SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K (AMENDED)
(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, 1999
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, 2000, there were outstanding 9,131,374 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 $71,224,717 as
determined by independent appraisal.
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COMPUTER TECHNOLOGY ASSOCIATES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1 BUSINESS 1
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
ITEM 6. SELECTED FINANCIAL DATA 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 25
ITEM 11. EXECUTIVE COMPENSATION 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 33
SIGNATURES
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PART I
ITEM 1. BUSINESS
Computer Technology Associates, Inc. ("the Company", formerly CTA
INCORPORATED) provides rapid development and deployment of advanced information
technology ("IT") solutions to commercial and government clients. The
Company's IT offerings include eCommerce and web-enabled solutions, internet
applications, and project management consulting through all stages of complex
IT projects. The Company also provides a full range of systems engineering
services for IT, encompassing engineering support, network development and
integration, information security, object-oriented applications development,
database migrations, legacy system modernization and embedded systems design,
development and integration. The Company's current business strategy is to
develop a balanced client base across both government and commercial sectors of
the IT services and eCommerce markets.
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 and beyond.
In the early 1990's, the Company sought and was awarded 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 Reynolds Metals and Allied-Signal and USAA.
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 ("Orbital") in order to focus on its core IT business. See
Note 2 of Notes to Consolidated Financial Statements.
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The Company refocused itself in the growing IT marketplace after the sale
of its Space business. Pursuing a "nearest neighbor" strategy, the Company
sought to penetrate state and local government IT markets. The Year 2000
("Y2K") compliance problem provided a viable entry point for the Company as it
competed for and won over 25 large complex Y2K engagements. The Company's
success in winning this work was due in large part to its previous federal
government IT work including some very early Y2K work for the Department of
Veterans Affairs. The Company expanded its Y2K portfolio to include embedded
systems, Independent Verification and Validation ("IV&V") and audit work.
As award of new Y2K work began to lessen in early 1999, the Company began
to increase its efforts on converting Y2K engagements to post-Y2K IT work. The
Company was successful in converting several of its state and local government
Y2K contracts to non-Y2K revenue.
The Y2K work also expanded to large commercial enterprises including Wells
Fargo, Norrell and Centecor Pharmaceuticals. This expansion into more
commercial markets combined with the Company's prior success in government
eBusiness laid the foundation for much of the current body of commercial
eBusiness opportunities.
In May 1999, the Company purchased Rey Consulting ("Rey"). Rey was an
Oracle partner reselling Oracle database and training products and the
consulting services to install and configure Oracle products. The Company's
expansion of the initial Rey offerings into broad based web development and
eCommerce turnkey project development combined with security engineering to
form the core of the Company's eBusiness strategy.
CORPORATE ORGANIZATION
Following the sale of the Space and Telecommunications business, the
Company organized into Federal and non-Federal operating units. These business
units focused on specific client groups, namely, federal, state and local
government and commercial clients. The Federal segment focuses on systems
engineering, network development and integration, information security and
complex embedded computer systems. The non-Federal segment focuses on IT
services, a major component of which was Year 2000 compliance services in 1998
and 1999 and eCommerce applications. The Company has begun a reorganization it
expects to be effective for 2000 that reflects its increased focus on eBusiness
and eGovernment Solutions. This organization will effectively have two
operating segments - one devoted entirely to commercial and government
eBusiness and related offerings and the other to IT services to the federal
market.
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) electronic commerce implementations and
other web based applications including the engineering and implementation of
secure and highly reliable computer and network systems, 2) legacy information
system modernization, 3) network integration and application development, 4)
the development, migration and maintenance of large scale databases, 5) a range
of IT services associated with complex embedded computer systems.
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The Company believes that it was one of the industry leaders in 1998 and
1999 in the large 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 Y2K compliance requirements. Approximately 42
percent of the Company's 1999 revenues were derived from Y2K compliance
contracts. These engagements and related revenues peaked prior to calendar Year
2000 as customers completed efforts to address their needs. The Company expects
that revenues derived from Y2K engagements will decline sharply after Year
2000. The Company believes that the 1999 Y2K related business that provided a
major portion of its 1998 and 1999 revenues will be largely replaced with
legacy system modernization projects including web based applications and
client-server conversions.
BUSINESS STRATEGY
GENERAL
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 long term experience in
federal government, state government and commercial complex IT 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 eBusiness web
enabled applications development legacy system modernization, and data base
migrations.
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 electronic commerce, customer relationship
management and resource management.
ACQUIRING STRATEGIC IT SERVICES BUSINESSES. The Company intends to pursue
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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 SOLUTIONS AND SERVICES (ITSS) AND GOVERNMENT EBUSINESS
The ITSS unit of the Company is currently a nationwide provider of IT
services to a broad range of public sector clients. The IT services practice
focuses on the development, upgrade and maintenance of embedded, mainframe and
client server computer systems and networks. This practice has been at the core
of the Company's success since 1979.
Successful penetration and continued growth in the public sector
eGovernment Solutions market will be initially focused on eProcurement systems,
Operating Resource Management and Case Management Solutions. The Company
expects to leverage its legacy of having completed over 575 complex IT
contracts with an aggregate value of over $1 billion dollars into meeting the
growing demand for large, complex mission critical solutions.
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 mid 2000.
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
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a cost-plus-award-fee contract, has a total value to CTA of $33 million and is
scheduled for completion in mid 2000.
