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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 333-64373
COMPUTER TECHNOLOGY ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0797618
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6903 ROCKLEDGE DRIVE, BETHESDA, MD 20817
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 581-3200
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, 1999, there were outstanding 8,584,095 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 $9,917,232 as
determined by independent appraisal.
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
PAGE
ITEM 1 BUSINESS 1
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
16
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 24
ITEM 11. EXECUTIVE COMPENSATION 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 31
SIGNATURES
<PAGE>
PART I
ITEM 1. BUSINESS
CTA provides rapid development and deployment of advanced information
technology ("IT") solutions for complex enterprise requirements. The Company's
offerings include project management consulting, network engineering, embedded
IT systems engineering, Enterprise Resource Planning ("ERP") installation and
integration, data warehousing and data base migrations, electronic commerce,
client-server and other web based applications development and legacy system
modernization. CTA's mission is to provide for rapid, low risk installation and
integration of complex information technology through the use of a disciplined
incremental implementation approach. 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 a combination of
service, quality and value. The Company's current business strategy includes
developing an international client base which is balanced across both
government and commercial sectors of the IT services market.
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
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
Following the sale of the Space and Telecommunications business, the
Company organized into Federal and Commercial operating units. These business
units focused on specific client groups, namely, federal, state and local
government and commercial clients. Subsequently, management determined that to
better focus the provision of services to our clients, an organization
consisting of Software Engineering and Systems Engineering groups would be more
appropriate. Accordingly, the Company's Software Engineering Group focuses on
the installation and integration of ERP software, software migration and
conversions, e-commerce implementation and Year 2000 services. The Company's
Systems Engineering Group focuses on complex embedded computer systems and
project management and engineering consulting.
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 rapid, high value,
solutions to a range of client IT requirements. The Company's principal
business focus is in the areas of 1) legacy information system modernization,
including Year 2000 compliance upgrades, 2) electronic commerce implementations
and other web based applications including the engineering and implementation
of secure and highly reliable computer and network systems, 3) network
integration and application development, 4) the development, migration and
maintenance of large scale databases, 5) the installation and integration of
ERP software, and 6) a range of IT services associated with complex embedded
computer systems. The Company is currently planning to focus the provision of
these services across a wide range of vertical markets.
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 revenues from additional Year 2000
engagements during the next 18 months. 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 legacy system modernization
projects including web based applications and client-server conversions.
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
heavily on achieving consistently high levels of 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 result in 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 to new customers the expertise
it has gained in past IT assignments. The Company's experience in federal
government, state government and commercial Year 2000 compliance projects 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, data base migrations, and web enabled applications development.
ESTABLISHING MARKETING ALLIANCES TO OFFER COMPLETE SOLUTIONS. The Company
has established, and will continue to establish, marketing alliances with
software product and tool providers which allow the Company to offer turn-key
solutions for such applications as Enterprise Resource Planning and electronic
commerce.
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 and skills 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 (earned and
recorded) and unrealized (to be earned and recorded in future periods)
revenues. Government 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, has a total value of $88 million and work under this contact is
scheduled to be completed in December 1999.
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, has a total value to CTA of $33 million and is
scheduled for completion in March 2000.
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 to CTA 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.
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 ("FAA"). 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 to CTA 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 to CTA 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 to CTA 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 to CTA 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 Company's current Federal Supply Service contract is
a follow-on contract to the original Federal Supply Service contract that was
awarded to the Company in 1992. The current 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 is a leading provider of Year 2000
compliance services to both commercial clients and state and local governments.
The Company currently has contracts to provide such services to 14 commercial
clients centered in the Financial Services and Process Manufacturing vertical
markets and 12 state and local governments. These contracts incorporate a wide
range of services including IT inventory assessment, code remediation, testing,
auditing of third party-vendor remediated systems and embedded systems
compliance evaluations. The Company's historical, positive performance track
record has fostered significant financial confidence within the customer base
that has resulted in multi-year contractual awards that range from $1 - $5
million for its commercial customers to $1 - $25 million for its state and
local government customers.
IT SYSTEMS ENGINEERING. In June of 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 OFFERINGS & PROGRAMS. In keeping with its stated
strategy to leverage Year 2000 contracts, the Company has staffed its Year 2000
projects with senior business and systems professionals whose experience
profiles go far beyond those required to perform general Year 2000 assessments
and remediation. By incorporating a high-level skill set with a proven
methodology, customers have yielded an experience-enhanced view of their
current IT portfolios that not only accelerates Year 2000 remediation, but also
provides for cost-effective alternatives for contingency planning, platform
consolidation, systems maintenance and ERP integration. As a result, nearly all
the Company's commercial clients and a third of the state and local government
clients have requested assistance with non-Year 2000 IT systems efforts.
In order to better leverage this opportunity, the Company has combined its
service capabilities into three primary offerings: Platform Conversions and
Migrations, Application Integration and ERP enhancement. Platform Conversions
and Migrations focus on the transformation of code and data. Projects of this
type may be driven by customer requirements for system consolidation, by
"orphaned" (vendor abandoned) systems that are still considered to be mission
critical or by clients who need to modify their systems to handle Euro-Currency
transactions. Application Integration is directed toward the linkage of
legacy mainframe and client/server platforms. ERP enhancement consists of a
combined product and service offering that facilitates the integration of
disparate ERP systems within the corporate enterprise.
The Company is utilizing these offerings to enhance its competitive
positioning within its installed base and to create a compelling rationale for
new clients to consider working with CTA. For its Financial clients, the
company has targeted these offerings at this market's high demand for data
mining and customer portfolio management systems. These systems provide a
comprehensive view of customer product and service purchases, customer
portfolio profitability and customer activity trends. This offering is
currently in the planning stages at USAA, a San Antonio, Texas-based provider
of insurance, as a natural extension to the current contract with USAA for IT
engineering services.
For the Company's process manufacturing clients, these offerings allow for
the successful implementation of a hybrid ERP system; where new investments in
packaged ERP systems (i.e., manufacturing, financial, inventory) and existing
investments in viable legacy systems (i.e., order processing, sales management,
distribution) provide for the framework of a unified system structure. The
Company is currently initiating these offerings at Dannon Foods and Centocor
Pharmaceuticals.
For its State and local clients, the Company's offerings provide a pathway
for migration from maintenance-intensive, sunset (obsolete) systems to advanced
open-systems technology. State and local government also have the need for
ERP-type systems, particularly in the areas of human resources services and
financial management. These initiatives are often hampered by the government's
ability to sustain expertise in aging legacy environments and hire and maintain
technical staff in a highly competitive marketplace. With the addition of
selective systems outsourcing as an adjunct to the standard IT Systems
Engineering offering, the Company has created a comprehensive program
consisting of Year 2000 compliance, sunset system maintenance support, phased
platform migration and ERP system support. Selective state agencies in
California, Connecticut, Kansas and Texas are reviewing these options as a
natural extension to their current Year 2000 contracts with CTA.
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 technology 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.
TYPES OF CONTRACTS
GENERAL. 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 1996 1997 1998
Fixed-price 11% 14% 24%
Time-and-materials 53% 54% 47%
Cost-reimbursable 36% 32% 29%
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 1996 without material adjustment.
BACKLOG
As the Company has evolved from Federal government contractor to commercial
IT services provider, the concept of backlog has become less important. In the
commercial marketplace, nearly all of the Company's orders are terminable by
either the customer or the Company on short notice. Government contracts are
generally multi-year awards subject to annual funding appropriations and
termination for convenience by the government customer. The Government's
ability to select multiple winners under IDIQ contracts, as well as its right
to limit orders to any particular awardee, mean that there is no assurance that
contract backlog will result in actual orders to the Company. Accordingly, the
Company does not believe that backlog is material to its business.
The Company's backlog represents an estimate of the remaining future
revenues from existing signed contracts and contracts that have been awarded
but not yet signed. Using the best available information, the Company estimates
backlog on a quarterly basis. Changes in the backlog calculation from quarter
to quarter result from: (a) additions for future revenues from the execution of
new contracts or extension or renewal of existing contracts; (b) reductions for
revenues earned from fulfilling contracts during the most recent quarter; (c)
reductions from the early terminations of contracts; and (d) adjustments to
estimates of previously included contracts. The Company's backlog at December
31, 1998 was approximately $148 million.
EMPLOYEES
At December 31, 1998, the Company had 774 employees, approximately 80
percent of whom are IT professionals and 20 percent in management and support
positions. The Company also utilizes the services of independent contractors
and as of December 31, 1998 had approximately 175 independent contractors
working on client engagements. None of the Company's employees are represented
by a labor union and the Company believes its relations with its employees to
be good.
