -- -- 698 -- --
Compensatory
issuance
of common
stock to
employees/
directors.. -- -- 7 -- -- (7,788) (67)
Net (loss).. -- -- -- (11,037) -- -- --
------- ----- --------- -------- ------- ------- ------
Balance at
December 31,
1996..... 5,000,000 $ 50 $ 7,993 $14,550 $ 698 447,352 $4,102
--------- ---- --------- -------- ------- ------- -------
--------- ---- --------- -------- ------- ------- -------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CTA INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................... $ 4,459 $ 1,946 $(11,037)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Loss on disposal of SIM.............. -- 718 --
Depreciation and amortization:
Furniture and equipment............. 2,418 2,877 3,734
Capitalized software development
costs.............................. -- 131 1,108
Other non-current assets............ 605 610 1,018
Deferred lease incentives........... (832) (382) (292)
Provision for receivable allowances.. (236) (990) 300
Accrued interest on subordinated debt 1,005 1,063 1,034
Other non cash expenses.............. 738 432 (8)
Changes in assets and liabilities:
Accounts receivable................. (8,181) (233) (4,106)
Recoverable income taxes............ 808 (2,707) (639)
Other assets........................ (449) 933 (2,353)
GEMnet investment................... (6,251) (1,011) 6,437
Accounts payable and accrued expenses 973 5,089 1,595
Excess of billings over costs and
contract prepayments............... 7,990 (4,816) 1,556
Deferred income taxes, net......... (1,660) (1,299) (3,900)
------- ------- -------
Net cash provided by (used in)
operating activities................ 1,387 2,361 (5,553)
------- ------- -------
INVESTING ACTIVITIES
Investments in furniture and equipment (5,072) (4,327) (6,469)
Capitalized computer software........ (846) (832) (87)
Acquisition of subsidiaries.......... (500) -- --
Other................................ -- -- 351
------- ------- -------
Net cash used in investing activities (6,418) (5,159) (6,205)
------- ------- -------
FINANCING ACTIVITIES
Net borrowings under bank line of
credit agreement.................... 12,109 1,324 12,011
Repayment of acquisition notes....... (2,643) (375) (375)
Proceeds from deferred lease
incentives.......................... 150 150 315
Purchase of treasury stock........... (3,755) (1,980) (458)
Proceeds from exercise of stock
options............................. 160 12 10
Sale of treasury stock to ESOP and
401(k) plan......................... 873 -- --
Other treasury stock sales........... 649 -- 36
------ ------ ------
Net cash provided by (used in)
financing activities................ 7,543 (869) 11,539
------ ------ ------
Net increase (decrease) in cash and
cash equivalents.................... 2,512 (3,667) (219)
Cash and cash equivalents at beginning
of period........................... 1,390 3,902 235
------ ------- ------
Cash and cash equivalents at end of
period.............................. $ 3,902 $ 235 $ 16
------ ------- ------
------ ------- ------
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Income taxes....................... $ 3,698 $ 5,115 $ 226
------ ------- ------
------ ------- ------
Interest........................... $ 2,638 $ 2,863 $ 2,836
------ ------- ------
------ ------- ------
Noncash investing and financing activities:
Investment in EarthWatch........... $ -- $ -- $ 2,038
------ ------- ------
------ ------- ------
Conversion of note to common stock. $ -- $ 375 $ 375
------ ------- ------
------ ------- ------
Common stock issued for notes...... $ -- $ 225 $ 473
------ ------- ------
------ ------- ------
Purchase of minority interest of
CTA Space Systems (Note 2):
Common stock acquired............ $ 2,500 $ -- $ --
Payment in CTA common stock...... (500) -- --
Cash payments.................... (500) -- --
------ ------- ------
Acquisition financing provided by
seller.......................... $ 1,500 $ -- $ --
------ ------- ------
------ ------- ------
</TABLE>
See accompanying notes.
F-5
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
CTA INCORPORATED (the "Company") provides diversified professional and
technical services to the aerospace and defense communities and other
governmental customers in the areas of systems engineering, software
development, and high-performance embedded systems development. The Company
also develops and manufactures satellites, satellite ground systems and
sensor systems. During 1995, the Company disposed of its aircraft simulation
systems business.
LIQUIDITY
The Company's cash flow during 1996 and the first quarter of 1997 has
been adversely impacted by a combination of operating losses and a
significant increase in accounts receivable not billable until certain
contract milestones are reached. The Company expects its liquidity to improve
substantially in the second quarter of 1997 upon completion of testing and
customer acceptance of its Indostar-1 direct broadcast satellite for a
commercial customer in Indonesia. A delay in satisfaction of contract
milestones or approval for payment by the customer could have a material
adverse effect on the Company's liquidity.