INFORMATION SYSTEMS SECURITY ("INFOSEC"). The INFOSEC Group,
headquartered in CTA's Colorado Springs facility, provides information systems
security consulting services, security analyses and assessments, and security
certification and accreditation support to commercial enterprises and state and
federal government agencies. The group is currently supporting major projects
to government and commercial clients. CTA's Information Security clients
include MCI, Raytheon, Internal Revenue Service, Lockheed Martin, Defense
Finance Accounting Service, and the General Services Administration ("GSA")
Federal Supply Service (FSS).
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 $25 million and is scheduled for completion in mid 2000.
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 $7 million and is scheduled for completion in
September 2001.
(iii) 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 $2.7
million and is scheduled for completion in September 2000.
DEPARTMENT OF JUSTICE. In February 1994, the Department of Justice
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("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.
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. During 1999, the Company provided Year 2000
compliance 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
warranted its services as part of its extensive customer satisfaction
initiatives. To date, there have been no material expenses incurred in
satisfying those warranties.
COMMERCIAL EBUSINESS AND RELATED OFFERINGS
The Company's commercial offerings center around the development of
internet based solutions in a variety of eCommerce applications. The Company
enhanced its presence in the rapidly growing eCommerce arena with the
acquisition of Rey Consulting in May, 1999.
The Company's eCommerce practice is targeted at: Commercial solutions
which encompass the sale of end-to-end systems designed to assist clients in
establishing or expanding their eBusiness capabilities; Commercial Software
encompassing the sale of commercial software licenses and related services;
Internet Marketing which provides clients with internet strategy formulation
and implementation; Network Security Services encompassing a range of security
assessment services for testing, monitoring and managing all security related
site issues; and general Consulting Support Services in specific eBusiness
applications.
The Company has been actively engaged in eBusiness applications since
1995. Under contract to the GSA, the Company developed GSA Advantage!, an
internet-based eCommerce system specializing in procurement. The system allows
vendors to electronically submit their product or services catalogs, users to
search for goods and services to purchase, purchase orders to be electronically
generated and sent to vendors, the status of orders to be tracked, and for
automated billing of orders. In short, a fully featured business-to-business
and business-to-consumer eCommerce site covering the entire supply chain. The
system was one of the first successful large scale eBusiness efforts in the
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United States.
The Company's successful transition of state government Year 2000
compliance contracts, most notably in Kansas, into eBusiness work provided an
important non-federal test of the Company's eBusiness capabilities and assets.
Leveraging on the success of the Company's on-going federal and non-federal
government eBusiness, and building on the acquisition of Rey Consulting and its
on-going commercial eBusiness practice, the Company believes it is uniquely
positioned to continue its eBusiness growth.
In January 2000, the Company completed the acquisition of Touchscreen
Media Group ("TMG"). TMG provides front end, creative design and development
of web sites for a variety of clients including Minolta and Bell Atlantic.
This acquisition is expected to greatly enhance the Company's total eBusiness
capabilities.
INFORMATION TECHNOLOGY SERVICES--COMPETITION
The IT services industry encompassing both traditional IT Systems and
Services and the growing eBusiness segment 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, KPMG, Arthur Andersen, 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. Additionally, in 1999, the Company realized revenues from the sale of
commercial software licenses related to its eBusiness work acquired as a result
of the Rey Consulting acquisition.
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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,
TYPE OF CONTRACT 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Fixed-price 14% 24% 13%
Time-and-materials 54% 47% 68%
Cost-reimbursable 32% 29% 16%
Licenses -- -- 3%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</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 have a material adverse affect on 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 1997 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 Indefinite Delivery,
Indefinite Quantity ("IDIQ") contracts, as well as its right to limit orders to
any particular awardee, means that there is no assurance that contract backlog
will result in actual orders to the Company. Accordingly, the Company does not
believe that backlog will necessarily be a reliable indicator of future
revenues.
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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, 1999 was approximately $47 million.
EMPLOYEES
At December 31, 1999, the Company had 516 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, 1999 had approximately 125 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
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.
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The Company is involved in certain other litigation incidental to its
business. In the first quarter of 2000, P.T. Media Citra Indostar ("MCI") com-
menced arbitration proceedings against Orbital Sciences Corporation ("Orbital")
for rescission and damages associated with MCI's purchase of a satellite. The
contract to purchase the satellite was assigned to Orbital when it acquired
the assets of the Company's subsidiary, CTA International, Inc. ("CTAI"), in
August of 1997. The Company is not a party to the arbitration proceeding, but
Orbital has informed the Company that it may seek indemnification from the
Company if it is found liable to MCI.
The rescission claim for the refund of the approximately $163 million that MCI
claims it paid for the satellite is based primarily on the allegation that MCI
was fraudulently induced to enter into the contract. MCI also seeks damages
in connection with alleged breaches of the purchase contract. The contract
between MCI and Orbital (as CTAI's successor) contains provisions limiting
general damages to five million dollars and prohibiting the award of
consequential damages. Management believes that MCI's allegations are without
merit and that the Company would have substantive defenses against claims from
Orbital as well as MCI. The Company will vigorously defend itself against these
allegations. Based on the information that is currently available, the
Company believes that the likelihood of the rescission claim succeeding is
remote and that this matter will not have a material adverse effect on the
financial position or future operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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. Since 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, 1997 or 1999.
