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, 1997
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)
Registrant's telephone number,
including area code (301)816-1200
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, 1998, there were outstanding 8,701,014 shares of
the registrant's common stock, par value $.01, which is the only class of
common or voting stock of the registrant. The aggregate market value of
the common stock held by non-affiliates of the registrant as of that date
was $43,940,121 as determined by independent appraisal.
CTA INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I
Item 1. Business
The Company provides advanced Information Technology (IT) services
to the federal government, state and local government and commercial
markets. The Company focuses on providing turn-key solutions to the IT
service needs of its customers, with emphasis on legacy system
modernization, secure computing and network solutions, applications
software and database maintenance and embedded computer applications. In
addition to its strong technical and program management capabilities, the
Company has established a reputation for consistently high levels of
customer satisfaction based on service, quality and value.
Company History
The Company was founded in 1979 as Computer Technology Associates
Inc., 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. Originally qualified to receive small
business related support from the federal government, the Company
established major relationships with U.S. military operations at the
Defense Department's Cheyenne Mountain Complex, the Naval Air Warfare
Center, Weapons Division, NASA's Goddard Space Flight Center and the Air
Force's Consolidated Space Operations Center. In 1992, the Company 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 assistance programs with contracts awarded under full and
open competition. The share of IT revenues derived from competitive
awards grew from 19% in 1992 to 100% in 1997.
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 business oriented IT disciplines equally applicable to the
federal civil agency and state government IT markets. The Company then
established strategic alliances with certain specialized software
companies that enabled it to enter the commercial IT market and win
contracts with commercial customers such as Cessna, Reynolds Metals and
Allied-Signal.
In 1992, the Company acquired a 79% interest in CTA Space Systems
(CTASS) to expand its business from 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 pioneered small
satellite-based store-and-forward technology, which it originally
developed to interrogate dispersed buoys equipped with acoustic sensors.
In 1994, 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 contract
provided for the Company to build a small, three-axis stabilized commercial
communications satellite, which was launched in 1997, and a complete
facility in Jakarta, Indonesia including broadcast and subscriber
management software, communications uplinking systems and hardware/software
systems for spacecraft telemetry, tracking and control. In late 1997, the
Company sold CTASS and certain related businesses to Orbital Sciences
Corporation in order to focus on its core IT business. See Note 2 of
Notes to Consolidated Financial Statements.
Corporate Organization and Strategy
In 1997, the Company realigned its corporate organization to
maximize its focus on the rapidly growing market for commercial and
governmental IT services. A streamlined corporate management structure
supports the Federal Information Systems Company, a division of the
Company which addresses the federal government market for IT services,
and CTA Commercial Systems, Inc., a wholly-owned subsidiary which
addresses the state government and commercial markets for IT services.
The Federal and Commercial companies are, therefore, free to tailor the
Company's IT products and services to the unique needs and business
practices of their respective markets.
Information Technology Services
The Company believes that it possesses a level of IT technical and
project management experience and expertise that allows it to offer high
value solutions to a wide range of client IT requirements. The Company's
principal business focus is in the areas of 1) legacy information system
modernization, to include Year 2000 compliance upgrades and electronic
commerce implementations, 2) information security, to include the
engineering and implementation of secure and highly reliable computer and
network systems, 3) the maintenance and upgrade of applications software
and associated large scale databases and 4) a range of IT services
associated with complex embedded computer systems.
The Company believes that it is one of the industry leaders in the
rapidly growing market for federal, state and commercial Year 2000
compliance upgrades based on its combination of direct Year 2000
conversion experience, use of automated tools and its ability to offer
its customers solutions to both their embedded and non-embedded Year 2000
compliance requirements. The Company expects that it will continue to
receive increased revenues from additional Year 2000 engagements during
the next two years. However, these engagements and related revenues are
expected to peak prior to calendar year 2000 as customers address their
needs. Thereafter, the Company expects that revenues derived from year
2000 engagements will steadily decline. The Company believes that
current Year 2000 related business will be replaced with similar
conversion business (e.g. Euro conversion beginning in 1999) and legacy
modernization projects including "middleware" integration and client-server
conversions.
INFORMATION TECHNOLOGY SERVICES--INDUSTRY OVERVIEW
FEDERAL GOVERNMENT
The U.S. government is the largest single buyer of IT services in
the world, with an estimated IT services market of $29 billion in 1997
with a growth rate of 1% in 1998 and 3% in 1999.
STATE AND LOCAL GOVERNMENT
Industry sources estimate the state and local government IT services
market to be $13 billion in 1997 with an expected annual growth rate of
20% in each of the next five years. Of the $13 billion, professional services is
estimated at $5.3 billion with a CAGR of 16%, systems integration is
estimated at $2.0 billion with a CAGR of 20% and outsourcing is estimated
at $4.4 billion with a CAGR of 21%
COMMERCIAL
Industry sources estimate the U.S. professional services segment,
including consulting, custom software development and training, at $37
billion in 1997 growing at 16% per year, systems integration at $19
billion growing at 21% and outsourcing at $26 billion growing at 19%.
YEAR 2000 COMPLIANCE SERVICES
The Gartner Group estimates the worldwide costs of correcting the
Year 2000 problem will range between $300 billion and $600 billion with
$30 billion required by the U.S. federal government alone.
Information Technology Services--Business Strategy
The principal strategies that the Company is pursuing to expand its
IT services business include:
INCREASING PENETRATION OF EXISTING CUSTOMER BASE. The Company
focuses on customer satisfaction and technical excellence. Due to its
long-term incumbent position as a key systems integrator for some of the
nation's largest and most complex information systems, the Company has
gained a unique and profound understanding of those systems. The Company
believes this knowledge provides it with a substantial advantage in terms
of cost, technical expertise and demonstrated past performance in
competing for future work related to these systems. The Company believes
that its Year 2000 conversion initiative will provide it with
similar competitive advantages with respect to a wide range of new customers.
PENETRATING NEW MARKETS BY LEVERAGING CORE COMPETENCIES. The
Company seeks out and exploits opportunities to market the expertise it
has gained in past IT assignments to new customers. The Company's
experience in federal and state government Year 2000 conversions and
information systems security has proven to be a key factor
differentiating the Company in competitive bidding situations with new
customers. The Company plans to use such engagements to establish
relationships with an expanded base of customers that can be used for
marketing the Company's expertise in additional areas such as legacy
system modernization and software and database applications maintenance
and outsourcing. Also, the methodology and tools required to accomplish
Year 2000 compliance are directly applicable to that required to upgrade
computer software to properly handle the upcoming common European Currency
conversion. The market for such Euro currency upgrades may exceed the
Euoropean Year 2000 market in total cost.
ESTABLISHING MARKETING ALLIANCES TO OFFER COMPLETE SOLUTIONS. The
Company has established, and needs to continue to establish, marketing
alliances with a number of software product and tool providers which
allow the Company to offer turn-key solutions for such applications as
automated scheduling of manufacturing processes and large-scale
electronic document management.
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
Certain of the Company's significant IT contracts and programs are
described below. Total contract values include both realized and
unrealized revenues. These contracts are typically funded annually and
there are no assurances that funding will continue beyond the current
fiscal year or, if they are funded beyond the current fiscal year, for
how many additional years.
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 warfare Center (NAWC) located 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 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. In
addition, the Company's clients for information system security services
include the Department of Treasury, General Services Administration,
Defense Finance and Accounting Service as well as several commercial
companies.
DEFENSE ENTERPRISE INTEGRATION SERVICES. 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.
MEDICAL INFORMATION SYSTEMS. The Company is providing medical
information systems expertise to the DOD Department of Health Affairs
Consolidated Health Care System. This second generation medical
information system implements the most advanced technology available in
the industry today. Its goal is a paperless, globally accessible
electronic patient record system that provides authorized medical
professionals with vital patient medical histories in near real time,
regardless of where the patient data may have been collected or stored,
or where the patient may be physically located when medical attention is
required. This technology not only enables more accurate record keeping
but also reduces the response time required to obtain medical information
from days or weeks to literally seconds. This contract is a cost-plus-
fixed-fee contract, has a total value of $30 million and is scheduled for
completion in March 2001.
U.S. GOVERNMENT--CIVILIAN AGENCIES
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 Department of Justice
(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, the Company 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, the Company
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. The
Company's support functions include engineering services and
telecommunication and security services. In the longer term, the Company
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 provides support for
the Federal Supply Service's central offices, its eleven regional offices
and its various commodity centers and depots. The Company provides
applications software and database maintenance and upgrades, network
administration, mainframe to client-server conversions and implementation
of electronic commerce applications. The initial 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.