The Company has been unable to comply with certain of the original
financial covenants of its bank credit facility and subordinated debt
agreements since March 31, 1996, due to operating losses incurred. The
Company and its bank have agreed to modifications of the covenants through
the original maturity of the credit facility on December 9, 1996 and have
since agreed to extensions of the credit facility through June 9, 1997 at
negotiated terms that include, among other things, a waiver of the financial
covenants at December 31, 1996, relaxed covenants for the quarter ending
March 31, 1997 and a higher effective interest rate. The Company and the
holders of its subordinated debt have agreed to waivers of certain of the
financial covenants through December 31, 1997, in exchange for a higher
interest rate, the extent of which is based on whether the Company raises new
equity capital by June 30, 1997. The Company believes it has good
relationships with its lenders and that the lenders will continue to work
with the Company. While the Company anticipates that it will be able to enter
into a new credit facility that includes a long term revolving credit
F-6
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
commitment, the inability of the Company to renew its existing credit
facility or to obtain a replacement credit facility on the same or similar
terms could have a material adverse effect on the Company's liquidity,
financial condition and results of operations.
The Company is pursuing various financing alternatives, including
raising additional equity capital, and, if necessary, would consider other
alternatives such as disposal of assets. Management believes additional
capital is needed to fund its planned strategic initiatives and growth
objectives.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes, in particular, estimates of contract cost and revenues
used in the earnings recognition process. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities
of three months or less to be cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Depreciation is computed
based upon accelerated methods using estimated useful lives of three to ten
years. Leasehold improvements are amortized on a straight-line basis over the
terms of the leases, which range from one to ten years. Purchased computer
software used by the Company is amortized on a straight-line basis over a
three-year period.
F-7
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COSTS IN EXCESS OF NET ASSETS ACQUIRED
Costs in excess of net assets are amortized on a straight-line basis
over periods of 5 to 15 years. Accumulated amortization at December 31, 1995
and 1996 was $2,205,000 and $2,790,000, respectively.
CAPITALIZED COMPUTER SOFTWARE COSTS
Included in other assets at December 31, 1995 and 1996 are costs to
develop software to be marketed to third parties of $1,547,000 and $525,000,
respectively, net of accumulated amortization. The amount of software
development costs capitalized in 1994, 1995 and 1996 was $846,000, $832,000
and $87,000, respectively. Amortization of capitalized software costs is
provided on a product-by-product basis at the greater of the amount computed
using the ratio of current gross revenues for a product to the total of
current and anticipated future gross revenues or the straight-line method
over the estimated economic life of the product. An original economic life of
five years is assigned to capitalized computer software development costs.
Amortization expense was $ 0, $131,000 and $1,108,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
CONTRACT REVENUES AND RELATED CONTRACT COSTS
Revenues result from services performed for the U.S. government and
commercial customers under a variety of long-term contracts and subcontracts,
some of which provide for reimbursement of costs plus fixed fees and/or award
fees, and others which are fixed-price type. Revenues on cost-type contracts
are recognized as costs are incurred on the basis of direct costs plus
allowable indirect expenses and an allocable portion of a fixed fee. Award
fees on cost-type contracts are recognized as earned. Revenues on fixed-price
type contracts are recognized using the percentage-of-completion method of
accounting, primarily based on contract costs incurred to date compared with
total estimated costs at completion. Estimated contract revenue at completion
includes contract incentive fees at estimated realizable amounts. Revenues
from time and materials contracts are recognized based on hours worked at
amounts represented by the agreed-upon billing amounts. Costs are recognized
on the percentage-of-completion method of accounting based on the total
estimated cost at completion.
F-8
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
When adjustments in contract value or estimated costs are determined,
any changes from prior estimates are reflected in earnings in the current
period. The effect of these adjustments could be material to interim or
annual operating results. The Company provides for anticipated losses, if
any, on contracts and allowances for receivables during the period in which
they are first identified. A cumulative effect adjustment for refinements in
profit estimates on contracts in process at the beginning of the year
favorably impacted fourth quarter 1994 profitability on contracts by
approximately $1.0 million. During the first quarter of 1996, the Company
recorded adjustments to the profitability of the Indostar and Eastern Zone
contracts that reduced operating profit by $5.0 million. These adjustments
resulted from the Company's periodic reviews of contract financial status
performed in the ordinary course of business.
Contract costs, including indirect costs for cost-type contracts, are
subject to audit by government representatives. Such audits have been
completed through 1991. Management believes that any adjustments resulting
from determinations for subsequent periods and contract close-outs will not
have a significant impact on the Company's consolidated financial position or
results of operations.
RESEARCH AND DEVELOPMENT COSTS
The Company has included in selling, general and administrative expenses
total independent research and development costs of approximately $890,000,
$2,587,000 and $1,014,000 for the years ended December 31, 1994, 1995, and
1996, respectively.
STOCK-BASED COMPENSATION
Compensation expense is recognized for stock options and other stock
grants to the extent the exercise price is less than the fair market value of
the Company's common stock at the date of grant.