The Company must compete against other employers for the acquisition of
high quality, professional staff members. The Company cannot assure the
retention of current staff or that replacement staff will be available at equal
cost. Competitors of the Company may be able to attract or retain employees
more successfully than the Company based on levels of benefits, demographics
and other factors.
The Company also regularly utilizes the services of consultants as an
integral part of its work on specific projects. The Company is not materially
dependent upon the services of any individual consultant or consulting firm.
ITEM 2. PROPERTIES
The Company leases approximately 23,000 square feet at its corporate
headquarters in Bethesda, Maryland under a lease expiring in 2005. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in certain legal proceedings incidental
to the ordinary course of its business. The Company does not believe that any
liabilities relating to the legal proceedings to which it is a party are likely
to be, individually or in the aggregate, material to its consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the stock of the Company
or its subsidiaries. However, the Company has maintained a limited market
("Limited Market") as described below to provide liquidity for its Common
Stock.
THE LIMITED MARKET
Since its inception, the Company has pursued a policy of remaining
essentially employee owned and, therefore, there has never been a public market
for the Common Stock. Prior to September 1992, the Company has offered to
repurchase shares from shareholders on several occasions primarily for
contribution to the Company's Employee Stock Ownership Plan ("ESOP"). In order
to provide liquidity for its shareholders, however, the Company established a
Limited Market through an agreement with Capitol Securities Management, Inc.
("Capitol") whereby Capitol maintains the Limited Market. From September 1992
through December 1998, the Company has conducted six trades in the Limited
Market, one each in 1992, 1993, 1995 and 1998 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 may be determined by the Board of
Directors with the advice of an independent appraiser, to employees,
consultants and directors of the Company. 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 each of the proposed sellers up to each seller's
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 Business Corporation
Act, which prohibit a corporation from purchasing its outstanding shares if, as
a result of such purchase, (i) the corporation would not be able to pay its
debts as they become due in the usual course of business or (ii) the
corporation's total assets would be less than its total liabilities plus any
amount necessary, if the corporation were to be dissolved at the time of the
distribution, to satisfy any preferential payments upon dissolution of
shareholders holding a class of stock being repurchased by the corporation. The
Company's current credit agreement also restricts the Company from purchasing
Common Stock if doing so would cause it to violate one of the financial
covenants in the credit agreement. These financial covenants include
requirements to preserve a certain fixed charge coverage ratio, earnings before
interest and taxes to interest expense ratio and total outstanding debt to
accounts receivable ratio. In addition, the Company may enter into other
contracts in the future which restrict its ability to repurchase its
outstanding Common Stock.
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. If the number of purchase orders exceeds the number of sell
orders plus any shares sold by the Company, the aggregate number of shares
offered for sale will be allocated, pro rata, among the purchasers based upon
the total number of shares each has subscribed for.
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.
Each shareholder of the Company who elects to purchase or sell Common Stock
has an account established with Capitol. On the day after each Trade Date, a
confirmation of purchases or sales is generated for each shareholder showing
price per share, number of shares, commission paid, net dollars transacted and
settlement date. The purchase price for Common Stock purchased on a Trade date
must generally be received by Capitol within three business days following such
date.
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.
THE FORMULA
The purchase price of the shares of Common Stock in the Limited Market 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) a number which is the product of 2.25 and the book value of
the Company at the end of the applicable period ("BV") and (B) a number which
is the product of (a) 11.34 ("K") and (b) a number equal to the product of (I)
a market index ("MI") based on certain comparable companies, (II) the after tax
profits from operations for the last 12 month period ("P") and (III) a
fraction, the denominator of which is 2 and the numerator of which is the sum
of (A) the change in contract margin ("CM"), which is a number equal to the
contract margin for the last 12 months divided by the contract margin for the
prior 12 month period, where contract margin is the contract fee as a
percentage of contract cost adjusted for program reserves and allowances and
(B) the change in revenue growth ("R"), which is a number equal to a fraction,
the numerator of which is revenue for the last 12 months and the denominator of
which is the revenue for the prior 12 month period times the change in the
consumer price index for that period. The Formula Price of the Common Stock
expressed as an equation, is as follows:
{Formula Price = D}
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 11.34 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 FORMULA PRICE
The Formula is used to determine the offering price at which the Common
Stock will be sold and will trade in the Limited Market, except in the
circumstances set forth below. The present Formula was adopted by the Board of
Directors on September 14, 1998, following a determination by the Board of
Directors that the prior formula was not resulting in a fair market value for
the Common Stock. The Board of Directors believes the current Formula results
in a fair market value for the Common Stock within a broad range of financial
criteria.
In redetermining the current Formula, net income for the trailing twelve
months was adjusted for all factors associated with the sale of the Company's
Space and Telecommunications business having a financial impact on continuing
operations in 1997. The adjusted net income for use in the Formula at June 30,
1998 was $2,482,000.
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 determines the Formula Price. The Board of Directors also obtains an
appraisal of the current fair market value of the Common Stock from the
independent appraiser in order to confirm that the Formula has resulted in a
price which falls within an acceptable range of values for the fair market
value of the Common Stock.
In those circumstances when the Board of Directors determines the Formula
has not resulted in a fair market value for the Common Stock, the Company
establishes a price for the Common Stock within the range established by the
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 is 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 may 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 valued by the Board of Directors
based on an appraisal performed by the Company's independent appraiser, Legg
Mason Wood Walker, Inc., for the last twelve 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, 1998 $7.800
June 30, 1998 $5.840
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
Since 1986, Legg Mason Wood Walker, Inc. ("Legg Mason") has been engaged by
the Company to act as the independent appraiser for the Company with respect to
the Common Stock. 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 recommends 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. Legg Mason also
provides to the Board of Directors an assessment as to whether the Formula
Price calculated is within a range which Legg Mason considers reasonable. Legg
Mason makes these determinations based on its own analysis after reviewing and
analyzing numerous factors including, without limitation, (i) the Company's
annual and quarterly reports, (ii) interviews with management regarding the
Company's business, earnings, cash flow, assets and prospects, (iii) contract
backlog data and contract profiles prepared by Company management, (iv) data
regarding the financial performance and market valuation of selected public
companies deemed by Legg Mason to be comparable to the Company and (v) data
relating to recent merger and acquisition activity of selected public companies
deemed by Legg Mason to be comparable to the Company.
DIVISION OF MARKET REGULATION
Section 5 of the Securities Exchange Act of 1934 (the "Exchange Act")
generally prohibits operation of an "exchange" to effect any transaction in a
security, or to report any such transaction, unless the exchange is either (i)
registered as a national securities exchange under Section 6 of the Exchange
Act or (ii) exempted from such registration because, in the opinion of the
Commission, the limited volume of the transactions effected on such exchange
does not make it necessary, appropriate or in the public interest to require
such registration. The Limited market is not registered as an exchange under
the Exchange Act. 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 Exchange Act. While the Commission has not formally
indicated to the Company any specific concerns regarding the operation of the
Limited Market it may do so in the future. If the Commission requires the
Limited Market to register as an exchange or otherwise raises concerns
regarding operation of the Limited Market, there can be no assurance that the
Company will be able to continue operation of the Limited Market.