STATE GOVERNMENT AND COMMERCIAL
YEAR 2000 CONVERSION. The Company believes it is a leading provider
of Year 2000 compliance services to both state and local governments. The
Company currently has contracts to provide such services to 22 state
governments. Some states include all applications under such a contract
(e.g. Nebraska ($22 million) and Kansas ($25 million) while others
include only a portion of the state's overall needs. In addition, the
Company is currently under contract to provide both embedded and non-
embedded Year 2000 compliance services to several commercial clients.
IT SYSTEMS ENGINEERING. In June 1996, the Company was awarded a
contract by USAA, a San Antonio, Texas-based provider of insurance,
banking and investment services, to provide technical and engineering
support to the USAA Information Technology Division. The Company's
functions include (i) project management support, 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 strategic business agreements
with knowledge-based tool vendors, the Company has developed a
generalized system transformation practice that enables it to cost
effectively perform a wide range of information system upgrades to
include Year 2000 conversions, Euro-currency implementation, telephone
area code expansion, replatforming of existing applications and migrating
from mainframe to client-server architectures. The Company believes that
the knowledge and experience it applies to help clients meet the Year
2000 challenge positions the Company to meet the broader long-term
information system needs of its clients.
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, IBM, 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
service capability.
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's continuing operations during
the indicated periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C> <C> <C>
TYPE OF CONTRACT
1995 1996 1997
Fixed-price 8% 11% 14%
Time-and-materials 52% 53% 54%
Cost-reimbursable 40% 36% 31%
100% 100% 100%
Total
</TABLE>
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 1992 without material
adjustment.
Backlog
The Company's total backlog was approximately $284 million at
December 31, 1997. 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
81% of total backlog at December 31, 1997. Commercial and other backlog
comprised approximately 33% of total backlog at December 31, 1997.
No individual contract or program represents more than 10% of total
backlog at December 31, 1997. The Company expects that approximately 31%
of the Company's total backlog as of December 31, 1997 will result in
revenues in the year ending December 31, 1998.
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, many of the
contracts included in backlog are subject to termination for the
convenience of the government customer.
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 and Colorado Springs, Colorado. The
Company believes that these properties are adequate to serve the
Company's present business operations, however, the Company is currently
exploring other options with respect to its corporate headquarters. 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
alleged 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
alleged 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 a certain contract
pursuant to which CTASS provided products and services to a customer in
Indonesia. The Company has denied all of the allegations.
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
binding arbitration. The matter has been submitted to arbitration which
is expected to be completed by mid-1998. The Company believes that the
outcome of this matter will not have a material adverse effect on the
financial condition or future results of operations of the Company.
The Company is currently involved in certain other 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 1997, 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 or 1997.
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, or such other price as determined by the
Board of Directors with the advice of the Company's independent
appraiser, 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.
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:
(CM+R)
BV+K (MI) (P) -----
2
Formula Price D equals ------------------------------
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.
Procedures for Determining Share 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.
In those circumstances when the formula does not result in a fair
market value for the Common Stock, the Company establishes a price for
the Common Stock based solely on an independent appraisal. The price of
$5.05 per share at June 30, 1997 and at December 31, 1997 was based
solely on an independent appraisal as were all share prices prior to the
adoption of the Formula. 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 2 for 1 split of the Company's
common stock in February 1998) at which the Common Stock was appraised by
the Company's independent appraiser, Legg Mason Wood Walker, Inc., for
the last ten years. The 1992, 1993, both 1994 and 1995 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, 1997 $5.050
June 30, 1997 $5.050
December 31, 1995 $4.745
December 31, 1994 $4.695
June 30, 1994 $4.485
December 31, 1993 $4.364
December 31, 1992 $3.583
December 31, 1991 $3.002
December 31, 1990 $2.088
December 31, 1989 $2.050
December 31, 1988 $2.015
December 31, 1987 $1.400
December 31, 1986 $0.888
</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 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.
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, 1998, there were approximately 290 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.
The Company's bank credit agreement also prohibits the payment of cash
dividends.
Item 6. Selected Financial Data
The following selected consolidated financial data for each of the
years in the five year period ended December 31, 1997 and as of
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
consolidated financial statements of the Company. The consolidated
financial statements for the five years ended December 31, 1993 through
1997 have been audited by Ernst & Young LLP, independent auditors. The
data (in thousands, except for per share data) should be read in
conjunction with the consolidated financial statements, related notes,
and other financial information included elsewhere in this document.
<PAGE>
<TABLE>
<CAPTION>
Income Statement
Data
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Contract revenues $92,072 $107,471 $105,224 $96,246 $92,239
Cost of contract
revenues 77,394 90,102 96,633 87,644 80,503
Selling, general
and
administrative
expenses 5,277 6,723 4,117 5,431 7,649
Other expenses 1,492 833 (292) 2,447 3,668
----- ----- ----- ----- -----
Operating profit 7,909 9,813 4,766 724 419
Interest expense 248 907 850 969 1,589
----- ----- ----- ----- -----
Income (loss) before
income taxes 7,661 8,906 3,916 (245) (1,170)
Provision (benefit) for
income taxes 3,370 3,830 1,567 (80) (500)
----- ----- ----- --- ---
Income (loss) from
continuing operations 4,291 5,076 2,349 (165) (670)
Income (loss) from
discontinued
operations, net of
income taxes(1)(2) 259 (617) (403) (10,872) 648
----- ----- ----- ------ ----
Net income (loss) $4,550 $4,459 $1,946 $(11,037) $(22)
Basic earnings (loss)
per share:
Continuing
operations $0.48 $0.53 $0.27 $(0.02) $(0.07)
Discontinued
operations 0.03 (0.06) (0.05) (1.22) 0.07
---- ----- ----- ----- -----
Earnings (loss)
per share $0.51 $0.47 $0.22 $(1.24) $0.00
Diluted earnings (loss)
per share:
Continuing
operations $0.46 $0.50 $0.25 $(0.02) $(0.07)
Discontinued
operations 0.03 (0.06) (0.04) (1.22) 0.07
----- ----- ----- ----- -----
Earnings (loss) per
share-diluted $0.49 $0.44 $0.21 $(1.24) $0.00
Weighted average number
of shares
outstanding 8,853 9,567 8,863 8,875 9,092
Diluted average number
of shares
outstanding 9,378 10,092 9,418 8,875 9,092
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
Balance Sheet Data: 1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents....... $ 1,390 $ 3,902 $ 235 $ 16 $ -
Working capital... 24,987 20,638 19,713 13,721 12,588
Total assets...... 74,346 89,816 91,530 92,690 45,288
Short-term debt... 5,524 15,750 17,074 28,335 9,112
Long-term debt.... 20,418 17,765 17,431 18,510 3,333
Total stockholders'
equity........... 24,417 27,950 28,773 17,793 15,810
</TABLE>
(1) During 1997, the Company sold its Space and Telecommunications
Systems and its Mobile Information and Communications Services businesses
to Orbital Sciences Corporation. Results of operations have been
restated to exclude revenues and expenses of discontinued operations from
captions applicable to continuing operations. See Note 2 to the
Consolidated Financial Statements.
(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 2 to the Consolidated
Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This filing may contain "forward-looking" statements, as that term
is defined in the Private Securities Litigation Reform Act of 1995.
Such statements include, but are not limited to, statements concerning
expectations of the Company's future performance in terms of revenue and
earnings. There can be no assurance that actual results will not differ
materially from those projected or suggested in such forward-looking
statements. Factors which could cause a material difference in results
include, but are not limited to, the following: regional and national
economic conditions; changes in interest rates; changes in government
spending policies and/or decisions concerning specific programs; individual
business decisions of customers and clients; developments in technology;
competitive factors and pricing pressures; changes in government laws
and regulations; acts of God; and the Company's ability to achieve the
objectives of its business plans.