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
11
<PAGE>
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
normally 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
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<PAGE>
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((2.25BV + K(MI)(P)((CM+R)/2))/Wi)
The "discount factor" is a number which is intended to reflect the
discount for the limited liquidity of the Common Stock and the "market index"
is a number which is intended to reflect existing securities market conditions.
Both of these factors are established annually by the Board of Directors based
upon the recommendation of an independent appraisal firm. The 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 no longer resulting in a fair market value for
the Common Stock. The Board of Directors believes the current Formula will
generally, but not always result in a fair market value for the Common Stock
within a broad range of financial criteria. For the year ended December 31,
1999, the formula did not result in a usable fair market value.
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
13
<PAGE>
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
cannot result or 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 and the price of $7.80 at December 31, 1999
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,
Houlihan Lokey Howard and Zukin Financial Advisors, Inc. ("HLHZ") in 1999 and
Legg Mason Wood Walker, Inc., for the years 1986 through 1998. The 1992, 1993,
both 1994, 1995 and June 1998 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, 1999 $7.800
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
Report of Independent Appraiser
For the 1999 year end appraisal, HLHZ were engaged as the independent
appraiser for the Company with respect to its common stock. The Company
believes that its current strategic direction aligns more closely with HLHZ's
14
<PAGE>
corporate background and capabilities. HLHZ has extensive nationwide
experience in the valuation of firms engaged in similar initiatives and with
similar technical expertise as the Company.
Prior to the engagement of HLHZ for the December 31, 1999 appraisal, all
previous appraisals were performed by Legg Mason Wood Walker, Inc. ("Legg
Mason").
In connection with the Board's determination of the Formula Price, the
appraiser 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. The appraiser
also provides to the Board of Directors an assessment as to whether the Formula
Price calculated is within a range which the appraiser considers reasonable.
The appraiser 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 the appraiser to be comparable to the
Company and (v) data relating to recent merger and acquisition activity of
selected public companies deemed by the appraiser to be comparable to the
Company.
In the event the Company's factors for use in the formula will render the
formula useless or will produce a nonsensical arithmetic result, the Board may
choose not to seek the appraiser's recommendations for formula factors.
Instead, the Board will seek only the range of stock prices established by
independent appraisal.
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 29, 2000, there were approximately 260 common stockholders
of the Company.
15
<PAGE>
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, 1999 and as of December 31, 1995,
1996, 1997, 1998 and 1999 have been derived from the consolidated financial
statements of the Company. The consolidated financial statements for each of
the five years ended December 31, 1995 through 1999 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.
16
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement
Data:
Contract revenues $105,224 $96,246 $92,239 $117,184 $104,887
Cost of contract 96,633 87,644 78,530 91,747 87,692
revenues
Selling, general
and administrative 4,117 5,431 9,622 15,585 14,589
expenses
Other expenses (292) 2,447 3,668 3,040 3,698
----- ----- ----- ----- ------
Operating 4,766 724 419 6,812 (1,092)
profit/(loss)
Interest expense 850 969 1,589 1,195 1,328
----- --- ----- ----- -----
Income (loss)
before income taxes 3,916 (245) (1,170) 5,617 (2,420)
Provision (benefit)
for income taxes 1,567 (80) (500) 2,225 (1,408)
----- --- ----- ----- -----
Income (loss) from
continuing 2,349 (165) (670) 3,392 (1,012)
operations
Income (loss) from
discontinued
operations, net of
income taxes(1)(2) (403) (10,872) 648 (2,482) -
----- ------- --- ----- ------
Net income (loss) $1,946 $(11,037) $ 22 $ 910 $(1,012)
====== ======== ====== ======= =======
Basic earnings
(loss) per share:
Continuing $0.27 $(0.02) $(0.07) $ 0.39 $ (.11)
operations
Discontinued
operations (0.05) (1.22) 0.07 (0.29) .00
----- ------ ------- ------- -----
Earnings (loss) per
share $0.22 $(1.24) $ 0.00 $ 0.10 $(.11)
===== ====== ======= ======= =====
Diluted earnings
(loss) per share:
Continuing
operations $0.25 $(0.02) $(0.07) $ 0.38 $(.11)
Discontinued
operations (0.04) (1.22) 0.07 (0.28) .00
----- ------ ------ ------- -----
Earnings (loss) per
share-diluted $0.21 $(1.24) $ 0.00 $ 0.10 $(.11)
===== ====== ======= ======= =====
Weighted average
number of shares
outstanding 8,863 8,875 9,092 8,694 8,830
===== ===== ===== ===== =====
Diluted average
number of shares
outstanding 9,418 8,875 9,092 8,815 8,830
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash $ 235 $ 16 $ - $ $
equivalents - - -
Working capital 19,713 13,721 12,588 12,242 7,083
Total assets 91,530 92,690 45,288 57,348 45,935
Short-term debt 17,074 28,335 9,112 17,890 14,344
Long-term debt 17,431 18,510 3,333 3,802 2,107
-------- -------- -------- -------- --------
Total Stockholders'
equity $ 28,773 $ 17,793 $ 15,810 $ 15,734 $ 17,452
</TABLE>
17
<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 primarily 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
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<PAGE>
government, have declined from $105 million, or 100% of contract revenues, in
1995 to $54 million, or 52% of contract revenues, in 1999. During 1997 and
1998, the Company 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 also 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. In 1999, the Company
purchased Rey, an Oracle partner reselling Oracle database products. This
helped establish the Company's presence in and commitment to eBusiness markets.