HOLDERS OF COMMON STOCK
As of February 28, 1999, there were approximately 270 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 requires advance approval by the bank for the Company to pay any
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, 1998 and as of December 31, 1994, 1995,
1996, 1997 and 1998 have been derived from the consolidated financial
statements of the Company. The consolidated financial statements for each of
the five years ended December 31, 1994 through 1998 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>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Income Statement
Data:
Contract revenues $107,471 $105,224 $96,246 $92,239 $117,184
Cost of contract 90,102 96,633 87,644 78,530 91,747
revenues
Selling, general
and administrative 6,723 4,117 5,431 9,622 15,585
expenses
Other expenses 833 (292) 2,447 3,668 3,040
Operating profit 9,813 4,766 724 419 6,812
Interest expense 907 850 969 1,589 1,195
Income (loss)
before income taxes 8,906 3,916 (245) (1,170) 5,617
Provision (benefit)
for income taxes 3,830 1,567 (80) (500) 2,225
Income (loss) from
continuing 5,076 2,349 (165) (670) 3,392
operations
Income (loss) from
discontinued
operations, net of (617) (403) (10,872) 648 (2,482)
income taxes(1)(2)
Net income (loss) $4,459 $1,946 $(11,037) $ (22) $ 910
Basic earnings
(loss) per share:
Continuing $0.53 $0.27 $(0.02) $(0.07) $ 0.39
operations
Discontinued (0.06) (0.05) (1.22) 0.07 (0.29)
operations
Earnings (loss) per $0.47 $0.22 $(1.24) $ 0.00 $ 0.10
share
Diluted earnings
(loss) per share:
Continuing $0.50 $0.25 $(0.02) $(0.07) $ 0.38
operations
Discontinued (0.06) (0.04) (1.22) 0.07 (0.28)
operations
Earnings (loss) per
share-diluted $0.44 $0.21 $(1.24) $ 0.00 $ 0.10
Weighted average
number of shares 9,567 8,863 8,875 9,092 8,694
outstanding
Diluted average
number of shares 10,092 9,418 8,875 9,092 8,815
outstanding
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash $ 3,902 $ 235 $ 16 $ $
equivalents - -
Working capital 20,638 19,713 13,721 12,588 12,242
Total assets 89,816 91,530 92,690 45,288 57,348
Short-term debt 15,750 17,074 28,335 9,112 17,890
Long-term debt 17,765 17,431 18,510 3,333 3,802
Total stockholders' 27,950 28,773 17,793 15,810 15,734
equity
</TABLE>
<PAGE>
(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 to
exclude revenues and expenses of discontinued operations from captions
applicable to continuing operations. 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.
OVERVIEW
Computer Technology Associates, Inc. (the "Company," formerly CTA INCORPORATED)
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 1996, the Company completed a five
year prime contract with the U.S. Navy and, although it was ineligible to rebid
this contract as the prime contractor, is now a major subcontractor receiving
approximately 45% of the total contract revenues. During 1997, the Company sold
the Advanced Information Systems division and several systems engineering
contracts ended. As a result, the Company's revenues from systems engineering
services, principally to the Federal government, have declined from $105
million, or 100% of contract revenues, in 1995 to $74 million, or 64% of
contract revenues, in 1998. Since 1997, the Company has focused its marketing
efforts on software engineering, primarily Year 2000 services, for State and
local governments and commercial entities in order to increase such revenues.
Also during 1997, the Company disposed of its Space and Telecommunications
Systems and its Mobile Information and Communications Services businesses. In
1998, the Company realigned its corporate organization to further refine its
focus on the rapidly growing market for commercial and governmental IT services
creating the CTA Systems Engineering Group and the CTA Software Engineering
Group.
RESULTS OF OPERATIONS
The following tables set forth certain items in the Company's
Statements of Operations as a percentage of contract revenues:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
Contract revenues:
Systems Engineering 95.5% 79.6% 62.8%
Software Engineering 4.5 20.4 37.2
Total contract revenues 100.0 100.0 100.0
Cost of contract revenues 91.1 85.2 78.3
Selling, general and administrative expenses 5.6 10.4 13.3
Supplemental ESOP contribution 0.0 3.2 0.9
Other expenses 2.5 0.8 1.7
Operating profit 0.8 0.4 5.8
Interest expense 1.0 1.7 1.0
Income (loss) before income taxes (0.2) (1.3) 4.8
Provision (benefit) for income taxes (0.0) (0.6) 1.9
Income (loss) from continuing operations (0.2) (0.7) 2.9
Income (loss) from discontinued operations, (11.3) 0.7 (2.1)
net of income taxes
Net income (loss) (11.5)% (0.0)% 0.8%
</TABLE>
The following tables set forth certain items in
the Company's Statements of Operations by operating segment:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
(In thousands of dollars)
Contract revenues:
<S> <C> <C> <C>
Systems Engineering $91,953 $73,464 $73,579
Software Engineering 4,293 18,775 43,605
$96,246 $92,239 $117,184
Operating profit:
Systems Engineering $2,442 $2,933 $5,259
Software Engineering 729 1,154 4,593
Other expenses (2,447) (3,668) (3,040)
$ 724 $ 419 $ 6,812
</TABLE>
1998 COMPARED WITH 1997
CONTRACT REVENUES. Contract revenues increased 27% to $117.2 million in 1998
from $92.2 million in 1997 as a result of a 132% increase in software
engineering contract revenues.
Systems engineering contract revenues increased to $73.6 million in 1998 from
$73.5 million in 1997. Decreases in revenues on the General Services
Administration ("GSA") Eastern Zone contract, which ended in the third quarter
of 1997, and on the Technical Engineering and Management Support IV ("TEMS IV")
program at Hanscom Air Force Base, which is winding down, and smaller decreases
in other Federal programs, were partially offset by increases in contract
revenues on embedded systems Year 2000 contracts and on GSA Schedule contracts.
Software engineering contract revenues increased to $43.6 million in 1998 from
$18.8 million in 1997. The increase is primarily attributable to new Year 2000
conversion contracts with the States of Michigan and Texas and commercial
companies such as Wells Fargo Bank and Norrell.
Commercial contract revenues from both systems engineering and software
engineering services increased to $50.7 million, or 43% of total contract
revenues, in 1998 from $18.8 million, or 20% of total contract revenues, in
1997.
COST OF CONTRACT REVENUES. Cost of contract revenues increased 16.8% to $91.7
million, or 78.3% of contract revenues, in 1998, from $78.5 million, or 85.2%
of contract revenues, in 1997. This decrease in cost of contract revenues as a
percentage of contract revenues resulted primarily from the increase of higher
margin commercial contracts as a percentage of overall contract revenues.
SG&A. Selling, general and administrative expenses ("SG&A") increased to $15.6
million, or 13.3% of contract revenues, in 1998, from $9.6 million, or 10.4% 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.
SUPPLEMENTAL ESOP CONTRIBUTION. During 1998, the Board of Directors elected to
make a supplemental contribution of approximately $1.1 million to the Company's
employee stock ownership plan (ESOP).
OTHER EXPENSES. Other expenses increased to $2.1 million in 1998 from $0.7
million in 1997 due to additional reserves and write-downs of certain contract
receivables.
OPERATING PROFIT. As a result of the foregoing, the Company had an operating
profit of $6.8 million in 1998 and an operating profit of $0.4 million in 1997.
LOSS FROM DISCONTINUED OPERATIONS. The loss from discontinued operations for
1998 reflects an adjustment of $2.1 million for the final settlement of the
sales price of the Company's Space and Telecommunications business, which was
sold in the third quarter of 1997, and a binding arbitration award of $2.0
million to a former employee of that business. The amounts are presented net of
income tax benefit in the Consolidated Statements of Operations.
1997 COMPARED WITH 1996
CONTRACT REVENUES. Contract revenues decreased 4.2% to $92.2 million in 1997
from $96.2 million in 1996. Software engineering contract revenues increased
337% to $18.8 million in 1997 from $4.3 million in 1996. Such increase
resulted primarily from the Company's Year 2000 Century date Change conversion
contracts. 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 systems engineering 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 GSA'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 in revenues from
the 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 with NASA and the GSA Eastern Zone contract
contributed to the decline in 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 which it deems adequate.
COST OF CONTRACT REVENUES. Cost of contract revenues decreased 10.4% to $78.5
million, or 85.2% 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 one-time start-up costs of $1.0 million related to certain
software engineering contracts.
SG&A. Selling, general and administrative expenses ("SG&A") for 1997 increased
77.2% to $9.6 million, or 10.4% 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 supplemental contribution of approximately $3.0 million to the Company's
ESOP out of the proceeds from the sale of the Space and Telecommunications
business to allow the employees to share in the Company's future potential
performance, if any. The Board authorized the supplemental contribution after
the sale had closed and the Company's new bank credit facility was in place.
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 a charge of $6.4 million from the write-off of the Company's
investment in GEMnet and a charge of $2.8 million for additional reserves due
to schedule delays on the Indostar program. During 1996, the Company had been
in discussions with certain international companies to continue the GEMnet
program after the 1995 launch failure. These discussions did not produce a
viable solution and as a result the Company decided to terminate the program
and write-off its remaining investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net income (loss) was $0.9 million, ($0.02 million), and ($11.0
million) 1998, 1997 and 1996, respectively. Its cash flow provided by (used in)
operating activities was $(1.8 million), $(10.2 million), and $(5.5 million)
in 1998, 1997 and 1996, respectively. The principal factors accounting for the
provision (use) of cash in operating activities in 1998 were $2.3 million in
losses on disposal of segments and sale of assets, $1.5 million of depreciation
and amortization expense, $1.1 million in other non-cash expenses and changes
in working capital accounts using $7.6 million of cash. 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.