F-9
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common and common equivalent shares outstanding, including shares owned by
the Company's employee stock ownership plan. Stock options are considered to
be common equivalent shares when dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," effective January 1, 1996. SFAS No. 121
requires that certain long-lived assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Additionally, SFAS No.
121 requires that certain long-lived assets to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell. The effect of
adopting SFAS No. 121 was not significant.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" in 1996. While SFAS No. 123 established financial accounting
and reporting standards for stock-based employee compensation plans using a
fair value method of accounting, it allows companies to continue to measure
compensation cost for those plans using the intrinsic value method of
accounting as prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Should a company choose not to
change its accounting method, it must disclose the pro forma effect on net
earnings and earnings per share as if the fair value method had been adopted.
The Company will continue its present APB Opinion No. 25 accounting treatment
for stock-based compensation.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current period presentation.
F-10
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. ACQUISITION
In July 1992, the Company acquired a 79% interest in CTA Space Systems
(CTASS) for $10.3 million, $4.9 million of which was paid in cash with the
remainder financed by the selling shareholders at an imputed interest rate of
8.5% per annum. Principal payments on the acquisition notes of $3.0 million
and $2.4 million were paid in July 1993 and July 1994, respectively. In July
1994, the Company acquired the remaining CTASS common stock for $2.5 million,
payable 50% in cash and 50% in the Company's common stock. The Company paid
the cash portion with payments of $500,000, $375,000 and $375,000 in 1994,
1995 and 1996, respectively, and the common stock portion with issuances of
57,293 shares in 1994, 39,936 shares in 1995 and 39,515 shares in 1996. The
number of shares of common stock issued as payment were based on the then
current fair market value of the common stock.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
U.S. Government:
Billed....................... $ 41,624 $ 33,578
Unbilled:
Contracts in progress....... 10,373 8,474
Amounts awaiting contractual
coverage................... 5,823 4,717
Revenue awaiting government
approval of final indirect
rates or contract close-
out....................... 1,138 1,360
Commercial customers:
Billed....................... -- 2,202
Unbilled:
Contracts in progress....... 2,328 15,104
-------- --------
61,286 65,435
Less allowances................... (2,700) (3,108)
-------- --------
$ 58,586 $ 62,327
-------- --------
-------- --------
</TABLE>
F-11
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. ACCOUNTS RECEIVABLE (CONTINUED)
Contracts in progress consist primarily of revenues on long-term
contracts that have been recognized under the percentage-of-completion method
for accounting purposes but not billed to customers. These amounts generally
will be billable upon product delivery or satisfaction of other contract
requirements.
Amounts awaiting contractual coverage include amounts for which the
Company expects to obtain the necessary contract modifications in the normal
course of business. At December 31, 1995 and 1996, approximately $1.6 million
and $2.9 million respectively, is related to situations where disputes
regarding the extent of contractual coverage have resulted in legal actions
or formal claims. The Company has provided allowances that it believes
adequately provide for the resolution of these and other matters. The Company
expects to realize substantially all billed and unbilled receivables within
one year.
4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT BALANCES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Other current assets:
Receivables from employees and
stockholders (Note 11)............... $ 849 $ 1,175
Other................................. 2,848 3,053
------ -------
$ 3,697 $ 4,228
------ -------
------ -------
</TABLE>
F-12
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT
BALANCES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment:
Data processing equipment............. $ 9,764 $ 9,433
Office furniture and equipment........ 8,586 8,431
Manufacturing and test equipment...... 1,654 6,048
Other equipment....................... 207 959
Leasehold improvements................ 1,090 1,277
------ -------
21,301 26,148
Accumulated depreciation and
amortization......................... (14,517) (16,073)
------ --------
$ 6,784 $ 10,075
------ --------
------ --------
Other assets:
Investment in and notes receivable
from SIM (Note 13)................... $ 2,370 $ 2,138
Investment in EarthWatch (Note 6)..... -- 2,038
Capitalized software costs, net....... 1,547 525
Deferred tax asset (Note 10).......... 750 1,385
Other................................. 2,145 1,373
------ --------
$ 6,812 $ 7,459
------ --------
------ --------
Accrued expenses:
Salaries and incentives............... $ 3,664 $ 3,608
Employee benefit plans................ 492 147
Other................................. 648 286
------ --------
$ 4,804 $ 4,041
------ --------
------ --------
</TABLE>
F-13
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
5. GEMnet INVESTMENT
In 1994, the Company began an initiative to enter the wireless global
data communications market through development and construction of its low
earth orbit (LEO) satellite, GEMnet. Construction of this satellite was
completed in 1995 but the satellite was destroyed because of a failure of the
launch vehicle. The Company recovered $6.1 million of insurance proceeds
related to the launch failure which were applied against program costs
incurred. The remaining GEMnet assets consisted primarily of satellite
software and ground station and other equipment. The Company intended to
utilize these assets in the future development of a LEO satellite
constellation or to invest them in a joint venture which would continue to
pursue the Company's global data communications initiatives.