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:
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Contract revenues 100.0% 100.0% 100.0%
Cost of contract revenues 91.8 91.1 87.3
Selling, general and
administrative expenses 3.9 5.6 8.3
Supplemental ESOP contribution 0.0 0.0 3.2
Other expenses (0.3) 2.5 0.8
----- ----- -----
Operating profit 4.5 0.8 0.4
Interest expense 0.8 1.0 1.7
---- ---- ----
Income (loss) before income taxes 3.7 (0.2) (1.3)
Provision (benefit) for
income taxes 1.5 (0.0) (0.6)
---- ---- ----
Income (loss) from continuing
operations 2.2 (0.2) (0.7)
Income (loss) from discontinued
operations, net of income taxes (0.4) (11.3) 0.7
---- ----- ----
Net income (loss) 1.8% (11.5)% (0.0)%
</TABLE>
The following tables set forth certain items in the Company's
Statements of Operations by operating segment:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1995 1996 1997
(In thousands of dollars)
Contract revenues:
<S> <C> <C> <C>
Federal $105,224 $91,953 $73,464
Commercial - 4,293 18,775
-------- ------- -------
$105,224 $96,246 $92,239
Operating profit (loss):
Federal $4,474 $2,442 $2,933
Commercial - 729 1,154
Other expenses 292 (2,447) (3,668)
------ ------ ------
$4,766 $ 724 $ 419
</TABLE>
1997 Compared with 1996
CONTRACT REVENUES. Contract revenues decreased 4.2% to $92.2 million
in 1997 from $96.2 million in 1996. Contract revenues from the Company's
Year 2000 Century Date Change conversion contracts increased 467% to
$15.8 million in 1997 from $3.4 million in 1996. The Company performed
such services in 1997 for the States of Nebraska, Kansas, Iowa and others
as well as Cessna Aircraft and Virginia Tech.
A new contract in 1997, providing program management and integration
for the Assistant Secretary of Defense for Health Affairs, generated
revenues of $7.1 million. Another new program, the Defense Enterprise
Integration Services (DEIS) subcontract to Computer Sciences Corporation
(CSC) generated revenues of $4.1 million in 1997. Contract revenues on
the Company's contact with the General Services Administration's Federal
Supply Service increased 65% from $6.5 million in 1996 to $10.8 million
in 1997.
These increases in contract revenues were offset by decreases on the
Technical Engineering and Management Support IV (TEMS IV) program at
Hanscom Air Force Base of $10.4 million in 1997 compared to 1996 as the
program winds down. Revenues on the Naval Air Weapons Center (NAWC)
contract at China Lake, California decreased in 1997 by $5.2 million
compared to 1996. In the first quarter of 1996, the Company completed its
five-year contract with the NAWC, the last of the Company's significant
contracts awarded during its period of eligibility for small business
awards which ended in 1992. 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, from which the Company receives approximately 45% of the
contract revenues.
Contract revenues on the NAWC subcontract increased by
$0.3 million in 1997 compared to 1996. Contract revenues in 1997
decreased by $2.0 million on the Range Instrumentation Development
contract and by $1.3 million on the AUA technical assistance contract.
Contracts which ended in 1997, such as the Systems Engineering Analysis
Contract for NASA and the GSA Eastern Zone contract, contributed to the
decline in contract revenues as did the sale of the Advanced Information
Systems Division. Contracts which ended in 1996, such as the Air Force
Warning System integration contract, also contributed to the overall decline
in contract revenues in 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 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 were not sufficient to offset these losses. 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.
COST OF CONTRACT REVENUES. Cost of contract revenues decreased
8.2% to $80.5 million, or 87.3% of contract revenues, in 1997 from $87.6
million, or 91.1% of contract revenues, in 1996. The decrease in cost of
contract revenues as a percentage of contract revenues resulted primarily
from the effect of changes in the estimated contract value and
profitability of the Eastern Zone contract in 1996. Without giving effect
to the reduction in revenues due to the Eastern Zone contract, the cost
of contract revenues as a percentage of contract revenues for 1996 was
88.7%. The decrease in cost of contract revenues in 1997 would have been
even more significant were it not for the indirect cost impact of $0.9
million related to the sale of the Space and Telecommunications business
and start-up costs of $1.0 million related to certain commercial contracts.
SG&A. Selling, general and administrative expenses ("SG&A") for 1997
increased 40.8% to $7.6 million, or 8.3% of contract revenues, from $5.4
million, or 5.6% of contract revenues, in 1996. Higher costs and reduced
revenues accounted for the increase in SG&A as a percentage of contract
revenues in 1997. The increase in SG&A reflects the Company's continued
investment in infrastructure and in the initiatives required to implement
the Company's marketing strategies and increased focus on commercial
markets as well as the indirect cost impact of $0.3 million related to the
sale of the Space and Telecommunications business.
SUPPLEMENTAL ESOP CONTRIBUTION. During 1997, the Board of Directors
elected to make a one-time supplemental contribution of approximately
$3.0 million to the Company's employee stock ownership plan (ESOP). The
ESOP allows employees to share in the Company's profitability and helps
the Company attract and retain a quality workforce.
OTHER EXPENSES. Other expenses decreased to $0.7 million in 1997
from $2.4 million in 1996. The decrease is due primarily to the write-off
in the fourth quarter of 1996 of capitalized software costs of $0.8
million and $0.9 million related to the Company's unsuccessful initial
public offering.
OPERATING PROFIT (LOSS). As a result of the foregoing, the Company
had an operating profit of $0.4 million in 1997 compared to an operating
profit of $0.7 million in 1996.
INTEREST EXPENSE. Interest expense increased to $1.6 million in
1997 from $1.0 million in 1996 due to the payment of additional interest
on the subordinated debt as a result of the sale of the Space and
telecommunications Systems business to Orbital. Interest expense
allocated to discontinued operations was $2.1 million in 1997 and $3.3
million in 1996.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. The income from
discontinued operations in 1997 was $0.6 million, net of tax benefits of
$1.4 million, compared to a loss from discontinued operations of $10.9
million, net of tax benefits of $5.6 million in 1996. The income in 1997
includes a gain on the sale of the segments to Orbital Sciences
Corporation of $3.9 million. The loss in 1996 includes charges totaling
$9.2 million related to lower profitability on a contract and the write-
off of the investment in GEMnet.
1996 Compared with 1995
CONTRACT REVENUES. Contract revenues decreased 8.5% to $96.2 million
in 1996 from $105.2 million in 1995. An increase in 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 contract 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. This represented
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 were not sufficient to offset these losses. 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.
COST OF CONTRACT REVENUES. Cost of contract revenues decreased
9.3% to $87.6 million, or 91.1% of contract revenues, in 1996 from $96.6
million, or 91.8% of contract revenues, in 1995. Without giving effect to
the reduction in revenues due to the Eastern Zone contract, the cost of
contract revenues as a percentage of contract revenues for 1996 was
88.7%.
SG&A. Selling, general and administrative expenses ("SG&A") for 1996
increased 31.9% to $5.4 million, or 5.6% of contract revenues, from $4.1
million, or 3.9% of contract revenues, in 1995. Higher costs and reduced
revenues accounted for the increase in SG&A as a percentage of contract
revenues in 1996. The increase in SG&A reflects the Company's continued
investment in infrastructure and in the initiatives required to implement
the Company's marketing strategies and increased focus on commercial
markets.
OTHER EXPENSES. Other expenses increased to $2.4 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 capitalized software costs of $0.8
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.
OPERATING PROFIT (LOSS). As a result of the foregoing, the Company
had an operating profit of $0.7 million in 1996 compared to an operating
profit of $4.8 million in 1995.
INTEREST EXPENSE. Interest expense increased to $1.0 million in
1996 from $0.8 million in 1995 due to higher average balances on the
Credit Facility due to increased capital expenditures. Interest expense
allocated to discontinued operations was $3.3 million in 1996 and $3.2
million in 1995.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. The loss from
discontinued operations in 1996 was $10.9 million, net of tax benefits of
$5.6 million, compared to a loss from discontinued operations of $0.4
million, net of tax benefits of $0.3 million in 1995. The loss in 1996
includes charges totaling $9.2 million related to lower profitability on
a contract and the write-off of the investment in GEMnet. The loss in
1995 includes a loss of $0.5 million from the disposal of the Simulation
Systems Division.
Liquidity and Capital Resources
The Company's net income (loss) was ($0.02 million), ($11.0
million), and $1.9 million in 1997, 1996 and 1995, respectively. Its cash
flow provided by (used in) operating activities was $(10.2 million),
$(5.6 million), and $2.4 million in 1997, 1996 and 1995, respectively.
The principal factors accounting for the provision (use) of cash in
operating activities in 1997 were $(3.9 million) non-cash gain on
disposal of segments, $2.8 million of depreciation and amortization
expense, ($3.6) million payment of previously accrued interest, and
changes in working capital accounts using $5.6 million of cash. 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.
Cash provided by (used in) investing activities totaled $14.4
million, $(6.2 million), and $(5.2 million) in 1997, 1996 and 1995,
respectively. Proceeds from the sale of segments provided $18 million in
1997. Additions to furniture and equipment were $3.6 million, $6.5
million, and $4.3 million in 1997, 1996 and 1995, respectively. Software
development expenditures were $0.1 million in 1996 and $0.8 million in
1995.