Cash provided by (used in) investing activities totaled $(4.5 million), $14.4
million, and $(6.2 million) in 1998, 1997 and 1996, respectively. Additions to
furniture and equipment were $2.4 million, $3.6 million, and $6.5 million in
1998, 1997 and 1996, respectively. Proceeds from the sale of segments provided
$18 million in 1997 and an adjustment to the sales price of the segments in
1998 used $2.1 million.
Cash provided by (used in) financing activities was $6.2 million, $(4.2
million), and $11.5 million in 1998, 1997 and 1996, respectively. Financing was
primarily provided by borrowings under the credit facility and offset by the
repayment of long-term debt and the purchase of treasury stock. The Company's
net borrowings (payments) under the credit facility were $8.8 million, $(3.7
million), and $12.0 million for 1998, 1997 and 1996, respectively. The 1997
amount is net of $5 million proceeds from a new three-year term loan. Repayment
of long-term debt was $1.7 million in 1998 and $0.5 million in 1997. Net
purchases of treasury stock were $1.0 million, $0.1 million, and $0.5 million
in 1998, 1997 and 1996, respectively.
In November 1997, the Company entered into a three-year agreement with a
bank for a revolving credit facility, which was amended in 1998, providing the
availability to borrow up to $18 million, which includes a facility for letters
of credit up to $4 million, and which also provides a $5 million term facility.
At December 31, 1998, there was $16.2 million outstanding under the revolving
credit facility and $3.3 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, 1998 was approximately 7.5%. 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 such as a fixed charge coverage
ratio, earnings before interest and taxes to interest expense ratio and total
outstanding debt to accounts receivable ratio. The agreement also requires the
Company to obtain the consent of the bank prior to making aggregate capital
expenditures for itself and its subsidiaries of greater than $2.5 million per
year. The Company believes it is in compliance with all of the financial
covenants.
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 Company has assigned certain individuals to identify and correct Year
2000 compliance issues. Information technology ("IT") systems with non-
compliant code are expected to be modified or replaced with systems that are
Year 2000 compliant. The individuals are also responsible for investigating the
readiness of suppliers, customers and other third parties along with the
development of contingency plans where necessary.
All IT systems have been inventoried and assessed for compliance, and detailed
plans are in place for required system modifications or replacements. Systems
conversion and testing activities are underway with approximately two-thirds of
the systems already compliant. IT systems are expected to be fully compliant
by the end of the third quarter of 1999. Inventories and assessments of non-IT
systems have been completed. Progress of the Year 2000 compliance program is
continuously being monitored by senior management.
The Company has identified critical suppliers, customers and other third
parties and has surveyed their Year 2000 remediation programs. Risk
assessments and contingency plans, where necessary, will be finalized in the
third quarter of 1999.
Incremental costs directly related to Year 2000 issues are estimated to be
$650,000 to be incurred between 1998 and 1999 of which $420,000 (or 65%) has
been spent to date. Approximately 10% of the total estimated spending
represents costs to modify existing systems. Costs incurred prior to 1998 were
immaterial. This estimate assumes that the Company will not incur significant
Year 2000 related costs on behalf of suppliers, customers or other third
parties.
The Company's most likely potential risk is the inability of some customers to
order and pay on a timely basis. Contingency plans for Year 2000-related
interruptions are being developed and will include, but not be limited to, the
development of emergency backup and recovery procedures, remediation of
existing systems parallel with installation of new systems and identification
of alternate suppliers. All plans are expected to be completed by the end of
the third quarter of 1999.
The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates no major
interruption of its business activities, that will be dependent in part, upon
the ability of third parties to properly remediate their IT and non-IT systems
in a timely manner. Although the Company has implemented the actions
described above to address third party issues, it has no ability to influence
the compliance actions of such parties. Accordingly, while the Company
believes its actions in this regard should have the effect of reducing Year
2000 risks, it is unable to eliminate them or estimate the ultimate effect Year
2000 risks will have on the Company's operating results.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and positions
represents the potential loss arising from adverse changes in interest rates.
At December 31, 1998 and 1997 the principal amount of the Company's aggregate
outstanding variable rate indebtedness was $19.5 million and $12.4 million,
respectively. A hypothetical 10% adverse change in interest rates would have
had an annualized unfavorable impact of approximately $146,000 and $95,000,
respectively, on the Company's earnings and cash flows based upon these year-
end debt levels.
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, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
C.E. Velez 58 President, Chief Executive Officer and
Chairman of the Board
Gregory H. Wagner 50 Executive Vice President, Chief
Financial Officer and Treasurer
Terry J. 55 President, Systems Engineering Group
Piddington
Sy Inwentarz 47 President, Software Engineering Group
Harvey D. 68 Director
Kushner(1)
David R. Mackie 60 Director
(1)
Raymond V. 65 Director
McMillan (1)
George W. 72 Director
Morgenthaler(1)
James M. Papada, 50 Director
III(1)
Arturo 68 Director
Silvestrini(1)
</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.
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 Systems Engineering
Group 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.
Sy Inwentarz has been President of the Company's Software Engineering
Group since March 1998. From 1996 until he joined the Company, he was a
Managing Principal with IBM Global Services. From 1992 to 1996 he was a
Vice President of Computer Horizons Corp., a business solutions software
supplier. Prior to 1992, he held various positions with Hewlett-Packard and
American Hoechst.
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 depart-
ment 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. From
November 1991 to December 1996, he was President and CEO of Earth Observation
Satellite Corporation. From 1965 to 1991, he was with Computer Sciences
Corporation (CSC), as President of various Divisions, Deputy to the
President of CSC Systems Group and 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.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation for 1998,
1997 and 1996 of the Company's Chief Executive Officer and the three
other most highly compensated executive officers in 1998 (the "Executive
Officer Group") for services rendered in all capacities to the Company.
The Company has no other executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL
COMPENSATION
Other Restricted Option All Other
NAME AND PRINCIPAL Salary Bonus Annual Stock Awards Compensation
POSITION(S) YEAR ($) ($) Compensation Awards ($) (#) ($)(2)
($)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
C.E. Velez 1998 308,000 145,673 2,052 -- 22,895 17,915
President, Chief 1997 280,000 130,220 2,090 -- -- 14,480
Executive Officer 1996 276,743 -- 1,870 -- 59,010 5,700
and Chairman of
the Board
Gregory H. 1998 187,000 88,494 954 -- 13,900 32,411
Wagner 1997 170,000 112,455 927 -- -- 32,461
Executive Vice 1996 167,900 -- 856 -- 85,828 5,700
President, Chief
Financial Officer
and Treasurer
Terry J. 1998 180,000 75,634 1,548 -- 12,828 24,131
Piddington- 1997 155,000 25,033 1,396 -- -- 14,028
President, Systems 1996 153,350 -- 1,221 -- 32,666 5,700
Engineering Group
Sy Inwentarz (3) 1998 161,826 93,399 696 -- 150,000 15,217
President, 1997 -- -- -- -- -- --
Software 1996 -- -- -- -- -- --
Engineering Group
</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. Inwentarz joined the Company in March 1998 at an annual salary of $225,000.
OPTION GRANTS DURING 1998
The following table sets forth information concerning the stock options granted
during fiscal 1998 to each member of the Executive Officer Group.
<TABLE>
<CAPTION>
% of
Number of Total
Shares Options
Underlying Granted Grant Date
Options to Exercise Expiration Present
NAME GRANTED Employees Price DATE Value ($)
(#) in ($/SH) (1)
Fiscal
YEAR
<S> <C> <C> <C> <C> <C>
C.E. Velez 17,909 2.0% $5.05 2/12/05 $42,623
4,986 0.6 5.05 5/14/05 11,867
Gregory H. 10,873 1.2 5.05 2/12/05 25,878
Wagner
3,027 0.3 5.05 5/14/05 7,204
Terry J. 9,914 1.1 5.05 2/12/05 23,595
Piddington
2,914 0.3 5.05 5/14/05 6,935
Sy Inwentarz 150,000 16.5 5.05 3/24/05 357,000
</TABLE>
(1) The Company uses the Black-Scholes model to estimate the fair values of
options, assuming a risk-free interest rate equal to the ninety-day U.S.
Treasury Bill rate, expected lives of five to ten years, an expected
volatility factor of .197 and no expected dividends.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of stock
options during fiscal 1998 and the number and value of unexercised stock
options held at year-end by each member of the Executive Officer Group.