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,
---------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Contract revenues:
Federal (formerly Systems Engineering) 79.6% 62.8% 51.8%
Non-Federal (formerly Software
Engineering) 20.4 37.2 48.2
----- ----- -----
Total contract revenues 100.0 100.0 100.0
Cost of contract revenues 85.2 78.3 83.7
Selling, general and administrative
expenses 10.4 13.3 13.9
expenses
Supplemental ESOP contribution 3.2 0.9 1.5
Other expenses 0.8 1.7 2.0
--- --- ----
Operating profit 0.4 5.8 (1.1)
Interest expense 1.7 1.0 (1.3)
--- --- ---
Income (loss) before income taxes (1.3) 4.8 (2.4)
Provision (benefit) for income taxes (0.6) 1.9 (1.4)
--- --- ---
Income (loss) from continuing operations (0.7) 2.9 (1.0)
Income (loss) from discontinued
operations, net of income taxes 0.7 (2.1) -
--- --- ---
Net income (loss) (0.0)% 0.8% (1.0)%
===== === =====
</TABLE>
The following tables set forth certain items in the Company's Statements
of Operations by operating segment:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Contract revenues:
Federal (formerly Systems
Engineering) $73,464 $73,579 $54,378
Non-Federal (formerly Software
Engineering) 18,775 43,605 50,509
------- -------- --------
$92,239 $117,184 $104,887
======= ======== ========
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<PAGE>
Operating profit:
Federal (formerly Systems
Engineering) $2,933 $5,259 $ 4,415
Non-Federal (formerly Software
Engineering) 1,154 4,593 (1,809)
Other expenses (3,668) (3,040) (3,698)
----- ----- -----
$ 419 $6,812 $(1,092)
</TABLE>
1999 COMPARED WITH 1998
CONTRACT REVENUES. Contract revenues decreased 10 percent to $104.9M in
1999 from $117.2M in 1998. This change was due primarily to the conclusion of
several large Y2K efforts in both the services and embedded components of the
Company's Y2K practice. Additionally, major tasks on other federal contracts
with the Navy and Department of Health Affairs concluded during 1999.
COST OF CONTRACT REVENUES. Cost of contract revenues decreased 4 percent
to $87.7 million in 1999 from $91.7 million in 1998. As a percentage of
revenue however, the 1999 figure represents 84 percent compared to 78 percent
in 1998, an increase of 7 percent. This increase in the percent of revenue
calculation stems from losses experienced on the Texas Department of Health
Services ("TDHS") contract and Texas Guaranteed Student Loan ("TGSL") contract
in 1999.
SG&A. Selling, general and administrative expenses ("SG&A") decreased 6
percent from $15.6 million in 1998 to $14.6 million in 1999. As a percentage
of revenue, however, the 1999 figure represents 14 percent compared to 13
percent in 1998. This increase in the period represents the cost of additional
selling expense incurred in the transition from Y2K markets and into new
commercial initiatives.
SUPPLEMENTAL ESOP CONTRIBUTION. During 1999, the Board of Directors
elected to make a supplemental contribution of approximately $1.6 million to
the Company's employee stock ownership plan ("ESOP").
OTHER EXPENSES. Other expenses increased to $2.1 million in 1999 from $2
million in 1998 due to additional reserves and write-downs of certain contract
receivables.
OPERATING PROFIT. As a result of the foregoing, the Company had an
operating loss of $1.1 million in 1999 compared with an operating profit of
$6.8 million in 1998.
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 $73.4 million in 1997. Decreases in revenues on the General Services
Administration ("GSA") Eastern Zone contract, which ended in the third quarter
20
<PAGE>
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. 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 $2.0 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net income (loss) was $(1.0 million), $0.9 million, and
($0.02 million), in 1999, 1998 and 1997, respectively. Its cash flow provided
by (used in) operating activities was $10.6 million, $(1.8 million), and $(10.2
21
<PAGE>
million), in 1999, 1998 and 1997, respectively. The principal factors
accounting for the provision (use) of cash in operating activities in 1999 were
$19.3 million in reductions to the outstanding accounts receivable balance.
Several significant receivables were collected in the period and the growth in
new receivables was slower than previously experienced. Depreciation and
amortization expense accounted for $2.5 million of cash added back to net
income, and other changes in working capital accounts other than Accounts
Receivable used ($9.3 million) of cash. 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.
Cash provided by (used in) investing activities totaled $(4.6 million),
$(4.5 million), and $14.4 million, in 1999, 1998 and 1997, respectively.
Additions to furniture and equipment were $1.4 million, $2.4 million, and $3.6
million in 1999, 1998 and 1997, respectively. Costs related to the acquisition
of Rey used $3.3 million of cash in 1999. 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 $(6.0 million), $6.2
million and $(4.2 million), in 1999, 1998 and 1997, 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 $(3.3 million), $8.8
million, and $(3.7 million), for 1999, 1998 and 1997, respectively. The 1997
amount is net of $5 million proceeds from a new three-year term loan. Repayment
of long-term debt was $2.1 million in 1999, $1.7 million in 1998 and $0.5
million in 1997. Net purchases of treasury stock were $0.7 million, $1.0
million, and $0.1 million in 1999, 1998 and 1997, 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, 1999, there was $13.1 million outstanding under the revolving
credit facility and $1.3 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 2.0% to 2.5% (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, 1999 was approximately 8.5%. 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
22
<PAGE>
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. The Company may, however, seek
additional sources of external capital to fund growth in new eCommerce
initiatives including potential acquisitions.