Cash provided by (used in) financing activities was $(4.2 million),
$11.5 million, and $(0.9 million) in 1997, 1996 and 1995, respectively.
Financing was primarily provided by borrowings under the Credit Facility
and offset by the repayment of subordinated debt and acquisition notes
and the purchase of treasury stock for the employee stock purchase plan.
The Company's net borrowings (payments) under the Credit Facility were
$(3.7 million), $12.0 million and $1.3 million for 1997, 1996 and 1995,
respectively. The 1997 amount is net of $5 million proceeds from a new
three-year term loan. In connection with the sale of the segments to
Orbital, $27 million in debt was assumed by the purchaser. Net purchases
of treasury stock were $0.1 million, $0.5 million, and $2.0 million in
1997, 1996 and 1995, respectively.
In November 1997, the Company entered into a new three-year
agreement with a bank for a credit facility providing the availability
to borrow up to $20 million, including a revolving facility of $15 million,
which includes a facility for letters of credit up to $4 million, and a
new $5 million term facility. At December 31, 1997, there was $7.4
million outstanding under the revolving credit facility and $5
million outstanding under the term facility, to be repaid in equal
quarterly payments.
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 1.5% to 2.25% (based on the Company's ratio of
total funded debt to earnings before interest, taxes, depreciation and
amortization) at the Company's discretion. The weighted average rate in
effect for short-term borrowings at December 31, 1997 was approximately
7.7%. 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.
The credit facility requires advance approval by the bank for the Company
to pay cash dividends. The agreement also includes financial covenants
which require the Company to maintain certain financial ratios and
restricts capital expenditures.
In January 1998, the Company completed the $2.0 million tender offer
accrued for as of December 31, 1997. The Company believes that cash flow
from operations and available bank borrowings will provide adequate funds
for continued operations for the next twelve months.
Other Matters
The "Year 2000" issue concerns the potential exposures related to
existing computer programs that use only two digits to identify a year in
the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. The Company has evaluated, and continues
to evaluate, the potential cost associated with becoming Year 2000
compliant. The Company believes that its principal payroll and human
resources related systems, which are licensed from and maintained by
third party software development companies, are Year 2000 compliant. The
Company is in the process of selecting new financial systems which
management expects to be Year 2000 compliant. Management does not
anticipate that the remaining costs associated with assuring that its
internal systems will be Year 2000 compliant will be material to its
business, operations or financial condition.
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, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
--- ------------------
<S> <C> <C>
C.E. Velez 57 President, Chief Executive Officer and
Chairman of the Board
Gregory H. Wagner 49 Executive Vice President, Chief
Financial Officer and Treasurer
Terry J. Piddington 54 President, CTA Federal Information
Systems Company
Harvey D. Kushner(1) 67 Director
David R. Mackie (1) 59 Director
Raymond V. McMillan (1) 64 Director
George W. Morgenthaler(1) 70 Director
James M. Papada, III(1) 49 Director
Arturo Silvestrini(1) 67 Director
</TABLE>
___________
(1) Member of the Compensation Committee and the Audit Committee of the
Board of Directors.
___________
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.
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 President of the Company's Federal
Information Systems Company since October 1997 and before that had 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.
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.
David R. Mackie has been a Director of the Company since 1997. Since
1985 he has been an independent consultant and is currently a Partner in
Diplomatic Resolutions, Inc. Prior to 1985, he held various positions
with Tandem Computers, where he was one of the co-founders, and Hewlett-
Packard.
Raymond V. McMillan has been a Director of the Company since August
1996 and President of Information Technology Services from April 1996 to
his retirement in October 1997 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 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 and
GlassTech, Inc., a manufacturer of glass tempering and bending systems.
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.
Executive officers are reviewed annually by the Board of Directors
and serve at the pleasure of the Board.
Item 11. Executive Compensation
The following table sets forth information regarding the
compensation for 1997, 1996 and 1995 of the Company's Chief Executive
Officer and the four other most highly compensated executive officers in
1997 (the "Executive Officer Group") for services rendered in all
capacities to the Company:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- --------------------------
Other Res-
Annual tricted
Compen Stock Option Compen
NAME AND PRINCIPAL Salary Bonus sation Awards Awards sation
POSITION(S) Year ($)) ($) ($)(1) ($) (#) ($)(2)
---- ------- ----- ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
C.E. Velez 1997 280,000 -- 2,090 -- -- 14,480
(1)President, 1996 276,743 -- 1,870 -- 59,010 5,700
Chief Executive 1995 253,454 -- 1,691 -- -- 6,300
Officer and
Chairman of the
Board
Ricardo de 1997 175,108 -- 1,540 44,339 -- 11,835
Bastos(3) 1996 134,616 -- 1,441 125,000 102,684 338,960(4)
President-Space 1995 -- -- -- -- -- --
and
Telecommunications
Systems and Director
Terry J. 1997 155,000 -- 1,396 -- -- 14,028
Piddington- 1996 153,350 -- 1,221 -- 32,666 5,700
Executive Vice 1995 139,412 38,453 1,107 -- -- 4,800
President
Raymond V. 1997 142,308 90,000 2,346 -- -- 50,759
McMillan 1996 182,779 -- 2,815 -- 178,988 12,180
President- 1995 166,385 -- 2,616 -- -- 16,915
Information
Technology Services (5)
Services (5)
Gregory H. Wagner 1997 167,900 85,000 927 -- -- 32,461
Executive Vice 1996 167,900 -- 856 -- 85,828 5,700
President, Chief 1995 150,007 -- 768 -- -- 27,085
Financial Officer
and Treasurer
</TABLE>
___________
(1) Represents long term disability premiums and group life insurance
premiums for amounts in excess of $50,000.
(2) 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.
(3) Mr. de Bastos joined the Company in April 1996 at an annual salary
of $200,000 and resigned effective August 15, 1997.
(4) Includes $125,000 (after tax) and relocation expense of $131,003
paid in connection with hiring.
(5) Mr. McMillan resigned in October 1997.
Option Grants During 1997
There were no options granted in fiscal 1997 to any member of the
Executive Officer Group.
Fiscal Year-End Option Values
The following table sets forth information concerning the exercise
of stock options during fiscal 1997 and the number and value of
unexercised stock options held at year end by each member of the
Executive Officer Group.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options at Options at
on Value FY-End (#) FY-End ($)(1)
Exercise Realized Exercisable/ Exercisable/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
----- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
C.E. Velez -- -- 19,670/39,340 5,999/11,999
Ricardo de Bastos -- -- -- --
Terry J. -- -- 10,888/21,778 3,321/6,642
Piddington
Raymond V. -- -- 106,994/115,994 14,120/2,824
McMillan
Gregory H. Wagner -- -- 11,942/73,886 1,821/22,535
</TABLE>
___________
(1) There was no public trading market for the Common Stock on
December 31, 1997. Accordingly, solely for purposes of this table, the
values in this column have been calculated on the basis of an estimated
market price of $5.05 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, 1997 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
OWNED (1) OWNED(2)
NAME OF BENEFICIAL OWNER
<S> <C> <C>
5% Stockholders:
C.E. Velez 4,661,750 (3) 50.6%
ESOP 1,615,318 17.5
B.A. Claussen 919,634 (4) 10.0
Directors and executive officers:
C.E. Velez 4,661,750 (3) 50.6%
Terry J. Piddington 442,890 (5) 4.8
Gregory H. Wagner 135,520 (6) 1.7
Raymond V. McMillan 123,782 (7) 1.5
George W. Morgenthaler 17,454 *
Harvey D. Kushner 12,912 (8) *
James M. Papada, III 4,446 *
Arturo Silvestrini 3,034 *
David R. Mackie 496 *
All current directors and
executive officers as a group
(9 persons as of December 31,
1997) 5,402,284 (9) 58.6%
</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 and subject 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, 1997 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, 1997 was 9,213,668 shares, which includes non-qualified
options to purchase 462,648 shares of Common Stock granted under the 1991
Plan, which are currently exercisable as of December 31, 1997.
(3) Includes non-qualified options to purchase 19,670 shares of Common
Stock granted under the 1991 Plan, which are currently exercisable as of
December 31, 1997.
(4) Includes non-qualified options to purchase 200,000 shares of Common
Stock granted under the 1991 Plan which are currently exercisable as of
December 31, 1997.
(5) Includes non-qualified options to purchase 10,888 shares of Common
Stock granted under the 1991 Plan which are currently exercisable as of
December 31, 1997.