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Shares Underlying In-the-Money
Acquired Value Unexercised Options at
NAME on Realized($) Options at FY-End FY-End ($)(1)
Exercise(#) (#) Exercisable/
Exercisable/ UNEXERCISABLE
UNEXERCISABLE
<S> <C> <C> <C> <C>
C.E. Velez -- -- 39,340/42,565 120,184/123,052
Gregory H. -- -- 73,884/25,844 225,715/74,714
Wagner
Terry J. -- -- 21,776/23,718 66,525/68,546
Piddington
Sy -- -- -- /150,000 -- /412,500
Inwentarz
</TABLE>
___________
(1) There was no public trading market for the Common Stock on December 31,
1998. Accordingly, solely for purposes of this table, the values in this
column have been calculated on the basis of an estimated market price of
$7.80 per share, less the aggregate exercise price of the options.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with regard to the benefi-
cial ownership of the Common Stock as of December 31, 1998 by (i) each
person known by the Company to own beneficially more than 5% of the outstan-
ding shares of Common Stock, (ii) each director, each executive officer
and each member of the Executive Officer Group and (iii) all current direc-
tors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
Shares Percent
NAME AND ADDRESS OF BENEFICIAL Beneficially Beneficially
OWNER(1)(2) OWNED (1) OWNED(3)
<S> <C> <C>
5% Stockholders:
C.E. Velez 4,681,420 (4) 50.4%
ESOP 1,615,318 17.4
B.A. Claussen 883,752 (5) 9.5
Directors and executive
officers:
C.E. Velez 4,681,420 (4) 50.4%
Terry J. Piddington 443,903 (6) 4.8
Raymond V. McMillan 230,346 (7) 2.5
Gregory H. Wagner 192,212 (8) 2.1
George W. Morgenthaler 20,705 (9) *
Harvey D. Kushner 18,195 (10) *
James M. Papada, III 7,755 (11) *
Arturo Silvestrini 3,948 *
David R. Mackie 3,373 *
Sy Inwentarz - *
All current directors and
executive officers as a group 5,601,857 60.3%
(10 persons as of December 31, (12)
1998)
</TABLE>
___________
* Less than 1%.
1. Beneficial ownership as of December 31, 1998 for each person includes shares
subject to options held by such person (but not held by any other person)
which are exercisable within 60 days after such date. All share amounts are
exclusive of shares beneficially owned through the ESOP. Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
2. The address for each beneficial owner except for Mr. Claussen is c/o
Computer Technology Associates, Inc. 6903 Rockledge Drive, Bethesda,
Maryland 20817. Mr. Claussen's address is c/o SymSystems, L.L.C., 12508 E.
Briarwood Avenue, Englewood, Colorado 80112.
(3) The percent beneficially owned is based on 8,584,095 shares of Common
Stock deemed outstanding as of December 31, 1998 and non-qualified options
to purchase 705,744 shares of Common Stock which are currently exercisable
within 60 days after such date.
(4)
Includes non-qualified options to purchase 39,340 shares of Common Stock .
(5)
Includes non-qualified options to purchase 200,000 shares of Common.
(6)
Includes non-qualified options to purchase 21,776 shares of Common Stock.
(7)
Includes non-qualified options to purchase 199,988 shares of Common Stock.
(8)
Includes non-qualified options to purchase 73,884 shares of Common Stock..
(9)
Includes non-qualified options to purchase 1,354 shares of Common Stock.
(1) Includes non-qualified options to purchase 5,646 shares of Common Stock.
(2) Includes non-qualified options to purchase 630 shares of Common Stock.
(3) Includes non-qualified options to purchase 342,618 shares of Common Stock.
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 August 1998, the Company
received $0.2 million in cash on the $1.8 million note and forgave the
balance (which was charged against the Company's allowance for doubtful
accounts). The other note was repaid from the Company's common stock
held by Mr. Claussen and the Company's minority interest reduced to 10.6%.
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.
In connection with Mr. Claussen's resignation as an officer and director
of the Company, during December 1996 he entered into an Employee Separation and
Non-Competition Agreement (the "Separation Agreement") with the Company
whereby, in consideration for Mr. Claussen's agreement to not compete with
the Company for a five (5) year period, the Company agreed: (i) to allow
Mr. Claussen to retain his outstanding stock options in the Company until
November 28, 2003 and (ii) to pay Mr. Claussen $175,000 per year for a period
of five years. At the same time, Mr. Claussen and Dr. Velez agreed to
terminate the Buy-Sell Agreement which had formerly restricted the transfer
of their shares in the Company. Mr. Claussen then executed a Stock Restric-
tion Agreement with respect to his Common Stock on the same terms as the
Stock Restriction Agreements signed by all other shareholders of the Company.
The Company also entered into a Consulting Agreement with Mr. Claussen during
December 1996 for a five (5) year term, whereby Mr. Claussen agreed to
provide consulting services to the Company, including with respect to the
procurement for the Company of commercial and international business.
During the term of the Consulting Agreement, the Company is required to
pay Mr. Claussen a fee equal to one percent (1%) of (i) the gross revenues
derived by the Company from contracts secured primarily through Mr.
Claussen's efforts and which will generate greater than $5 million of
aggregate revenue for the Company. The Company has not paid any fees to
Mr. Claussen under the Consulting Agreement.
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
Condolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves F-24
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:
23(a) Consent of Ernst & Young LLP F-25
23(b) Consent and Report of Legg Mason Wood Walker, Inc. F-26
14(B) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the fourth quarter of 1998.
14(C) FINANCIAL DATA SCHEDULE
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Computer Technology Associates, Inc.
We have audited the accompanying consolidated balance sheets of Computer
Technology Associates, Inc. (formerly CTA INCORPORATED) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial
statements and the schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Computer Technology Associates, Inc. and subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, 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 12, 1999
F-1
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
(IN THOUSANDS,
EXCEPT FOR SHARE
DATA)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ $
- -
Accounts receivable (NOTES 1 AND 3) 33,300 48,909
Other current assets (NOTE 4) 1,222 1,145
Recoverable income taxes (NOTE 8) 3,576 -
Total current assets 38,098 50,054
Furniture and equipment (NOTES 1 AND 4) 11,110 8,940
Accumulated depreciation and (8,066) (5,192)
amortization
3,044 3,748
Other assets (NOTES 1, 4, AND 8) 4,146 3,546
Total assets $45,288 $57,348
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
(IN THOUSANDS,
EXCEPT FOR SHARE
DATA)
Liabilities and stockholders' equity
<S> <C> <C>
Current liabilities:
Notes payable - line of credit (NOTE 5) $ 7,445 $16,223
Current portion of long-term debt (NOTE 1,667 1,667
5)
Accounts payable 5,788 10,576
Accrued expenses (NOTE 4) 3,156 4,156
Excess of billings over costs and 2,738 1,109
contract prepayments
Other current liabilities 270 290
Income taxes payable (NOTE 8) - 19
Accrued tender offer (NOTE 7) 2,019 -
Deferred income taxes (NOTE 8) 2,427 3,822
Total current liabilities 25,510 37,812
Long-term debt, less current portion 3,333 1,667
(NOTE 5)
Other long-term liabilities (NOTE 6) 635 2,135
Commitments and contingencies (NOTE 11) - -
Stockholders' equity (NOTE 7):
Preferred stock, $.01 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 7,869 7,855
Retained earnings 14,528 15,438
22,497 23,393
Notes receivable from employees (698) (698)
(NOTE 10)
Treasury stock, at cost (1,248,980
shares in 1997
and 1,415,905 shares in 1998) (5,989) (6,961)
Total stockholders' equity 15,810 15,734
Total liabilities and stockholders' equity $45,288 $57,348
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997 1998
(IN THOUSANDS, EXCEPT FOR SHARE
DATA)
Contract revenues
<S> <C> <C> <C>
$ 96,246 $ 92,239 $117,184
Cost of contract revenues 87,644 78,530 91,747
Selling, general and 5,431 9,622 15,585
administrative expenses
Supplemental ESOP contribution - 2,958 1,087
(NOTE 6)
Other expenses 2,447 710 1,953
Operating profit 724 419 6,812
Interest expense 969 1,589 1,195
Income (loss) before income taxes (245) (1,170) 5,617
Income taxes (benefit) (NOTE 8) (80) (500) 2,225
Income (loss) from continuing (165) (670) 3,392
operations
Discontinued operations (NOTE 2):
Loss from discontinued
operations, (10,872) (3,272) (1,094)
net of income taxes
Gain (loss) on disposal of
segments, - 3,920 (1,388)
net of income taxes
Income (loss) from discontinued (10,872) 648 (2,482)
operations
Net income (loss) $(11,037) $ (22) $ 910