OTHER MATTERS
The Company assigned certain individuals to identify and correct Year 2000
compliance issues. IT systems with non-compliant code were modified or
replaced with systems that were Year 2000 compliant. The individuals were also
responsible for investigating the readiness of suppliers, customers and other
third parties along with the development of contingency plans where necessary.
All necessary IT systems were inventoried and assessed for compliance with
modifications made or replacement systems secured. IT systems are now believed
to be fully compliant. Inventories and assessments of non-IT systems have been
completed.
The Company also identified critical suppliers, customers and other third
parties and surveyed their Year 2000 remediation programs. Risk assessments
and contingency plans, where necessary, were finalized in 1999.
The Company has not experienced any Y2K disruption to its operations and
does not expect any material disruptions in the future.
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, 1999 and 1998 the principal amount of the
Company's aggregate outstanding variable rate indebtedness was $14.3 million
and $19.6 million, respectively. A hypothetical 10% adverse change in interest
rates would have had an annualized unfavorable impact of approximately $107,000
and $146,000, 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.
23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
24
<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, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
C.E. Velez 59 President, Chief Executive Officer and
Chairman of the Board
Gregory H. Wagner 51 Executive Vice President, Chief
Financial Officer and Treasurer
Terry J. 56 Executive Vice President
Piddington
Mark Phillips 48 Executive Vice President
Harvey D. Kushner 69 Director
(1)
David R. Mackie 61 Director
(1)
Raymond V. Mc 66 Director
Millan (1)
James M. Papada, 51 Director
III (1)
Arturo 69 Director
Silvestrini (1)
Joseph Cinque 46 Director
</TABLE>
___________
(1) Member of the Compensation Committee and the Audit Committee of the Board
of Directors.
___________
Dr. C.E. "Tom" Velez, a founder of the Company, has been President and
Chairman of the Board since the Company's organization in 1979. Prior to
founding the Company, Dr. Velez was employed by Martin Marietta Aerospace for
three years as Director, Software Engineering Research and Development, and was
previously employed at the NASA Goddard Space Flight Center for 12 years in
various positions including Chief of the Systems Development and Analysis
Branch.
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 fourteen 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.
Mark Phillips has been an Executive Vice President since 1996, prior to
that he was a Vice President since 1992. He has held positions including
Regional Operations Manager, Division Director and Chief Operating Officer of
the Systems Group. Prior to CTA, Mr. Phillips held various positions with
25
<PAGE>
Martin Marietta Corporation.
Harvey D. Kushner has been a Director of the Company since July 1989.
Mr. Kushner formed Kushner Management Planning Corporation in 1988 which is a
professional services firm advising in management, business and technology
development. From 1987 to 1988, he was an officer of Atlantic Research
Corporation. Prior to 1987, Mr. Kushner had been employed by the ORI Group for
33 years, having served as Chairman of the Board of Directors, Chief Executive
Officer, and President for 20 years.
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. Mc Millan 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.
James M. Papada, III has been a Director of the Company since August 1996.
Since 1991, he has been a senior partner in the corporate department of the law
firm of Stradley, Ronon, Stevens & Young, a limited liability partnership in
Philadelphia, Pennsylvania, specializing in merger and acquisition
transactions. He is also the Chairman of the Board of Technitrol, Inc., a
multi-national, diversified manufacturing company listed on the New York Stock
Exchange. He is also a Director of ParaChem Southern, Inc., a manufacturer of
specialty chemical products and GlassTech, Inc., a manufacturer of glass
tempering and bending systems. From February 1983 until December 1987, Mr.
Papada was President and Chief Operating Officer of Hordis Brothers, Inc., a
privately held glass fabricator.
Arturo Silvestrini has been a Director of the Company since August 1991.
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.
Joseph L. Cinque has been a Director of the Company since July 1999. He
has held various senior sales management positions at Hewlett-Packard since
1980, most recent of which was General Manager of software sales for North
America. Prior to that, he was a sales engineer with Hewlett-Packard and Texas
Instruments.
Executive officers are reviewed annually by the Board of Directors and
serve at the pleasure of the Board.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation for
1999, 1998 and 1997 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>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- -----------------------
Other Restrict Option Other
NAME AND PRINCIPAL Salary Bonus Annual Stock Awards Comp.
POSITION(S) YEAR ($) ($) Comp. Awards (#) ($)(2)
($)(1) ($) (#)
<S> <C> <C> <C> <C> <C> <C> <C>
C.E. Velez 1999 329,415 106,076 2,040 -- -- 131,486
President, Chief 1998 308,000 145,673 2,052 -- 22,895 17,915
Executive Officer 1997 280,000 130,220 2,090 -- -- 14,480
and Chairman of
the Board
Gregory H. Wagner 1999 221,677 64,553 942 -- -- 17,047
Executive Vice 1998 187,000 88,494 954 -- 13,900 32,411
President, Chief 1997 170,000 112,455 927 -- -- 32,461
Financial Officer
and Treasurer
Terry J. 1999 192,308 52,587 1,536 -- -- 17,358
Piddington 1998 180,000 75,634 1,548 -- 12,828 24,131
Executive Vice 1997 155,000 25,033 1,396 -- -- 14,028
Mark Phillips 1999 151,220 19,530 690 -- 2,944 169,874
Executive Vice 1998 140,969 49,179 666 -- 22,471 15,852
President 1997 170,786 -- 665 -- -- 14,361
</TABLE>
___________
(1) Represents long term disability premiums and group life insurance premiums
for amounts in excess of $50,000.