(6) Includes non-qualified options to purchase 11,942 shares of Common
Stock granted under the 1991 Plan which are currently exercisable as of
December 31, 1997.
(7) Includes non-qualified options to purchase 106,994 shares of Common
Stock granted under the 1991 Plan which are currently exercisable as of
December 31, 1997.
(8) Includes non-qualified options to purchase 3,240 shares of Common
Stock granted under the 1991 Plan which are currently exercisable as of
December 31, 1997.
(9) Includes non-qualified options to purchase 152,734 shares of Common
Stock granted under the 1991 Plan which are currently exercisable as of
December 31, 1997.
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. During 1997, the Company and Mr. Claussen entered
into an employee separation and non-competition agreement under which he
will be paid $175,000 per year for a period of five years.
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. Dr. Velez paid all outstanding principal and accrued
interest on the loan in November 1997.
<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-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
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
(23b) Consent and Report of Legg Mason
Wood Walker, Inc. F-30
14(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the
fourth quarter of 1997.
14(c) Financial Data Schedule
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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
1997. 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 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, 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.
February 28, 1998
F-1
<PAGE>
CTA INCORPORATED
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1997
-------- ------
(IN THOUSANDS,
EXCEPT FOR SHARE DATA)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 16 $ -
Accounts receivable (NOTES 1 AND 3) 30,665 33,300
Net assets of discontinued operations (NOTE 2)
34,484 -
Other current assets (NOTE 4) 1,690 1,222
Recoverable income taxes (NOTE 8) 3,537 3,576
------ ------
Total current assets 70,392 38,098
Furniture and equipment (NOTES 1 AND 4) 11,795 11,110
Accumulated depreciation and amortization
(8,888) (8,066)
------- -------
2,907 3,044
Costs in excess of net assets acquired 5,048 -
Other assets (NOTES 1, 4, AND 8) 5,110 4,146
------- -------
Total assets $83,457 $45,288
======= =======
</TABLE>
F-2
<PAGE>
CTA INCORPORATED
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT FOR SHARE DATA)
Liabilities and stockholders' equity
<S> <C> <C>
Current liabilities:
Notes payable - line of credit(NOTE 5) $28,335 $ 7,445
Current portion of long-term debt - 1,667
Accounts payable 10,266 5,788
Accrued expenses (NOTE 4) 3,686 3,156
Excess of billings over costs and contract
prepayments 2,733 2,738
Other current liabilities 757 270
Accrued tender offer (NOTE 7) - 2,019
Deferred income taxes (NOTE 8) 1,377 2,427
------ ------
Total current liabilities 47,154 25,510
Long-term debt, less current portion (NOTE 5) 15,000 3,333
Other long-term liabilities 3,510 635
Commitments and contingencies (NOTE 11) - -
Stockholders' equity (NOTE 7):
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 10,000,000 issued 100 100
Capital in excess of par value 7,943 7,869
Retained earnings 14,550 14,528
------ ------
22,593 22,497
Notes receivable from employees
(NOTE 10) (698) (698)
Treasury stock, at cost (894,704
shares in 1996 and 1,248,980
shares in 1997) (4,102) (5,989)
------- -------
Total stockholders' equity 17,793 15,810
------- -------
Total liabilities and stockholders' equity $83,457 $45,288
======= =======
</TABLE>
SEE ACCOMPANYING NOTES. F-3
<PAGE>
CTA INCORPORATED
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------- ------- --------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(S) <C> <C> (C)
Contract revenues $105,224 $96,246 $92,239
Cost of contract revenues 96,633 87,644 80,503
Selling, general and
administrative expenses 4,117 5,431 7,649
Supplemental ESOP
contribution (NOTE 6) - - 2,958
Other expenses (292) 2,447 710
-------- ------- ------
Operating profit 4,766 724 419
Interest expense 850 969 1,589
----- --- -----
Income (loss) before
income taxes 3,916 (245) (1,170)
Income taxes (benefit) (NOTE 8) 1,567 (80) (500)
----- ---- ------
Income (loss) from continuing
operations 2,349 (165) (670)
Discontinued operations(NOTE 2):
Income (loss) from discontinued
operations, net of income taxes 62 (10,872) (3,272)
Gain (loss) on disposal of
segments, net of income taxes (465) - 3,920
---- ------- ------
Income (loss) from discontinued
operations (403) (10,872) 648
----- -------- ----
Net income (loss) $1,946 $(11,037) $(22)
Earnings (loss) per share
(NOTE 9):
Continuing operations $ .27 $ (.02) $ (.07)
Discontinued operations (.05) (1.22) .07
------ -------- --------
Earnings (loss) per share $ .22 $ (1.24) $ .00
Earnings (loss) per share -
assuming dilution (NOTE 9):
Continuing operations $ .25 $ (.02) $ (.07)
Discontinued operations (.04) (1.22) .07
------ -------- --------
Earnings (loss) per share -
assuming dilution $ .21 $ (1.24) $ .00
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CTA INCORPORATED
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Capital Notes
--------------- in Rcv Treasury Stock
Par Excess Retained from -----------------
Shares Value Par Earnings Empl Shares Cost
---------- ----- ----- ------- ---- --------- ------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 10,000,000 $100 $8,872 $23,641 $ - 1,108,370 $4,663
Purchase of
treasury stock - - - - - 147,684 684
Exercise of stock
options - - (46) - - (79,000) (283)
Compensatory
issuance of common
stock to
employees/
directors - - 58 - - (52,274) (187)
Issuance of stock
for acquisition
notes payable - - 89 - - (79,872) (286)
Purchase of
treasury stock
from ESOP - - - - - 276,200 1,296
Net income - - - 1,946 - - -
---------- ------ ----- ------ ----- ------- -----
Balance at December
31, 1995 10,000,000 100 8,973 25,587 - 1,321,108 5,887
Purchase of
treasury stock - - - - - 125,368 590
Sale of treasury
stock - - 8 - - (7,826) (28)
Exercise of stock
options - - (1,452) - - (449,340) (1,935)
</TABLE>
F-5
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Compensatory
issuance of common
stock to
employees/
directors - - 7 - - (15,576) (67)
Issuance of stock
for acquisition
notes payable - - 30 - - (79,030) (345)
Tax benefit of
non-qualified
stock options
exercised - - 377 - - - -
Issuance of stock
to employees for
notes receivable - - - - 698 - -
Net loss - - - (11,037) - - -
------------ ---- ------- -------- ---- -------- ------
Balance at December
31, 1996 10,000,000 100 7,943 14,550 698 894,704 4,102
Purchase of
treasury stock
(NOTE 7) - - - - - 466,500 2,381
Exercise of stock
options - - (191) - - (89,870) (392)
Compensatory
issuance of common
stock to
employees/
directors - - 12 - - (22,354) (102)
Tax benefit of
non-qualified
stock options
exercised - - 105 - - - -
Net loss - - - (22) - - -
---------- ---- ------ ------- ---- --------- -------
Balance at December
31, 1997 10,000,000 $100 $7,869 $14,528 $698 1,248,980 $ 5,989
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
CTA INCORPORATED
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1995 1996 1997
------- --------- ---------
(IN THOUSANDS)
Operating activities
<S> <C> <C> <C>
Net income (loss) $ 1,946 $(11,037) $ (22)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Loss on disposal of SIM 718 - -
Gain on disposal of segments - - (3,920)
Depreciation and amortization:
Furniture and equipment 2,877 3,734 2,612
Capitalized software development costs 131 1,108 76
Other noncurrent assets 610 1,018 390
Deferred lease incentives (382) (292) (271)
Provision for receivable allowances (990) 300 360
Accrued interest on subordinated debt 1,063 1,034 (3,590)
Other noncash expenses 432 (8) (224)
Changes in assets and liabilities:
Accounts receivable (233) (4,106) 901
Recoverable income taxes (2,707) (639) (906)
Other assets 933 (2,353) 463
GEMnet investment (1,011) 6,437 -
Accounts payable and accrued expenses 5,089 1,595 (5,017)
Excess of billings over costs and contract
prepayments (4,816) 1,556 (3,180)
Deferred income taxes, net (1,299) (3,900) 2,100
------ ------ ------
Net cash provided by (used in) operating
activities 2,361 (5,553) (10,228)
Investing activities:
Investments in furniture and equipment (4,327) (6,469) (3,584)
Proceeds from sale of segments - - 18,000
Capitalized computer software (832) (87) -
Other - 351 -
------ ------ ------
Net cash provided by (used in) investing
activities (5,159) (6,205) 14,416
</TABLE>
F-7
<PAGE>
CTA INCORPORATED
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996 1997
------ -------- ------
(IN THOUSANDS)
Financing activities
<S> <C> <C> <C>
Net borrowings (payments) under
bank line of credit agreement 1,324 12,011 (8,684)
Proceeds from term loan - - 5,000
Repayment of subordinated debt - - (450)
Repayment of acquisition notes (375) (375) -
Proceeds from deferred lease incentives 150 315 -
Purchase of treasury stock (1,980) (458) (104)
Proceeds from exercise of stock options 12 10 34
Other - 36 -
------ ------ ------
Net cash provided by (used in) financing
activities (869) 11,539 (4,204)
------ ------ ------
Net decrease in cash and cash
equivalents (3,667) (219) (16)
Cash and cash equivalents at
beginning of period 3,902 235 16
----- --- ---
Cash and cash equivalents at
end of period $ 235 $ 16 $ -
======= ===== =====
Supplemental Information
Cash paid during the year for:
Income taxes $ 5,115 $ 226 $ 117
Interest $ 2,863 $ 2,836 $ 8,807
Noncash investing and financing
activities:
Debt assumed by purchaser (NOTE 2) $ - $ - $ 27,000
Purchase of treasury stock (NOTE 7)$ - $ - $ 2,019
Investment in EarthWatch $ - $ 2,038 $ -
Conversion of note to common stock $ 375 $ 375 $ -
Common stock issued for notes $ 225 $ 473 $ -
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
CTA INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1997
1. The Company and Significant Accounting Policies
CTA INCORPORATED (the Company) provides information
technology services to Federal, State and commercial markets
including Year 2000 services, network design and
implementation, mainframe to client-server conversions,
software language upgrades, database development and
maintenance, electronic data interchange and automated
enterprise management technologies. During 1995, the Company
disposed of its aircraft simulation systems business. During
1997, the Company disposed of its Space and
Telecommunications Systems and its Mobile Information and
Communications Services businesses.