Earnings (loss) per share
(NOTE 9):
Continuing operations $ $ $
(.02) (.07) .39
Discontinued operations .07
(1.22) (.29)
Earnings (loss) per share
$ (1.24) $ .00 $ .10
Earnings (loss) per share -
assuming dilution
(NOTE 9):
Continuing operations $ (.02) $ (.07) $ .38
Discontinued operations .07
(1.22) (.28)
Earnings (loss) per share -
Asssuming dilution $(1.24) $ .00 .10
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
CAPITAL
COMMON IN NOTE
STOCK PAR EXCESS RCV
SHARES VALUE PAR RETAIN FROM TREASURY STOCK
VALUE EARNING EMPL SHARES COST
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 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 - - (1,452) - - (449,340) (1,935)
options
Compensatory issuance
of common stock to - - 7 - - (15,576) (67)
employees/directors
Issuance of stock for
acquisition notes - - 30 - - (79,030) (345)
payable
Tax benefit of non-
qualified stock options - - 377 - - - -
exercised
Issuance of stock to
employees for notes - - - - 698 - -
receivable
Net loss - - - (11,037) - - -
Balance at December 31, 10,000,000 100 7,943 17,550 698 894,704 4,102
1996
Purchase of treasury - - - - - 466,500 2,381
stock (NOTE 7)
Exercise of stock - - (191) - - (89,870) (392)
options
Compensatory issuance
of common stock to - - 12 - - (22,354) (102)
employees/directors
Tax benefit of non-
qualified stock options - - 105 - - - -
exercised
Net loss - - - (22) - - -
Balance at December 31, 10,000,000 100 7,869 14,528 698 1,248,980 5,989
1997
Purchase of treasury - - - - - 214,860 1,196
stock
Sale of treasury stock - - - - - (17,141) (100)
to employees
Exercise of stock - - (32) - - (14,000) (61)
options
Compensatory issuance
of common stock to - - 18 - - (16,794) (63)
employees/directors
Net income - - - 910 - - -
Balance at December 31, 10,000,000 $100 $7,855 $15,438 $698 1,415,905 $6,961
1998
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
(IN THOUSANDS)
Operating activities
<S> <C> <C> <C>
Net income (loss) $(11,037) $ (22) $ 910
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
(Gain) loss on disposal of segments - (3,920) 2,100
Loss on sale of assets - - 238
Depreciation and amortization:
Furniture and equipment 3,734 2,612 1,911
Capitalized software development costs 1,108 76 -
Other noncurrent assets 1,018 390 -
Deferred lease incentives (292) (271) (405)
Provision for receivable allowances 300 360 1,019
Accrued interest on debt 1,034 (3,590) -
Other noncash expenses (8) (224) 81
Changes in assets and liabilities:
Accounts receivable (4,106) 901 (16,628)
Recoverable income taxes (639) (906) 3,595
Other assets (2,353) 463 (126)
GEMnet investment 6,437 - -
Accounts payable and accrued expenses 1,595 (5,017) 5,644
Excess of billings over costs and 1,556 (3,180) (1,629)
contract prepayments
Deferred income taxes, net (3,900) 2,100 1,495
Net cash (used in) operating activities (5,553) (10,228) (1,795)
INVESTING ACTIVITIES
Investments in furniture and equipment (6,469) (3,584) (2,391)
Proceeds from (adjustments to) sale of - 18,000 (2,100)
segments
Proceeds from sale of assets - - 38
Capitalized computer software (87) - -
Other 351 - -
Net cash provided by (used in) investing $ (6,205) $ 14,416 $ (4,453)
activities
</TABLE>
F-6
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
(IN THOUSANDS)
Financing activities
<S> <C> <C> <C>
Net borrowings (payments) under
bank line of credit agreement $ 12,011 $ (8,684) $ 8,778
Proceeds from term loan - 5,000 -
Repayment of long-term debt - (450) (1,666)
Repayment of acquisition notes (375) - -
Proceeds from deferred lease incentives 315 - -
Purchase of treasury stock (458) (104) (993)
Sale of treasury stock - - 100
Proceeds from exercise of stock options 10 34 29
Other 36 - -
Net cash provided by (used in) financing 11,539 (4,204) 6,248
activities
Net decrease in cash and cash equivalents (219) (16) -
Cash and cash equivalents at beginning of 235 16 -
period
Cash and cash equivalents at end of period $ 16 $ - $ -
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Income taxes $ 226 $ 117 $ 309
Interest $ 2,836 $ 8,807 $ 1,037
Noncash investing and financing
activities:
Debt assumed by purchaser (NOTE 2) $ - $ 27,000 $ -
Purchase of treasury stock (NOTE 7) $ - $ 2,019 $ -
Settlement of note receivable for common $ - $ - $ 203
stock
Investment in EarthWatch $ 2,038 $ - $ -
Conversion of note to common stock $ 375 $ $ -
Common stock issued for notes $ 473 $ - $ -
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements
December 31, 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Computer Technology Associates, Inc. (the Company, formerly CTA INCORPORATED)
provides rapid development and deployment of advanced information technology
("IT") to complex enterprise applications. The Company's offerings include
government systems, engineering support, network development and integration,
embedded IT systems engineering, object oriented applications development,
Enterprise Resource Planning ("ERP") installation and integration, data
warehousing and data base migrations, electronic commerce and other web based
applications development and legacy system modernization. The Company's mission
is to provide for the rapid, on budget, low risk installation and integration
of complex information technology. The Company's current business strategy
includes developing an international client base which is balanced across both
government and commercial sectors of the IT services market.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant inter-company 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.
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 seven years. Purchased computer software
used by the Company is amortized on a straight-line basis over a three-year
period.
F-8
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONTRACT REVENUES AND RELATED CONTRACT COSTS
Revenues result from services performed for the U.S. government and commercial
customers under a variety of long-term contracts and subcontracts, some of
which provide for reimbursement of costs plus fixed fees and/or award fees, and
others which are fixed-price type. Revenues on cost-type contracts are
recognized as costs are incurred on the basis of direct costs plus allowable
indirect expenses and an allocable portion of a fixed fee. Award fees on cost-
type contracts are recognized as earned. Revenues on fixed-price type
contracts are recognized using the percentage-of-completion method of
accounting, 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
1996. 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.
STOCK-BASED COMPENSATION
The Company has elected to continue accounting for stock-based compensation
under Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES." In addition, the Company has adopted the provisions of Statement
of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," regarding the required disclosure provisions of the pro forma
effect on net earnings and earnings per share. 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 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. It requires recognition of all derivatives as either assets or
liabilities in the statement of financial position at their fair value. SFAS
No. 133 is applicable to the Company beginning with its first quarter of fiscal
2000. The impact of this statement on the Company's statement of financial
position is not expected to be significant.
F-9
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the current
period presentation.
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 was subject to certain adjustments and was subsequently reduced by $2.1
million in 1998.
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 and $3.3 million in 1996. Net sales of the Space and
Telecommunications Systems business prior to its disposition were $66.8 million
in 1997 and $83.5 million in 1996. 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 and $(10.9) million in 1996, 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 and $(5.6) million in 1996.
The loss from discontinued operations for 1998 reflects an adjustment of $2.1
million on the disposal of segments for the final settlement of the sales price
to Orbital and a binding arbitration award of $2.0 million to a former employee
of that business. The amounts are presented net of income tax benefit in the
consolidated statements of operations.
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 and $2.9 million in 1996 and are
included in continuing operations.
In 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. In 1998, the Company received $0.2 million in cash on the $1.8 million
note and forgave the balance (which was charged against the Company's allowance
for doubtful accounts). The other note was repaid from the Company's common
stock held by the former director. In connection with these transactions, the
Company's minority interest was reduced to 10.6%.