The development of the GEMnet satellite and the full satellite system
requires capital in excess of that committed or currently available to the
Company. During 1996, the Company was unable to raise the additional capital
necessary to proceed with the program at this time. Due to technological
advances, it is not certain at this time that the same technology would be
utilized in the program. The ultimate recoverability of the expenditures
incurred to date and any future investments in GEMnet depends on various
factors, including the success of the Company's efforts to obtain licenses
needed to operate the satellite system, the ability to finance development of
the satellite system, and the ability to develop sufficient business to
support profitable operations. Based on these uncertainties, the Company, in
the fourth quarter of 1996, wrote off $6.4 million of its previous investment
in GEMnet, which is included in other expenses in the accompanying statements
of operations, and transferred the remaining assets to furniture and
equipment for use in other programs.
6. INVESTMENT IN EarthWatch
In May 1994, the Company entered into an agreement with EarthWatch, Inc.
("EarthWatch") pursuant to which it is manufacturing two remote sensing
satellites. Total consideration under the fixed-price portion of this
contract consists of $4.0 million in cash and 1,018,750 shares of EarthWatch
preferred stock valued at $4.00 per share which is convertible into
approximately 4.7 percent of EarthWatch's fully diluted equity
as of December 31, 1996. Other assets at December 31, 1996
F-14
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. INVESTMENT IN EarthWatch (CONTINUED)
include 509,374 shares of such stock, carried at a cost basis of $2.0
million, received in 1996 as a milestone payment under the contract with
EarthWatch. The remaining milestone payments payable in EarthWatch preferred
stock are 254,687 shares to be issued upon delivery of the first satellite
and 254,689 shares to be issued upon delivery of the second satellite.
7. NOTES PAYABLE AND SUBORDINATED DEBT
BANK DEBT
In December 1993, the Company and its subsidiaries entered into an
agreement with a bank for a revolving credit facility providing the
availability to borrow up to $30,000,000, which includes a facility for
letters of credit up to $10,000,000. The revolving line of credit expired on
December 9, 1996 but has been extended until June 9, 1997. The current
arrangement provides an additional credit facility of $4,500,000 that is
reduced or eliminated upon collection of certain amounts on the Indostar
contract, completion of one or more private equity placements or at specified
dates through June 9, 1997.
At December 31, 1995 and 1996, there was $16,324,000 and $28,335,000,
respectively, outstanding under the credit facility. Borrowings under the
credit facility are secured by substantially all of the Company's assets and
bear interest at either the lender's prime rate or LIBOR plus 1.25%, at the
Company's discretion. The weighted average rate in effect for short-term
borrowings at December 31, 1995 and 1996 was approximately 7.6%, and 6.8%,
respectively. Under the agreement, the Company pays an annual commitment fee
on the unused credit line and an annual administration fee on the total
revolving credit line. See additional discussion in Note 1 under "Liquidity."
SUBORDINATED DEBT
In December 1993, the Company entered into a note purchase agreement
(the "Notes Agreement") providing for $15,000,000 aggregate principal amount
of unsecured, senior subordinated notes (the "Notes"). The Notes bear
interest at 12.0% per annum (13.0% effective April 1, 1996), payable
quarterly. The Notes may be prepaid at any time beginning in 1997, subject to a
F-15
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. NOTES PAYABLE AND SUBORDINATED DEBT(CONTINUED)
premium starting at 6.86% and declining annually to zero at maturity of the
Notes in 2001. These premiums are subject to reduction to 50% of the premium
otherwise payable if made after the occurrence of a "Qualifying Sale" of the
Company's common stock as defined by the Notes Agreement. The Company is
required at the election of the holder to repurchase the Notes at the unpaid
principal amount, plus accrued interest, at the occurrence of a transaction
which results in a change in control of ownership of the Company or a
"Qualifying Sale" of the Company's common stock as defined by the Notes
Agreement.
The Notes also provide for payment of contingent interest over and above
the 13.0% fixed rate upon the occurrence of a change of control in ownership
of the Company, sales of the Company's common stock by the Company or its
shareholders as defined in the Notes Agreement as a "Qualifying Sale" or a
"Secondary Sale to the public," or at December 31, 1998, at the election of
the holders of the Notes. If no Qualifying Sale or change of control has
occurred, the ultimate amount of the contingent interest is based on the
greater of amounts resulting from several calculations as specified in the
Notes Agreement, some of which are based on the market value of the Company's
common stock as determined in annual valuations by an appraisal. The
contingent interest is intended to approximate 10% of the Company's fair
market. The Company recognizes interest expense annually for the pro rata
amount of contingent interest estimated to be payable at December 31, 1998.