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.
An important focus of the Company's efforts to pursue
commercial markets is to assist state and local governments
and commercial companies address the Year 2000 Issue with
their information systems. The Year 2000 Issue arises because
many electronic data processing systems will be unable to
process year-date data accurately beyond the year 1999. The
Company believes it has instituted reasonable contract
management practices to control the financial risk of
performance on these contracts.
Cash and Cash Equivalents
The Company considers highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-9
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
1. The Company and Significant Accounting Policies
(continued)
Furniture and Equipment
Furniture and equipment are carried at cost. Depreciation is
computed based upon accelerated methods using estimated
useful lives of three to seven 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.
Contracts 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, based on contract costs
incurred to date compared with total estimated costs at
completion or other measures of progress on the contract.
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.
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.
Contract costs, including indirect costs for cost-type
contracts, are subject to audit by government
representatives. Such audits have been completed through
1992. 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.
F-10
<PAGE>
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
1. The Company and Significant Accounting Policies
(continued)
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.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
EARNINGS PER SHARE. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share
amounts for all periods presented have been restated to
conform to the SFAS No.128 requirements (see Note 9).
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, in 1997. SFAS No.
131 supercedes SFAS No. 14, replacing the "industry segment
approach" with the "management approach," whereby companies
report financial and descriptive information about their
operating segments. Operating segments are revenue-producing
components of the enterprise for which separate financial
information is produced internally and are subject to
evaluation by the chief operating decision maker in deciding
how to allocate resources to segments (see Note 13).
Reclassifications
Certain prior year balances have been reclassified to conform
with the current period presentation.
F-11
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
2. Disposal of Segments
In August 1997, the Company sold its Space and
Telecommunications Systems and its Mobile Information and
Communications Services businesses to Orbital Sciences
Corporation in exchange for $18 million in cash and
assumption by Orbital of certain liabilities of the Company.
In addition, Orbital paid to certain lenders of the Company
an aggregate of $27 million in partial satisfaction of the
Company's obligations to such lenders. The final purchase
price is subject to certain adjustments, however, in the
opinion of management, such adjustments, if any, will not
have a material effect on the financial position or the fuure
results of operations of the Company. The Company also is
entitled to receive certain deferred consideration for future
sales of STARBus satellites and satellite busses and 3% of
all cumulative revenues attributable to the GEMtrak
monitoring system in excess of a threshold amount of $50
million.
The consolidated statements of operations exclude sales and
expenses of discontinued operations from captions applicable
to continuing operations. The discontinued operations include
an allocation of interest expense based on the proportion of
debt paid by Orbital to the Company's total debt outstanding
at the time of the sale. Interest expense allocated to
discontinued operations was $2.1 million in 1997, $3.3
million in 1996 and $3.2 million in 1995. Net sales of the
Space and Telecommunications Systems business prior to its
disposition were $66.8 million in 1997, $83.5 million in 1996
and $111.8 million in 1995. There were no sales for the
Mobile Information and Communications Services business prior
to its disposition. The income (loss) from operations of the
disposed businesses was $(3.3) million in 1997, $(10.9)
million in 1996 and $1.3 million in 1995, net of income tax.
The operating loss in 1996 includes charges totaling $9.2
million related to lower profitability on a contract and the
write-off of the investment in GEMnet. The 1997 gain from
disposal of the businesses was $3.9 million, net of income
tax. The income tax provision (benefit) related to these
discontinued segments was $(1.4) million in 1997, $(5.6)
million in 1996 and $0.9 million in 1995.
F-12
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
2. Disposal of Segments (continued)
During 1997, the Company also sold its Advanced Information
Systems (AIS) division for approximately $0.4 million. The
net contract revenues of AIS prior to its disposition were
$0.9 million in 1997, $2.9 million in 1996 and $3.7 million
in 1995 and are included in continuing operations.
In September 1995, the Company sold 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
net book value of $3.1 million. Realization of the investment
and notes receivable totaling $0.2 million are dependent
primarily on the future success of the business and/or the
collateral securing the note, while the realization of a note
totaling $1.8 million 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.
Net sales of SIM prior to its disposition were $0.5 million
in 1995. The loss from operations of the SIM business, which
is reported in discontinued operations, was $1.3 million in
1995, net of income tax. The 1995 loss from disposal of the
business was $0.5 million, net of income tax. The income tax
benefit related to this discontinued business was $1.2
million in 1995.
F-13
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
3. Accounts Receivable
<TABLE>
<CAPTION>
December 31
1996 1997
------- -------
Accounts receivable: (IN THOUSANDS)
U.S. Government:
<S> <C> <C>
Billed $21,969 $17,556
Unbilled:
Contracts in progress 6,106 4,659
Amounts awaiting contractual coverage
4,338 4,192
Revenue awaiting government approval of final
indirect rates or contract close-out
1,360 242
Commercial Customers:
Billed - 5,646
Unbilled:
Contracts in progress - 4,473
33,773 36,768
Less allowances (3,108) (3,468)
$30,665 $33,300
</TABLE>
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, 1996 and 1997, approximately $2.9 million and $2.2
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.
F-14
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
4. Composition of Certain Financial Statement Balances
<TABLE>
<CAPTION>
December 31
1996 1997
------ -------
(IN THOUSANDS)
Other current assets:
<S> <C> <C>
Receivables from employees and stockholders
(NOTE 10) $1,175 $ 76
Prepaid expenses 253 495
Other 262 651
------ ------
$1,690 $1,222
Furniture and equipment:
Data processing equipment $8,353 $7,513
Office furniture and equipment 2,425 2,805
Other equipment 351 115
Leasehold improvements 666 677
------ -----
11,795 11,110
Accumulated depreciation and amortization
(8,888) (8,066)
------- -------
$ 2,907 $3,044
Other assets:
Investment in and notes receivable from SIM (NOTE
2) $2,138 $2,218
Capitalized software costs, net 525 -
Deferred tax asset (NOTE 8) 1,385 935
Other 1,062 993
------ ------
$5,110 $4,146
Accrued expenses:
Salaries and incentives $3,253 $3,106
Employee benefit plans 147 -
Other 286 50
$3,686 $3,156
</TABLE>
F-15
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
5. Notes Payable and Subordinated Debt
Bank Debt
In November 1997, the Company entered into a new three-year
agreement with a bank for a revolving credit facility
providing the availability to borrow up to $15 million, which
includes a facility for letters of credit up to $4 million
and which also provides a new $5 million term facility. At
December 31, 1997, there was $7.4 million outstanding under
the revolving credit facility and $5 million outstanding
under the term facility, to be repaid in equal quarterly
payments.