F-10
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
Accounts receivable: (IN THOUSANDS)
U.S. Government:
<S> <C> <C>
Billed $17,556 $20,746
Unbilled:
Contracts in progress 4,659 1,012
Amounts awaiting contractual coverage 4,192 3,505
Revenue awaiting government approval of
final indirect rates or contract close- 242 286
out
Commercial Customers:
Billed 5,646 15,555
Unbilled:
Contracts in progress 4,473 10,071
36,768 51,175
Less allowances (3,468) (2,266)
$33,300 $48,909
</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, 1997 and 1998, approximately $2.2 million 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-11
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT BALANCES
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
(IN THOUSANDS)
Other current assets:
<S> <C> <C>
Receivables from employees and $ 76 $ 46
stockholders (NOTE 10)
Prepaid expenses 495 584
Other 651 515
$ 1,222 $ 1,145
Furniture and equipment:
Data processing equipment $ 7,513 $ 6,545
Office furniture and equipment 2,920 1,848
Leasehold improvements 677 547
11,110 8,940
Accumulated depreciation and amortization (8,066) (5,192)
$ 3,044 $ 3,748
Other assets:
Intangible pension asset (NOTE 6) $ $ 1,900
-
Investment in and notes receivable from SIM 2,218 200
(NOTE 2)
Deferred tax asset (NOTE 8) 935 835
Other 993 611
$ 4,146 $ 3,546
Accrued expenses:
Salaries and incentives $ 3,106 $ 3,735
Employee benefit plans - 357
Other 50 64
$ 3,156 $ 4,156
</TABLE>
F-12
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE AND SUBORDINATED DEBT
BANK DEBT
In November 1997, the Company entered into a three-year agreement with a bank
for a revolving credit facility, which was amended in 1998, providing the
availability to borrow up to $18 million, which includes a facility for letters
of credit up to $4 million, and which also provides a $5 million term facility.
At December 31, 1998 and 1997, there was $16.2 million and $7.4 million,
respectively, outstanding under the revolving credit facility and $3.3 million
and $5.0 million, respectively, 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, 1998 and 1997 was approximately 7.5% and 7.7%,
respectively. Under the agreement, the Company pays an annual commitment fee
on the unused credit line and an annual administration fee on the total
revolving credit line. 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.
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 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 during 1997
along with accrued interest and contingent interest of $5.8 million.
F-13
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
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 retirement. The ESOP allows only Company contributions, in cash or in
common stock, as determined by the Board of Directors, which are recorded as
compensation expense. During 1998 and 1997, the Board elected to make
supplemental contributions of approximately $1.1 million and $2.9 million,
respectively. 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, 1998, no shares of the Company's common stock have been
distributed by the ESOP. At December 31, 1997 and 1998, the ESOP owned
1,615,318 shares of the Company's common stock, all of which have been
allocated to plan participants.
The Company and its subsidiaries maintain a 401(k) savings plan which allows
for Company and employee contributions. Employees vest in Company matching
contributions immediately. The Company's 401(k) plan owned 140,000 shares of
the Company's common stock at December 31, 1997 and 1998.
In August 1998, the Company adopted a Supplemental Executive Retirement Plan
("SERP"). Eligibility for participation is determined by the Compensation
Committee of the Board of Directors. The SERP will provide normal benefits of
sixty percent of average final compensation upon retirement at age sixty-two.
The plan is unfunded, however, the Company has purchased corporate owned life
insurance to provide for partial funding of the obligations under the Plan.
The net periodic cost of the Plan for the period August 1 to December 31, 1998
was comprised of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Service cost $ 43
Interest cost 95
Amortization of prior 97
service cost
Net periodic benefit $ 235
cost
</TABLE>
F-14
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
Plan activity affecting the benefit obligation during 1998 and the
reconciliation of the benefit obligation to accrued pension cost at December
31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Benefit obligation at Plan $3,270
inception
Service cost 43
Interest cost 95
Actuarial gain (13)
Benefit obligation at year
end 3,395
Unrecognized net actuarial
gain 13
Unrecognized prior service
cost (3,173)
Minimum pension liability
recorded 1,900
Accrued pension cost $2,135
</TABLE>
Accrued pension cost is equal to the Company's accumulated benefit obligation
under the Plan. An intangible asset of $1.9 million was recorded during 1998
equal to the minimum pension liability, which represents the difference between
the accumulated benefit obligation at December 31, 1998 and the net periodic
benefit cost charged to operations. The assumptions used to measure the benefit
obligation are a 7% discount rate and a 5% average increase in compensation
levels.
Amounts charged to expense under the above plans were approximately $2.0
million, $4.2 million and $3.3 million (including the supplemental
contributions) for the years ended December 31, 1996, 1997 and 1998,
respectively. The Company currently provides no significant other post
retirement benefits.
7. COMMON STOCK AND STOCK OPTIONS
All of the Company's outstanding shares, except for those held by C.E. Velez,
the Company's Chairman and Chief Executive Officer, contain restrictions on
transferability.
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.
F-15
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
7. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
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, 1998, options for
908,282 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, 1996, 1997 and 1998 was $1.91, $1.60 and $2.38,
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 .197 and no expected dividends. The Company recognized no
compensation expense for stock option grants during the three years in the
period ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES
YEAR ENDED DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
Options outstanding at beginning of
year (weighted average exercise price
of $1.90 in 1996, $3.96 in 1997 and 934,450 1,282,126 847,880
$4.08 in 1998)
Granted (weighted average exercise
price of $4.74 in 1996, $5.05 in 1997 799,016 13,574 906,768
and $5.49 in 1998)
Canceled (weighted average exercise
price of $2.09 in 1996, $4.61 in 1997 (2,000) (357,950) (48,930)
and $4.70 in 1998)
Exercised (weighted average exercise
price of $1.07 in 1996, $2.24 in 1997 (449,340) (89,870) (14,000)
and $2.09 in 1998)
Options outstanding at end of year
(weighted average exercise price of
$3.96 in 1996, $4.08 in 1997 and $4.59 1,282,126 847,880 1,691,718
in 1998)
Options exercisable at end of year
(weighted average exercise price of
$2.48 in 1996, $3.16 in 1997 and $3.76 391,022 462,648 705,035
in 1998)
</TABLE>
F-16
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
7. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES DECEMBER 31,
1998
<S> <C>
$2.01-$3.58:
Options outstanding:
Number of shares 276,000
Weighted average exercise price $2.30
Weighted average remaining contractual life 3.7
(in years)
Options exercisable:
Number of shares 276,000
Weighted average exercise price $2.30
$4.36-$5.84:
Options outstanding:
Number of shares 1,415,718
Weighted average exercise price $5.03
Weighted average remaining contractual life 5.1
(in years)
Options exercisable:
Number of shares 429,035
Weighted average exercise price $4.71
</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 1996 and 1997 is not representative of the impact on pro forma net
income in 1998 and future years, when the pro forma effect is fully reflected.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
(IN THOUSANDS, EXCEPT FOR
SHARE DATA)
<S> <C> <C> <C>
Pro forma income (loss) from $(327) $(964) $2,964
continuing operations
Pro forma earnings (loss) per share
Basic $(.04) $(.10) $ .34
Diluted $(.04) $(.10) $ .34
</TABLE>
F-17
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
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
1996 1997 1998
(IN THOUSANDS)
Current:
<S> <C> <C> <C>
Federal $(20) $(2,400) $600
State - (200) 130
(20) (2,600) 730
Deferred:
Federal (50) 2,000 1,225
State (10) 100 270
(60) 2,100 1,495
$(80) $ (500) $2,225
</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.
F-18
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
(IN THOUSANDS)
Current deferred tax liabilities:
<S> <C> <C>
Unbilled receivables $5,425 $5,843
Other 135 118
5,560 5,961
Current deferred tax assets:
Contract provisions and 2,482 1,350
allowances
Accrued vacation 510 762
Other accruals 141 27
3,133 2,139
Net current deferred tax $2,427 $3,822
liabilities
Long-term deferred tax assets:
Depreciation $ 400 $ 480
Net operating loss carryforward 350 350
Other 535 355
1,285 1,185
Less: valuation allowance (350) (350)
Net long-term deferred tax assets $ 935 $ 835
</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
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory $(83) $(398) $1,910
rate
State income taxes, net of Federal (31) (60) 255
tax benefit
Other 34 (42) 60
$(80) $(500) $2,225
</TABLE>
F-19
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
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
1996 1997 1998
(IN THOUSANDS, EXCEPT FOR
SHARE DATA)
Numerator:
<S> <C> <C> <C>
Income (loss) from continuing $ (165) $ (670) $3,392
operations
Income (loss) from discontinued (10,872) 648 (2,482)
operations
Net income (loss) for both basic
and diluted earnings per share $(11,037) $ (22) $ 910
Denominator:
Denominator for basic earnings per
share- 8,875,086 9,092,214 8,694,133
Weighted average shares
outstanding
Dilutive potential common shares:
Employee stock options - - 121,333
Denominator for diluted earnings
per share-
Adjusted weighted average 8,875,086 9,092,214 8,815,466
shares and assumed conversions
</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.