(2) Includes amounts of the Company's contributions allocated to participants'
accounts pursuant to the Company's 401(k) plan and ESOP, other relocation
reimbursements and miscellaneous cash payments pursuant to the Company's
cafeteria plan.
27
<PAGE>
OPTION GRANTS DURING 1999
The following table sets forth information concerning the stock options
granted during fiscal 1999 to each member of the Executive Officer Group.
<TABLE>
<CAPTION>
% of Total
Number of Options
Shares Granted to
Underlying Employees Exercise Grant Date
Options in Fiscal Price Expiration Present
NAME GRANTED YEAR ($/SH) DATE Value
(#) ($)(1)
--------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
C.E. Velez -- -- -- -- --
Gregory H.Wagner -- -- -- -- --
Terry J.Piddington-- -- -- -- --
Mark Phillips 2,944 0.8% 7.80 4/22/06 7,419
</TABLE>
(1) The Company uses the Black-Scholes model to estimate the fair values of
options, assuming a risk-free interest rate equal to the ninety-day U.S.
Treasury Bill rate, expected lives of five to ten years, an expected
volatility factor of .199 and no expected dividends.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of
stock options during fiscal 1999 and the number and value of unexercised stock
options held at year-end by each member of the Executive Officer Group.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options at FY-End Options at
on Value (#) FY-End ($)(1)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
---------- --------- --------- --------------- --------------
<S> <C> <C> <C> <C>
C.E. Velez -- -- 66,642/15,263 201,265/41,973
Gregory H. -- -- 90,464/9,264 243,156/14,106
Wagner
Terry J. -- -- 39,942/8,552 120,641/14,430
Piddington
Mark -- -- 12,490/17,925 39,972/27,618
Phillips
</TABLE>
___________
(1) There was no public trading market for the Common Stock on December 31,
28
<PAGE>
1999. 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.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with regard to the
beneficial ownership of the Common Stock as of December 31, 1999 by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director, each executive officer and each
member of the Executive Officer Group and (iii) all current directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
Shares Percent
NAME AND ADDRESS OF BENEFICIAL Beneficially Beneficially
OWNER(1)(2) OWNED (1) OWNED(3)
------------------------------ ------------ -------------
<S> <C> <C>
5% Stockholders:
C.E. Velez 4,874,678 (4) 49.8%
ESOP 1,615,318 16.5
B.A. Claussen 883,752 (5) 9.0
Directors and executive
officers:
C.E. Velez 4,874,678 (4) 49.8%
Terry J. Piddington 462,374 (6) 4.7
Raymond V. Mc Millan 227,799 (7) 2.3
Gregory H. Wagner 212,416 (8) 2.2
Harvey D. Kushner 20,893 (9) *
James M. Papada, III 10,646(10) *
Arturo Silvestrini 5,336 *
David R. Mackie 4,762 *
All current directors and
executive officers as a group
(9 persons as of December 31,
1999) 5,837,079(11) 59.7%
</TABLE>
___________
* Less than 1%.
(1) Beneficial ownership as of December 31, 1999 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 8,957,703 shares of Common
Stock deemed outstanding as of December 31, 1999 and non-qualified options
to purchase 826,297 shares of Common Stock which are currently exercisable
within 60 days after such date.
30
<PAGE>
(4) Includes non-qualified options to purchase 72,610 shares of Common Stock .
(5) Includes non-qualified options to purchase 200,000 shares of Common.
(6) Includes non-qualified options to purchase 40,247 shares of Common Stock.
(7) Includes non-qualified options to purchase 179,186 shares of Common Stock.
(8) Includes non-qualified options to purchase 94,088 shares of Common Stock..
(9) Includes non-qualified options to purchase 6,636 shares of Common Stock.
(1) Includes non-qualified options to purchase 1,620 shares of Common Stock.
(2) Includes non-qualified options to purchase 406,877 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 7.0%.
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 Restriction 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
31
<PAGE>
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.
In 1999, the Company approved a loan to Dr. Velez of up to $750,000 for
the purchase of a new home related to his relocation to the Company's
California offices. The note is payable upon demand not later than September
13, 2004 and bears no interest. The note is collateralized by a like amount of
value in the principal shareholder's shares of the Company's stock. As of
December 31, 1999, approximately $689,000 of the approved loan amount has been
disbursed and this amount is currently outstanding.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(A) CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES: PAGE
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules:
Schedule II - Valuation and Qualifying
Accounts and Reserves F-28
All other schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the related
instructions or are inapplicable and therefore have been omitted.
Exhibits:
23(a) Consent of Ernst & Young LLP F-29
23(b) Consent and Report of Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. F-30
23(c) Consent of Legg Mason Wood Walker, Inc. F-37
14(B) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the fourth quarter of 1999.