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 1.5% to 2.25%
(based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and
amortization) at the Company's discretion. The weighted
average rate in effect for short-term borrowings at December
31, 1997 was approximately 7.7%. 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. The credit facility requires advance approval by
the bank for the Company to pay dividends. The agreement
also includes financial covenants which require the Company
to maintain certain financial ratios and restricts capital
expenditures.
The balance outstanding at December 31, 1996 under the
previous credit facility was $28.3 million. The weighted
average interest rate in effect for short-term borrowings at
that date was approximately 7.6%.
Subordinated Debt
In December 1993, the Company entered into a note purchase
agreement (the "Notes Agreement") providing for $15 million
aggregate principal amount of unsecured, senior subordinated
notes (the "Notes"). The Notes bore interest at 12.0% per
annum (13.0% effective April 1, 1996), payable quarterly. The
Company was 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
resulted in a change in
F-16
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
5. Notes Payable and Subordinated Debt (continued)
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 provided for payment of contingent interest
over and above the 13.0% fixed rate upon the occurrence of a
"Qualifying Sale." The sale of the Space and
Telecommunications Systems business as described in Note 2
was a "Qualifying Sale." As a result, the subordinated debt
was repaid along with accrued interest and contingent
interest of $5.8 million.
6. Employee Benefit Plans
Substantially all of the Company's employees are eligible to
participate in the Company's employee stock ownership plan
(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. During 1997, the Board
elected to make a one-time supplemental contribution of
approximately $2.9 million. 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, 1997, no shares of the Company's common stock have been
distributed by the ESOP. At December 31, 1996 and 1997, the
ESOP owned 1,029,440 and 1,615,318 shares, respectively, 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. The Company's 401(k) plan owned
140,000 shares of the Company's common stock at December 31,
1996 and 1997.
Amounts charged to expense under the above plans were
approximately $2.1 million, $2.0 million and $4.2 million
(including the supplemental contribution) for the years ended
December 31, 1995, 1996 and 1997, respectively. The Company
currently provides no significant other post retirement
benefits.
F-17
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
7. Common Stock and Stock Options
All of the Company's outstanding shares contain restrictions
on transferability. Shares of common stock held by the
Company's principal stockholder are subject to a buy-sell
arrangement with the Company which contains repurchase
features under specified circumstances. At December 31,
1997, none of the specified circumstances exist.
The Company completed a tender offer for 399,946 shares at
$5.05 per share on December 31, 1997 which resulted in a
corresponding increase of treasury stock. The Board of
Directors declared a two-for-one stock split for all shares
outstanding on January 15, 1998 which is reflected for all
periods presented in these financial statements.
In December 1991, the Company adopted the 1991 Stock Option
and Purchase Plan which reserves 2,600,000 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 five to ten years and provide for vesting
periods of three years. As of December 31, 1997, options for
1,504,750 shares are available for grant under this plan. The
weighted average grant date fair value of an option granted
during the years ended December 31, 1995, 1996 and 1997 was
$2.03, $1.91 and $1.60, respectively. The Company uses the
Black-Scholes model to estimate the fair values of options,
assuming a risk-free interest rate equal to the ninety-day
U.S. Treasury Bill rate, expected lives of five to ten years,
an expected volatility factor of .236 and no expected
dividends. The Company recognized no compensation expense
for stock option grants during the three years in the period
ended December 31, 1997.
F-18
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
7. Common Stock and Stock Options (continued)
<TABLE>
<CAPTION>
Number of Shares
Year ended December 31
1995 1996 1997
--------- ------- ---------
<S> <C> <C> <C>
Options outstanding at beginning of year
(weighted average exercise price of $2.08
in 1995, $1.90 in 1996 and $3.96 in 1997)
1,175,950 934,450 1,282,126
Granted (weighted average exercise price of
$4.68 in 1995, $4.74 in 1996 and $5.05 in
1997) 30,500 799,016 13,574
Canceled (weighted average exercise price
of $3.04 in 1995, $2.09 in 1996 and $4.61
in 1997) (193,000) (2,000) (357,950)
Exercised (weighted average exercise price
of $3.00 in 1995, $1.07 in 1996 and $2.24
in 1997) (79,000) (449,340) (89,870)
--------- -------- --------
Options outstanding at end of year
(weighted average exercise price of $1.90
in 1995, $3.96 in 1996 and $4.08 in 1997)
934,450 1,282,126 847,880
========= ========= ========
Options exercisable at end of year
(weighted average exercise price of $1.66
in 1995, $2.48 in 1996 and $3.16 in 1997)
824,244 391,022 462,648
======= ======= =======
</TABLE>
F-19
<PAGE>
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
7. Common Stock and Stock Options (continued)
<TABLE>
<CAPTION>
Range of Exercise Prices December 31, 1997
<S> <C>
$2.01-$3.00:
Options outstanding:
Number of shares 266,000
Weighted average exercise price $2.17
Weighted average remaining contractual life (in 1.7
years)
Options exercisable:
Number of shares 266,000
Weighted average exercise price $2.17
$3.58-$5.05:
Options outstanding:
Number of shares 581,880
Weighted average exercise price $4.95
Weighted average remaining contractual life (in 3.2
years)
Options exercisable:
Number of shares 196,648
Weighted average exercise price $4.49
</TABLE>
Pro forma compensation expense associated with options
granted subsequent to December 31, 1994 generally is
recognized over a three year vesting period; therefore, the
initial impact of applying SFAS No. 123 on pro forma net
income (loss) for 1995 and 1996 is not representative of the
impact on pro forma net income in 1997 and future years, when
the pro forma effect is fully reflected. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------ ------ -------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
Pro forma income (loss) from
continuing operations $2,325 $(327) $(964)
Pro forma earnings (loss) per share
Basic $.26 $(.04) $(.10)
Diluted $.24 $(.04) $(.10)
</TABLE>
F-20
<PAGE>
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
The provision (benefit) for income taxes attributable to
continuing operations consisted of the following components:
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------- ------ ------
(IN THOUSANDS)
Current:
<S> <C> <C> <C>
Federal $ 2,140 $(20) $(2,400)
State 410 - (200)
------- ---- -------
2,550 (20) (2,600)
Deferred:
Federal (875) (50) 2,000
State (108) (10) 100
------- ---- -------
(983) (60) 2,100
------- ---- -------
$ 1,567 $(80) $(500)
======= ==== =======
</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-21
<PAGE>
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
<TABLE>
<CAPTION>
December 31
1996 1997
------ ------
(IN THOUSANDS)
Current deferred tax liabilities:
<S> <C> <C>
Unbilled receivables $5,820 $5,425
Other 185 135
------ ------
6,005 5,560
Current deferred tax assets:
Contract provisions and allowances 3,707 2,482
Accrued vacation 704 510
Other accruals 217 141
----- ------
4,628 3,133
------ ------
Net current deferred tax liabilities $1,377 $2,427
====== ======
Long-term deferred tax assets:
Accrued interest on subordinated debt $1,240 $ -
Net operating loss carryforward 504 350
Other 145 935
------ ------
1,889 1,285
Less: valuation allowance (504) (350)
------ ------
Net long-term deferred tax assets $1,385 $ 935
====== ======
</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:
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------ ----- ------
(IN THOUSANDS>
<S> <C> <C> <C>
Federal income taxes at statutory rate $1,331 $(83) $(398)
State income taxes, net of Federal tax
benefit 181 (31) (60)
Other 55 34 (42)
------ ----- -----
$1,567 $(80) $(500)
====== ===== =====
</TABLE>
F-22
<PAGE>
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
9. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
Numerator:
<S> <C> <C> <C>
Income (loss) from continuing operations $2,349 $ (165) $ (670)
Income (loss) from discontinued
operations (403) (10,872) 648
Net income (loss) for both basic and
------ -------- -------
diluted earnings per share $1,946 $(11,037) $ (22)
Denominator:
Denominator for basic earnings
per share ---
Weighted average shares outstanding 8,862,530 8,875,086 9,092,214
Dilutive potential common shares:
Employee stock options 556,006 - -
--------- --------- ---------
Denominator for diluted earnings per share
- --- Adjusted weighted average shares and
assumed conversions 9,418,536 8,875,086 9,092,214
</TABLE>
Due to a loss from continuing operations in 1996 and 1997,
employee stock options are considered anti-dilutive and not
included in the denominator for diluted earnings per share.
F-23
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
10. Transactions with Related Parties
The Company made loans in prior years 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 were secured by deeds of trust on
residential property. The loans bore 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 1996. The remaining outstanding
loan of approximately $600,000 was repaid in 1997.