10. TRANSACTIONS WITH RELATED PARTIES
The Company made loans in prior years to certain officers and employees related
to the exercise of options to acquire common stock. Unpaid 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.
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.
F-20
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
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 are on a full
service rental basis, but do require the Company to pay increases for
maintenance and operating expenses such as taxes, insurance and utilities over
a base year, 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, 1996, 1997 and 1998 was
$2.7 million, $2.4 million and $2.2 million, respectively.
At December 31, 1998, total future minimum rental commitments under non-
cancelable leases are summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $1,918
2000 1,713
2001 1,728
2002 1,190
2003 1,042
2004 and 692
after
$8,283
</TABLE>
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 arbitration was settled in June 1998 with an award of
$2.0 million, which is included in the loss from discontinued operations.
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-21
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
12. OPERATING SEGMENTS
The Company has two principal operating segments: the Systems Engineering Group
and the Software Engineering Group. The Systems Engineering Group focuses on
information security and complex embedded computer systems and the Software
Engineering Group focuses on Year 2000 services and the installation and
integration of ERP software. The following table provides certain financial
information for each operating segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
(IN MILLIONS)
Contract revenues:
<S> <C> <C> <C>
Systems Engineering $91.9 $73.4 $73.6
Software Engineering 4.3 18.8 43.6
$96.2 $92.2 $117.2
Operating profit:
Systems Engineering $ 2.4 $ 3.0 $5.2
Software Engineering 0.7 1.1 4.6
Other expense (2.4) (3.7) (3.0)
$ 0.7 $ 0.4 $6.8
Depreciation and amortization expense:
Systems Engineering $ 2.4 $ 0.8 $ 0.6
Software Engineering - 0.4 0.9
Discontinued operations 3.2 1.6 -
Capital expenditures:
Systems Engineering $ 1.0 $ 0.4 $ 1.5
Software Engineering - 1.4 0.9
Discontinued operations 5.5 1.8 -
Identifiable assets:
Systems Engineering $ 29.8 $ 27.4 $ 27.4
Software Engineering 3.0 12.0 23.8
Discontinued operations 42.8 - -
General corporate assets 7.8 5.9 6.2
$ 83.4 $ 45.3 $ 57.4
</TABLE>
F-22
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
12. OPERATING SEGMENTS (CONTINUED)
The percentage of Systems Engineering contract revenues from U.S. Government
customers that comprise 10% or more of total revenues were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
<S> <C> <C> <C>
Department of Defense 63% 47% 26%
General Services Administration 14% 16% 19%
</TABLE>
The operating profit in 1996 for the Systems Engineering Group 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 1998 and 1997 include $1.1 million and $2.9 million, respectively, for
supplemental ESOP contributions
F-23
<PAGE>
SCHEDULE II
COMPUTER TECHNOLOGY ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
($000)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance, Charged Charged Balance,
Beginning to Costs to Other End of
DESCRIPTION OF and ACCOUNTS DEDUCTIONS PERIOD
PERIOD EXPENSES
<S> <C> <C> <C> <C> <C>
For the year
ended December $2,700 $300 $108 $0 $3,108
31, 1996
For the year
ended December $3,108 $600 $94 $334 $3,468
31, 1997
For the year
ended December $3,468 $1,019 $325 $2,546 $2,266
31, 1998
</TABLE>
F-24
<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
Computer Technology Associates, Inc. (formerly CTA INCORPORATED) and in the
related prospectus of our report dated February 12, 1999, with respect to the
consolidated financial statements and schedule of Computer Technology
Associates, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
Washington, D.C.
March 26, 1999
F-25
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
Computer Technology Associates, Inc. and in the related prospectus of our
report dated February 18, 1999, with respect to the fair market value of
minority holdings of Common Stock of Computer Technology Associates, Inc. as of
December 31, 1998 included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ Legg Mason Wood Walker, Inc.
Baltimore, MD
March 26, 1999
F-26
<PAGE>
REPORT OF LEGG MASON WOOD WALKER, INC., INDEPENDENT APPRAISERS
Board of Directors
Computer Technology Associates, Inc.
6903 Rockledge Drive, Suite 800
Bethesda, Maryland 20817
Members of the Board:
You have
requested our advice with regard to certain factors impacting the formula price
of the Common Stock of Computer Technology Associates, Inc. ("CTA" or the
"Company") as of December 31, 1998. Specifically, you asked us to provide you
with (i) a discount factor to reflect the limited liquidity of CTA Common Stock
(the "Discount Factor") (ii) a market index to reflect existing securities
market conditions, including their relationship to public companies we have
deemed comparable to CTA (the "Market Index") and (iii) our assessment as to
whether or not the price produced by the formula for CTA Common Stock as of
December 31, 1998 falls within a range we consider reasonable (together, our
"Opinion"). In that regard, and pursuant to the terms and conditions of our
letter agreement dated February 12, 1999, we are pleased to respond with this
letter and related exhibits.
In rendering
our Opinion we have, among other things: (i) reviewed the Annual Reports to
Shareholders and the Annual Reports on Form 10-K for the three years ended
December 31, 1998; (ii) reviewed certain interim reports to shareholders and
Quarterly Reports on Form 10-Q; (iii) reviewed certain other information
relating to the business, earnings, cash flow, assets and prospects of the
Company; (iv) reviewed contract backlog data and contract profiles prepared by
management; (v) 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; (vi) reviewed data relating to recent
merger and acquisition activity in relevant industry classifications; and (vii)
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 and,
accordingly, do not assume responsibility for the accuracy or
F-27
<PAGE>
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.
Regarding a Market Index, we note that the Company has decided to reset
the Market Index to 1.000 as of September 10, 1998. On this date, we note that
the Dow Jones Industrial Average closed at 7,615.54 and the S&P 500 Index
closed at 980.19. Since September 10, 1998 the Dow Jones Industrial Average has
increased to 9,195.47, as of February 17, 1999 and the S&P 500 Index has
increased to 1,224.03. Of greater relevance, a composite of commercial
information technology stocks increased in value by 11.9% over the same period.
Accordingly, we believe the appropriate Market Index is 1.10.
Based upon our analyses of the foregoing and upon such other data as we
have considered relevant to our analysis, it is our Opinion that (i) the
appropriate Discount Factor is 17.5% (ii) the appropriate Market Index is
1.100, and (iii) the formula produced price for CTA Common Stock of $7.80 per
share does fall within the range we believe represents fair market value.
Very truly yours,
LEGG MASON WOOD WALKER, INCORPORATED
Baltimore, MD
February 18, 1999
By:
/S/ SCOTT R.COUSINO
Scott R. Cousino
Managing Director
F-28
<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.
Computer Technology Associates, Inc.
Date: March 31, 1999
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,
Date: March 31, 1999
By:/S/ GREGORY H. WAGNER
Gregory H. Wagner
Executive Vice President, Chief
Financial Officer, Principal
Accounting Officer and Treasurer Date: March 31, 1999
By:/S/ HARVEY D. KUSHNER
Harvey D. Kushner
Director Date: March 31, 1999
By:/S/ DAVID R. MACKIE
David R. Mackie
Director Date: March 31, 1999
By:
Raymond V. McMillan
Director Date: March 31, 1999
By:/S/ GEORGE W. MORGENTHALER
George W. Morgenthaler
Director Date: March 31, 1999
By:
James M. Papada, III
Director Date: March 31, 1999
By:/S/ ARTURO SILVESTRINI
Arturo Silvestrini
Director Date: March 31, 1999
By:/S/ GREGORY H. WAGNER
Gregory H. Wagner
As Attorney-in-Fact Date: March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 51175
<ALLOWANCES> 2266
<INVENTORY> 0
<CURRENT-ASSETS> 50054
<PP&E> 8940
<DEPRECIATION> 5192
<TOTAL-ASSETS> 57348
<CURRENT-LIABILITIES> 37812
<BONDS> 0
<COMMON> 100
0
0
<OTHER-SE> 15634
<TOTAL-LIABILITY-AND-EQUITY> 57348
<SALES> 117184
<TOTAL-REVENUES> 117184
<CGS> 91747
<TOTAL-COSTS> 91747
<OTHER-EXPENSES> 18625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1195
<INCOME-PRETAX> 5617
<INCOME-TAX> 2225
<INCOME-CONTINUING> 3392
<DISCONTINUED> (2482)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 910
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