Minimum scheduled principal repayments of the Notes commence in 1998 and
are as follows: $3,000,000 in 1998 through 1999, $4,000,000 in 2000, and
$5,000,000 in 2001.
The loan agreements require advance approval by the lenders of payment
of dividends. The agreements also include financial covenants which require
the Company and subsidiaries to maintain certain financial ratios and provide
restrictions on capital expenditures. See additional discussion in Note 1
under "Liquidity."
8. EMPLOYEE BENEFIT PLANS
Substantially all of the Company's employees are eligible to participate
in the Company's employee stock ownership plan
F-16
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
("ESOP"). The ESOP is designed to enable participating employees to share in
the growth and prosperity of the Company while providing them with the
opportunity to accumulate capital for their future. The ESOP allows only
Company contributions, in cash or in common stock, as determined by the Board
of Directors. Contributions are proportionately allocated on the basis of
each eligible participant's compensation. Employee vesting in benefits ranges
from 40% at the end of two years to 100% at the end of four years. Shares of
the Company's common stock which may ultimately be distributed by the ESOP to
participants carry certain limited provisions for repurchase by
the Company. Through December 31, 1996, no shares of the Company's common
stock have been distributed by the ESOP. At December 31, 1995 and 1996, the
ESOP owned 514,720 shares of the Company's common stock, all of which have
been allocated to plan participants.
The Company and its subsidiaries maintain 401(k) savings plans which
allow for Company and employee contributions based upon a percentage of the
participating employee's salary. Employee vesting in Company contributions
ranges from one to four years. Beginning in 1994, participants could choose
to invest their contributions in Company common stock. During 1994, the
Company's 401(k) plan acquired 70,000 shares of the Company's treasury stock
on behalf of the plan participants. The Company's 401(k) plan owned 70,000
shares of the Company's common stock at December 31, 1995 and 1996.
Amounts charged to expense under the above plans were $2,077,000,
$2,089,000 and $2,024,000 for the years ended December 31, 1994, 1995 and
1996, respectively. The Company currently provides no significant other post
retirement benefits.
9. COMMON STOCK AND STOCK OPTIONS
All of the Company's outstanding shares contain restrictions on
transferability. Shares of common stock held by two of the Company's
principal stockholders are subject to a buy-sell arrangement with the Company
which contains repurchase features under specified circumstances. At December
31, 1996, none of the specified circumstances exist. Certain former
participants in a terminated benefit plan hold approximately
F-17
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
28,510 shares of the Company's common stock which contain provisions for
repurchase by the Company, at the option of those stockholders.
In December 1991, the Company adopted the 1991 Stock Option and Purchase
Plan which reserves 1,300,000 common shares for the granting of incentive or
non-qualified stock options or stock purchase rights through 2001. The
Compensation Committee of the Board of Directors is authorized to grant
options and purchase rights and to establish the respective terms, subject to
certain restrictions. Options generally are for terms of 5 to 10 years and
provide for vesting periods of 3 years. As of December 31, 1996, options for
580,187 shares are available for grant under this plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ -----
<S> <C> <C> <C>
Options outstanding at beginning
of year (weighted average
exercise price of $3.95 in 1994,
$4.16 in 1995 and $3.80 in 1996) 568,190 587,975 467,225
Granted(weighted average exercise
price of $8.45 in 1994, $9.36
in 1995 and $9.49 in 1996)....... 56,135 15,250 399,508
Canceled(weighted average exercise
price $7.17 in 1994, $6.08 in 1995
and $4.18 in 1996)................ (4,550) (96,500) (1,000)
Exercised(weighted average exercise
price of $5.03 in 1994, $6.01 in
1995 and $2.15 in 1996)...........(31,800) (39,500) (224,670)
------- ------- -------
Options outstanding at end of year
(weighted average exercise price
of $4.16 in 1994, $3.80 in 1995
and $7.92 in 1996).............. 587,975 467,225 641,063
------- ------- -------
------- ------- -------
Options exercisable at end of year
(weighted average exercise price
of $3.67 in 1994, $3.33 in 1995
and $4.96 in 1996).............. 487,093 412,122 195,511
------- ------- -------
------- ------- -------
</TABLE>
F-18
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
The weighted average grant date fair value of an option granted during
the years ended December 31, 1995 and 1996 was $4.06 and $3.82, respectively.
The Company uses the Black-Scholes model to estimate the fair values of
options, assuming a risk-free interest rate equal to the 90 day U.S. Treasury
Bill rate, expected lives of 5 to 10 years, an expected volatility factor of
.23 and no expected dividends. The Company recognized no compensation expense
for stock option grants during the three years in the period ended December
31, 1996.