The Company made loans in prior years 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.
11. 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 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 from continuing operations for the years
ended December 31, 1995, 1996 and 1997 was $3.1 million, $2.7
million and $2.4 million, respectively.
F-24
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
Operating Leases (continued)
At December 31, 1997, total future minimum rental commitments
under non-cancelable leases are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 2,650
1999 1,743
2000 794
2001 544
2002 354
2003 and after 321
--------
$ 6,406
========
</TABLE>
At December 31, 1997, 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. Management of
the Company, after reviewing developments with legal counsel,
is of the opinion that the outcome of this matter will not
have a material adverse effect on the financial position or
future operations of the Company.
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.
F-25
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
12. 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
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Department of Defense 64% 63% 47%
General Services Administration 17% 14% 16%
</TABLE>
13. Operating Segments
The Company has two principal operating segments: Federal and
Commercial Information Technology Systems. Segment data has
been adjusted from previously reported amounts to reflect
treatment of the Space and Telecommunications Systems and the
Mobile Information and Communications Services businesses and
Simulation Systems Division as discontinued operations. The
following table provides certain financial information for
each operating segment:
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------ ------ ------
(IN MILLIONS)
Contract revenues:
<S> <C> <C> <C>
Federal $105.2 $91.9 $73.4
Commercial - 4.3 18.8
------ ----- -----
$105.2 $96.2 $92.2
Operating profit (loss):
Federal $ 4.5 $ 2.4 $ 3.0
Commercial - 0.7 1.1
Other expense 0.3 (2.4) (3.7)
------ ------ ------
$ 4.8 $ 0.7 $ 0.4
</TABLE>
F-26
CTA INCORPORATED
Notes to Consolidated Financial Statements (continued)
13. Operating Segments (continued)
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------ ------ ------
(IN MILLIONS)
Depreciation and amortization expense:
<S> <C> <C> <C>
Federal $ 1.6 $ 2.4 $ 0.8
Commercial - - 0.4
Discontinued operations 1.6 3.2 1.6
Capital expenditures:
Federal $ 1.4 $ 1.0 $ 0.4
Commercial - - 1.4
Discontinued operations 3.8 5.5 1.8
Identifiable assets:
Federal $ 42.4 $ 29.8 $ 27.4
Commercial - 3.0 12.0
Discontinued operations 39.5 42.8 -
General corporate assets 9.7 7.8 5.9
------ ------- ------
$ 91.6 $ 83.4 $ 45.3
====== ======= ======
</TABLE>
The operating profit in 1996 for the Federal operating
segment was adversely impacted by a $2.6 million adjustment
to the profitability of the General Services Administration -
Eastern Zone contract. Other expenses in 1996 include $0.9
million related to an unsuccessful initial public offering.
Other expenses in 1997 include $2.9 million for a
supplemental ESOP contribution.
F-27
Schedule II
CTA INCORPORATED
Valuation and Qualifying Accounts and Reserves
($000)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance, Charged to
Beginning Costs Charged to Balance,
of and Other End of
DESCRIPTION Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
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
For the year ended
December 31, 1997 $3,108 $600 $ 94 $ 334 $3,468
</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 February 28, 1998, with respect to the consolidated
financial statements of CTA INCORPORATED included in the
Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/Ernst & Young LLP
Washington, D.C.
March 26, 1998
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 February 28, 1998, with respect to the consolidated
financial statements of CTA INCORPORATED included in the
Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/Ernst & Young LLP
Washington, D.C.
March 26, 1998
F-29
<PAGE>
CONSENT OF LEGG MASON WOOD WALKER, INC., INDEPENDENT
APPRAISERS
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 February 28, 1998, with respect to the fair market
value of minority holdings of Common Stock of CTA
INCORPORATED as of December 31, 1997 included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
/s/Legg Mason Wood Walker, Inc.
Baltimore, MD
March 26, 1998
F-30
<PAGE>
REPORT OF LEGG MASON WOOD WALKER, INC., INDEPENDENT
APPRAISERS
Board of Directors
CTA INCORPORATED
6116 Executive Boulevard
Suite 800
Rockville, Maryland 20852
Members of the Board:
You have requested our opinion (the "Opinion") as to the
fair market value of minority holdings of Common Stock of CTA
INCORPORATED ("CTA" or the "Company") as of December 31,
1997. We understand that the Company intends to use the
Opinion for the purpose of contributing common stock to an
employee stock plan.
In rendering our Opinion we have, among other things:
(i) reviewed the audited financial statements of CTA
for each of the five years ended December 31, 1993
through December 31, 1997;
(ii) reviewed certain other information relating to the
business, earnings, cash flow, assets and prospects
of the Company;
(iii)reviewed contract backlog data and contract
profiles prepared by management;
(iv) reviewed certain data regarding the financial
performance and market valuation of selected public
companies we deemed to be engaged in operations
similar to those of CTA;
(v) reviewed data relating to recent merger and
acquisition activity in relevant industry
classifications; and
(vi) met with senior management of CTA to discuss the
operating performance and future prospects of the
Company.
We have relied without independent verification on
information supplied to us by CTA and its employees,
representatives and independent public accountants as well as
information available from generally recognized public
sources
F-31
and, accordingly, do not assume responsibility for the
accuracy or completeness of such information. Additionally,
we have not made an appraisal of any assets of CTA. Our
Opinion herein is necessarily based upon conditions and
circumstances as they exist, have been disclosed to us and
can be evaluated as of the date hereof.
In recommending a 17.5% Discount Factor for the minority
holdings of CTA Common Stock we note that while there is no
active trading market for the Common Stock, there have been
limited treasury stock purchases by the Company, its Employee
Stock Option Plan and employees of CTA.
Based upon our analysis of the foregoing and upon such
other data as we have considered relevant to our analysis, it
is our Opinion that the fair market value of minority
holdings of CTA Common Stock falls in a range of $4.29 per
share to $5.82 per share as of December 31, 1997, with an
expected value of $5.05 per share. It should be noted that
this valuation reflects the 2 for 1 Common Stock split that
became effective February 2, 1998.
Very truly yours,
LEGG MASON WOOD WALKER, INCORPORATED
Baltimore, MD
February 28, 1998
By:/S/SCOTT R. COUSINO
Scott R. Cousino
Managing Director
F-32
<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, 1998 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, 1998
By:/S/ GREGORY H. WAGNER
Gregory H. Wagner
Executive Vice President, Chief
Financial Officer, Principal
Accounting Officer and Treasurer Date: March 31, 1998
By:/S/ HARVEY D. KUSHNER
Harvey D. Kushner
Director Date: March 31, 1998
By:/S/ DAVID R. MACKIE
David R. Mackie
Director Date: March 31, 1998
By:/S/ RAYMOND V. MCMILLAN
Raymond V. McMillan
Director Date: March 31, 1998
By:/S/ GEORGE W. MORGANTHALER
George W. Morganthaler
Director Date: March 31, 1998
By:/S/ JAMES M. PAPADA, III
James M. Papada, III
Director Date: March 31, 1998
By:/S/ ARTURO SILVESTRINI
Arturo Silvestrini
Director Date: March 31, 1998
By:/S/ GREGORY H. WAGNER
Gregory H. Wagner
As Attorney-in-Fact Date: March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 0 16 235
<SECURITIES> 0 0 0
<RECEIVABLES> 36768 33773 61286
<ALLOWANCES> 3468 3108 2700
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 38098 70392 72301
<PP&E> 11110 11795 21301
<DEPRECIATION> 8066 8888 14517
<TOTAL-ASSETS> 45288 83457 91530
<CURRENT-LIABILITIES> 25510 47154 45326
<BONDS> 0 0 0
<COMMON> 100 100 100
0 0 0
0 0 0
<OTHER-SE> 15710 17693 28673
<TOTAL-LIABILITY-AND-EQUITY> 45288 83457 91530
<SALES> 92239 96246 105224
<TOTAL-REVENUES> 92239 96246 105224
<CGS> 80503 87644 96633
<TOTAL-COSTS> 80503 87644 96633
<OTHER-EXPENSES> 11317 7878 3825
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1589 724 850
<INCOME-PRETAX> (1170) (245) 3916
<INCOME-TAX> (500) ( 80) 1567
<INCOME-CONTINUING> (670) (165) 2349
<DISCONTINUED> 648 (10872) (403)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (22) (11037) 1946
<EPS-PRIMARY> 0 (1.24) .22
<EPS-DILUTED> 0 (1.24) .01
</TABLE>