14(C) FINANCIAL DATA SCHEDULE
33
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Financial Statements
As of December 31, 1999 and 1998
and for each of the three years
in the period ended December 31, 1999
CONTENTS
Report of Independent Auditors...........................F-1
Audited Consolidated Financial Statements:
Consolidated Balance Sheets.............................F2-3
Consolidated Statements of Operations....................F-4
Consolidated Statements of Stockholders' Equity..........F-5
Consolidated Statements of Cash Flows...................F6-7
Notes to Consolidated Financial Statements.............F8-27
<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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 14, 2000
F-1
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------- -------
(IN THOUSANDS)
Assets
<S> <C> <C>
Current assets:
Accounts receivable (NOTES 1 AND 3) $ 48,909 $ 31,777
Other current assets (NOTE 4) 1,145 1,682
-------- --------
Total current assets 50,054 33,459
Furniture and equipment (NOTES 1 AND 4) 8,940 9,555
Accumulated depreciation and (5,192) (6,627)
amortization ------ ------
3,748 2,928
Costs in excess of net assets acquired - 5,839
(NOTE 1)
Other assets (NOTES 4 AND 8) 3,546 3,709
-------- --------
Total assets $ 57,348 $ 45,935
</TABLE>
F-2
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------ --------
(IN THOUSANDS)
Liabilities and stockholders' equity
<S> <C> <C>
Current liabilities:
Notes payable - line of credit (NOTE $ 16,223 $ 13,094
5)
Current portion of long-term debt 1,667 1,250
(NOTE 5)
Accounts payable 10,576 5,949
Accrued expenses (NOTE 4) 4,156 3,181
Excess of billings over costs and 1,109 77
contract prepayments
Other current liabilities 240 89
Income taxes payable (NOTE 8) 19 890
Deferred income taxes (NOTE 8) 3,822 1,846
------ ------
Total current liabilities 37,812 26,376
Long-term debt, less current portion 1,667 -
(NOTE 5)
Other long-term liabilities (NOTE 6) 2,135 2,107
Commitments and contingencies (NOTE 11) - -
Stockholders' equity (NOTE 7):
Preferred stock, $1.00 par value,
1,000,000 shares
authorized and none issued - -
Common stock, $.01 par value,
20,000,000 shares
authorized (10,000,000 issued in
1998 and 10,384,616 in 1999) 100 104
Additional capital 7,855 12,082
Retained earnings 15,438 14,426
------ ------
23,393 26,612
Notes receivable from employees (698) (698)
(NOTE 10)
Treasury stock, at cost (1,415,905
shares in 1998
and 1,426,913 shares in 1999) (6,961) (8,462)
------ ------
Total stockholders' equity 15,734 17,452
-------- --------
Total liabilities and stockholders' $ 57,348 $ 45,935
equity
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Contract revenues $ 92,239 $ 117,184 $ 104,887
Cost of contract revenues 78,530 91,747 87,692
Selling, general and 9,622 15,585 14,589
administrative expenses
Supplemental ESOP contribution 2,958 1,087 1,581
(NOTE 6)
Other expenses 710 1,953 2,117
Operating profit 419 6,812 (1,092)
Interest expense 1,589 1,195 1,328
Income (loss) before income (1,170) 5,617 (2,420)
taxes
Income taxes (benefit) (NOTE 8) (500) 2,225 (1,408)
Income (loss) from continuing (670) 3,392 (1,012)
operations
Discontinued operations (NOTE
2):
Loss from discontinued
operations, net of income (3,272) (1,094) -
taxes
Gain (loss) on disposal of
segments, net of income taxes 3,920 (1,388) -
Income (loss) from discontinued 648 (2,482) -
operations
Net income (loss) $ (22) $ 910 $ (1,012)
Earnings (loss) per share (NOTE
9):
Continuing operations $ (.07) $ .39 $ (.11)
Discontinued operations .07 (.29) .00
Earnings (loss) per share $ .00 $ .10 $ (.11)
Earnings (loss) per share -
assuming dilution (NOTE 9):
Continuing operations $ (.07) $ .38 $ (.11)
Discontinued operations .07 (.28) .00
Earnings (loss) per share -
assuming dilution $ .00 $ .10 $ (.11)
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Computer Technology Associates, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
(In thousands, except for share data)
NOTES
COMMON RECV TREASURY STOCK
STOCK PAR ADD RET FROM --------------
SHARES VALUE CAPL EARN EMPLS SHARES COST
---------- ---- ------ ------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 10,000,000 $100 $7,943 $14,550 $698 894,704 $4,102
Purchase of treasury - - - - - 466,500 2,381
stock (NOTE 7)
Exercise of stock options - - (191) - - (89,870) (392)
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, 1997 10,000,000 100 7,869 14,528 698 1,248,980 5,989
Purchase of treasury - - - - - 214,860 1,196
stock (NOTE 7)
Sale of treasury stock to - - - - - (17,141) (100)
employees
Exercise of stock options - - (32) - - (14,000) (61)
Compensatory issuance of
common stock to - - 18 - - (16,794) (63)
employees/directors
Net income - - - 910 - - -
Balance at December 31, 1998 10,000,000 100 7,855 15,438 698 1,415,905 6,961
Purchase of treasury - - - - - 69,229 536
stock (NOTE 7)
Exercise of stock options - - (36) - - (48,054) (229)
Compensatory issuance of - - 26 - - (10,167) (47)
common stock to
employees/directors
Issuance of new shares 384,616 4 2,996 - - 384,616 3,000
Issuance of stock for - - 1,241 - - (384,616)(1,759)
acquisition
Net loss - - - (1,012) - - -
---------- --- ----- ------ --- --------- -----
Balance at
December 31, 1999 10,384,616 104 12,082 14,426 698 1,426,913 8,462
========== === ====== ====== === ========= =====
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Computer Technology Associates, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
--------- ------ --------
(IN THOUSANDS)
Operating activities
<S> <C> <C> <C>
Net income (loss) $ (22) $ 910 $ (1,012)
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 55
Depreciation and amortization:
Furniture and equipment 2,612 1,911 2,119
Capitalized software development 76 - -
costs
Other noncurrent assets 390 - 417
Deferred lease incentives (271) (405) -
Provision for receivable allowances 360 1,019 (1,157)
Accrued interest on debt (3,590) - 61