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES DECEMBER 31, 1996
------------------------ -----------------
<S> <C>
$4.03-$6.01:
Options outstanding:
Number of shares................. 179,450
Weighted average exercise price.. $4.30
Weighted average remaining
contractual life (in years)..... 2.4
Options exercisable:
Number of shares................. 165,450
Weighted average exercise price.. $4.31
$7.17-$9.49:
Options outstanding:
Number of shares................. 461,613
Weighted average exercise price.. $9.33
Weighted average remaining
contractual life (in years)..... 6.4
Options exercisable:
Number of shares................. 30,061
Weighted average exercise price.. $8.50
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," is applicable only to stock options granted
subsequent to December 31, 1994. The pro-forma impact of applying SFAS No.
123 to net income (loss) and related per share amounts was not material for
1995 and 1996. However, the pro forma compensation expense associated with
options granted subsequent to December 31, 1994 would generally be recognized
over a three year vesting period; therefore, the initial impact of applying
SFAS No. 123 on pro forma net income (loss) is not representative of the
potential impact on pro forma net income in future years, when the pro forma
effect would be fully reflected.
F-19
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. INCOME TAXES
The provision (benefit) for income taxes attributable to continuing
operations consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....................... $ 4,254 $ 3,346 $(1,950)
State......................... 838 640 100
------ ------ ------
5,092 3,986 (1,850)
------ ------ ------
Deferred:
Federal....................... (1,531) (1,345) (3,400)
State......................... (127) (193) (500)
------ ------ ------
(1,658) (1,538) (3,900)
------ ------ ------
$ 3,434 $ 2,448 $(5,750)
------ ------ ------
------ ------ ------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
F-20
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax liabilities:
Unbilled receivables................... $ 4,832 $ 5,820
Change in accounting for tax reporting. 985 --
Other.................................. 2,755 185
----- -----
8,572 6,005
----- -----
Current deferred tax assets:
Contract provisions and allowances..... 2,746 3,707
Accrued vacation....................... 693 704
Other ................................. 491 217
----- -----
3,930 4,628
----- -----
Net current deferred tax liabilities..... $ 4,642 $ 1,377
----- -----
----- -----
Long-term deferred tax assets (liabilities):
Accrued interest on subordinated debt $ 818 $ 1,240
Net operating loss carryforward........ -- 504
Other ................................. (68) 145
----- -----
750 1,889
Less: valuation allowance............. -- (504)
----- -----
Net long-term deferred tax assets........ $ 750 $ 1,385
----- -----
----- -----
</TABLE>
A reconciliation of income tax expense at the statutory Federal rate to
income tax expense related to continuing operations at the Company's
effective income tax rate is as follows:
F-21
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at
statutory rate............... $ 2,795 $ 2,142 $(5,875)
State income taxes, net of
Federal tax benefit.......... 444 290 (309)
Goodwill amortization......... 212 252 235
Foreign sales corporation (FSC)
benefit...................... -- (243) --
Other......................... (17) 7 199
----- ----- -----
$ 3,434 $ 2,448 $(5,750)
----- ----- -----
----- ----- -----
</TABLE>
11. TRANSACTIONS WITH RELATED PARTIES
The Company has made loans to two of its principal stockholders for
relocation costs that include the purchase of new residences. The loans were
made in exchange for promissory notes and are secured by deeds of trust on
residential property. The loans bear interest at the same rates applicable to
the Company's revolving line of credit. The remaining indebtedness of
approximately $111,000 on one of these loans was paid in January 1996. At
December 31, 1995 and 1996, $631,000 and $556,000, respectively, remained
outstanding under these loans. The remaining outstanding loan is due on
demand.
The Company has made loans totaling $884,000 to certain officers and
employees related to the exercise of options to acquire common stock.
Amounts related to the stock exercise price are presented as a reduction of
stockholders' equity. The notes are for five years and bear interest at the
same rates paid by the Company.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has operating leases for all of its office space and various
computer and office equipment. Most of the office space leases require the
Company to pay maintenance and
F-22
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
operating expenses such as taxes, insurance and utilities and also include
provisions for renewal. Certain of the leases contain provisions for periodic
rate escalations to reflect changes in the consumer price index. Total rent
expense for the years ended December 31, 1994, 1995 and 1996 was $5,045,000,
$4,602,000 and $4,391,000, respectively.
At December 31, 1996, total future minimum rental commitments under non-
cancelable leases are summarized as follows (in thousands):
<TABLE>
<S> <C>
1997..................... $ 3,650
1998..................... 3,475
1999..................... 2,620
2000..................... 1,125
2001..................... 275
-------
$11,145
-------
-------
</TABLE>
At December 31, 1996, the Company had a 6.75% limited partnership
interest in its corporate headquarters building in Rockville, Maryland that
vests up to 9.5% over the life of the lease.
LITIGATION
In October 1996, a former employee of the Company filed suit against the
Company alleging, among other things, breach of contract in connection with a
profit sharing agreement. Subsequently, the litigation was stayed by
agreement of the parties because the profit sharing agreement called for
mandatory and binding arbitration. The Company intends to vigorously defend
itself against the claims. However, as the arbitration is in its earliest
stages, the Company is unable to predict the outcome or its potential effect
on the Company's financial condition or results of operations. There can be
no assurance that such arbitration, if adversely determined, would not have a
material adverse effect on the Company's financial condition or results of
operations.
F-23
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is involved in certain other litigation incidental to its
business. Management of the Company, after reviewing developments with legal
counsel, is of the opinion that the outcome of such matters will not have a
material adverse effect on the financial position or future operations of the
Company.
13. SALE OF SIMULATION SYSTEMS DIVISION
In September 1995, the Company entered into an agreement to sell
substantially all of the assets of its Simulation Systems Division ("SIM") to
a former director and a principal stockholder of the Company and other
investors in exchange for two notes secured by the assets of the division
with an aggregate principal amount of $2.2 million, bearing interest at the
Company's borrowing rate and a 15% minority interest in the purchasing
entity, valued at $0.2 million. The assets of the division consisted
primarily of a cockpit flight simulator and various fixed assets, which had
an aggregate book value of $3.1 million, net of accumulated depreciation. SIM
is currently seeking Federal Aviation Administration certification of the
simulator to enhance its value. Realization of the investment and notes
receivable totaling $570,000 are dependent primarily on the future success of
the business and/or the collateral securing the note, while the realization
of a note totaling $1,800,000 is dependent on the proceeds from the use or
sale of the simulator. The investment and notes receivable are periodically
reviewed by management for impairment considering, among other factors, the
estimated fair value of the collateral.
DISCONTINUED OPERATIONS
The consolidated statements of operations exclude sales and expenses of
discontinued operations from captions applicable to continuing operations.
Net sales of SIM prior to its disposition were $9,720,000 in 1994 and
$470,000 in 1995. The loss from operations of the SIM business was $93,000 in
1994 and $1,260,000 in 1995, net of income tax. The 1995 loss from disposal
of the business was $465,000, net of income tax. The income tax benefit
related to discontinued operations was $72,000 in 1994 and $1,149,000 in
1995.
F-24
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
14. OTHER INFORMATION
MAJOR CUSTOMERS
The percentage of contract revenues from U.S. Government customers that
comprise 10% or more of total revenues were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Department of Defense................ 36% 31% 35%
National Aeronautics and Space
Administration...................... -- 19% 20%
Department of Transportation......... 16% -- --
General Services Administration...... 11% -- --
</TABLE>
In addition, 27% and 25% of the Company's total revenues were from a
single commercial customer of its space and telecommunications systems
segment for the years ended December 31, 1995 and 1996, respectively.
Revenues recognized from foreign sales were $58,233,000 and $45,465,000,
payable in U.S. dollars, during the years ended December 31, 1995 and 1996,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents and notes payable under
the Company's line of credit approximate their fair market values. The
Company's subordinated notes payable (see Note 7) are not readily marketable.
In addition to the fixed 13% interest rate, the Notes provide for the one-
time payment of contingent interest based on the market value of the
Company's common stock. Management estimates the fair value of the Notes to
be approximately $20,000,000 at December 31, 1996, which compares to the
approximately $18,000,000 recorded value of the Notes plus the accrued
contingent interest to date.
FORMULA FOR DETERMINING FAIR MARKET VALUE OF COMMON STOCK
In 1991, the Board of Directors of the Company approved the use of a
formula for assessing the fair market value of the Company's common stock.
Net book value, contract revenues, income from continuing operations,
contract margin and weighted average shares outstanding constitute some of
the financial statement factors considered in this formula.
F-25
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
15. BUSINESS SEGMENTS
The Company operates in three principal business segments: Space and
Telecommunications Systems, Information Technology (IT) Services and Mobile
Information and Communications Services. The Space and Telecommunications
Systems business principally designs and manufactures small low-earth and
geosynchronous orbit satellites and related support systems. The Information
Technology Services business comprises the Company's historical business base
of providing IT services for a variety of customers. The Mobile Information
and Communications Services business has been formed to pursue commercial
applications of the Company's proprietary technology in innovative IT and
space-based or wireless solutions to a variety of applications, including
mobile asset tracking and remote fixed asset monitoring. Segment data has
been adjusted from previously reported amounts to reflect treatment of the
Simulation Systems Division as a discontinued operation and to conform to the
current income statement presentation. The following table provides certain
financial information for each business segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Contract revenues:
Information Technology Services... $107.5 $109.4 $100.0
Space and Telecommunications Systems 35.6 107.6 79.7
Mobile Information and Communications
Services............................ -- -- --
----- ----- -----
$143.1 $217.0 $179.7
----- ----- -----
----- ----- -----
Operating profit (loss):
Information Technology Services... $ 10.6 $ 5.9 $ 3.1
Space and Telecommunications Systems 1.8 5.6 (3.6)
Mobile Information and Communications
Services............................ -- (1.0) (8.6)
Other expenses....................... (.8) (.3) (3.5)
----- ----- -----
$ 11.6 $ 10.2 $(12.6)
----- ----- -----
----- ----- -----
</TABLE>
F-26
<PAGE>
CTA INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
15. BUSINESS SEGMENTS(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation and amortization expense:
Information Technology Services..... $ 1.9 $ 1.6 $ 2.4
Space and Telecommunications Systems 0.5 1.4 2.0
Mobile Information and Communications
Services............................ -- -- 0.4
Capital expenditures:
Information Technology Services..... $ 2.1 $ 1.4 $ 1.0
Space and Telecommunications Systems 3.0 2.8 5.4
Mobile Information and Communications
Services............................ -- 0.1 0.1
Identifiable assets:
Information Technology Services......$29.6 $42.4 $32.8
Space and Telecommunications Systems 46.2 32.1 51.6
Mobile Information and Communications
Services............................ 6.3 7.3 0.5
General corporate assets............. 7.7 9.7 7.8
----- ----- -----
$89.8 $91.5 $92.7
----- ----- -----
----- ----- -----
</TABLE>
The operating profit in 1996 for the Information Technology Services
segment was adversely impacted by a $2.6 million adjustment to the
profitability of the Eastern Zone contract. The operating loss in 1996 for
the Space and Telecommunications Systems segment includes a $2.8 million
reduction to the profitability of the Indostar contract. The operating loss
in 1996 for the Mobile Information and Communications Services segment
includes the write-off of the investment in GEMnet of $6.4 million (see Note
5). Other expenses in 1996 include $0.9 million related to an unsuccessful
initial public offering.
F-27
<PAGE>
Schedule II
CTA INCORPORATED
Valuation and Qualifying Accounts and Reserves
($000)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance, Charged to Costs Charged to Balance, End of
Beginning OF and EXPENSES Other ACCOUNTS PERIOD
DESCRIPTION PERIOD DEDUCTIONS
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1994
$3,926 $520 $0 $756 $3,690
For the year ended
December 31, 1995
$3,690 $200 $292 $1,482 $2,700
For the year ended
December 31, 1996
$2,700 $300 $108 $0 $3,108
</TABLE>
F-28
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-71128) pertaining to the Defined Contribution
401(k) Retirement Plan of CTA INCORPORATED and in the related prospectus of
our report dated March 26, 1997, with respect to the consolidated financial
statements of CTA INCORPORATED included in the Annual Report (Form 10-K) for
the year ended December 31, 1996.
/s/Ernst & Young LLP
Washington, D.C.
March 26, 1997
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CTA INCORPORATED
Date: March 31, 1997 By:/S/ C.E. VELEZ
C.E. Velez
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:/S/ C.E. VELEZ
C.E. Velez
Chairman of the Board, President,
Chief Executive Officer and Director Date: March 31, 1997
By:/S/ RICARDO DE BASTOS
Ricardo de Bastos
President - Space and
Telecommunications Systems
and Director Date: March 31, 1997
By:/S/ RAYMOND V. MCMILLAN
Raymond V. McMillan
President - Information Technology
Services
and Director Date: March 31, 1997
By:/S/ GREGORY H. WAGNER
Gregory H. Wagner
Executive Vice President, Chief
Financial Officer, Principal
Accounting Officer and Treasurer Date: March 31, 1997
By:/S/ HARVEY D. KUSHNER
Harvey D. Kushner
Director Date: March 31, 1997
By:/S/ GEORGE W. MORGENTHALER
George W. Morgenthaler
Director Date: March 31, 1997
By:/S/ JAMES M. PAPADA, III
James M. Papada, III
Director Date: March 31, 1997
By:/S/ ARTURO SILVESTRINI
Arturo Silvestrini
Director Date: March 31, 1997
By:/S/ JOHN L. SLACK
John L. Slack
Director Date: March 31, 1997
By:/S/ GREGORY H. WAGNER
Gregory H. Wagner
As Attorney-in-Fact Date: March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 65435
<ALLOWANCES> 3108
<INVENTORY> 0
<CURRENT-ASSETS> 70108
<PP&E> 26148
<DEPRECIATION> 16073
<TOTAL-ASSETS> 92690
<CURRENT-LIABILITIES> 56387
<BONDS> 0
<COMMON> 50
0
0
<OTHER-SE> 17743
<TOTAL-LIABILITY-AND-EQUITY> 92690
<SALES> 179703
<TOTAL-REVENUES> 179703
<CGS> 170706
<TOTAL-COSTS> 170706
<OTHER-EXPENSES> 21549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4235
<INCOME-PRETAX> (16787)
<INCOME-TAX> (5750)
<INCOME-CONTINUING> (11037)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11037)
<EPS-PRIMARY> (2.49)
<EPS-DILUTED> (2.49)
</TABLE>