Other noncash expenses (224) 81 74
Changes in assets and liabilities:
Accounts receivable 901 (16,628) 19,301
Recoverable income taxes (906) 3,595 821
Other assets 463 (126) (1,184)
Accounts payable and accrued (5,017) 5,644 (5,633)
expenses
Excess of billings over costs and
contract prepayments (3,180) (1,629) (1,032)
Deferred income taxes, net 2,100 1,495 (2,249)
-------- ------- -------
Net cash provided by (used in)
operating activities $(10,228) $(1,795) $10,581
-------- ------- ------
INVESTING ACTIVITIES
Investments in furniture and equipment (3,584) (2,391) (1,414)
Proceeds from (adjustments to) sale of 18,000 (2,100) -
segments
Proceeds from sale of assets - 38 146
Acquisition costs - - (3,310)
Other - - 12
Net cash provided by (used in) ------- -------- --------
investing activities $14,416 $(4,453) $(4,566)
------- -------- --------
</TABLE>
F-6
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
------- ------ -------
(IN THOUSANDS)
Financing activities
<S> <C> <C> <C>
Net borrowings (payments) under
bank line of credit agreement $ (8,684) $ 8,778 $(3,272)
Proceeds from term loan 5,000 - -
Repayment of long-term debt (450) (1,666) (2,084)
Purchase of treasury stock (104) (993) (667)
Sale of treasury stock - 100 -
Proceeds from exercise of stock 34 29 8
options --------- ------- --------
Net cash provided by (used in) $ (4,204) $ 6,248 $(6,015)
financing activities --------- ------- --------
Net decrease in cash and cash (16) - -
equivalents
Cash and cash equivalents at beginning 16 - -
of period --------- ------- --------
Cash and cash equivalents at end of $ - $ - $ -
period ========= ======= ========
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Income taxes $ 117 $ 309 $ 549
======== ======= ========
Interest $ 8,807 $ 1,037 $ 1,419
======== ======= ========
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 stock $ - $ 203 $ -
======== ======= ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements
December 31, 1999
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 e-
commerce and web-enabled solutions, internet applications,
and project management consulting through all stages of
complex IT projects. The Company also provides a full range
of systems engineering services for IT encompassing
engineering support, network development and integration,
information security, object-oriented applications
development, data warehousing, database migrations, legacy
system modernization and embedded systems design, development
and integration. The Company's current business strategy is
to develop a balanced client base across both government and
commercial sectors of the IT services and e-commerce markets.
On May 4, 1999 the Company purchased Rey Consulting Group,
Inc. ("Rey") for $5.95 million, comprised of $2.95 million in
cash and $3.0 million of the Company's common stock. The
Company issued 384,616 shares of stock valued at $7.80 per
share in this exchange. The results of operations for Rey
are included in the Company's income statement subsequent to
May 4, 1999. Approximately $6.2 million of goodwill
associated with this transaction was recorded which will be
amortized on a straight-line basis over 10 years.
Approximately $417,000 of goodwill was amortized during the
year ended December 31, 1999.
Pro forma statements of operations to reflect the effect of
Rey had it been combined with the Company for the three years
ending December 31, 1999 are (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Contract revenues $ 96,772 $ 122,330 $ 107,102
Net income $ 20 $ 1,366 $ (1,347)
Earnings (loss) per share - $ .00 $ .15 $ (.15)
assuming dilution
</TABLE>
F-8
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements
(continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its subsidiaries. Significant intercompany
accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes,
in particular, estimates of contract cost and revenues used
in the earnings recognition process. Actual results could
differ from those estimates.
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.
INTANGIBLE ASSETS
Costs in excess of net assets acquired (goodwill) is
amortized on a straight-line basis over 10 years, and is
displayed on the balance sheet net of accumulated
amortization of $417,000 as of December 31, 1999. The
carrying values of intangible assets, as well as other long-
lived assets, are reviewed for impairment, if changes in the
facts and circumstances indicate potential impairment of
their carrying values. Any impairment determined is recorded
in the current period and is measured by comparing the
discounted cash flows of the related business operations to
the appropriate carrying values.
F-9
<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 federal and state
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 related to government contracts, including
indirect costs for cost-type contracts, are subject to audit
by government representatives. Such audits have been
completed through 1996, and all audit fieldwork has been
completed for 1997. Management believes that any adjustments
resulting from determinations for subsequent periods and
contract close-outs will not have a significant impact on the
Company's consolidated financial position or results of
operations.
F-10
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements
(continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 ("SFAS") 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, as
amended, is applicable to the Company beginning January 1,
2001. The impact of this statement on the Company's
statement of financial position is not expected to be
significant.
F-11
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements
(continued)
2. DISPOSAL OF SEGMENTS
In August 1997, the Company sold its Space and
Telecommunications Systems and its Mobile Information and
Communications Services businesses to Orbital Sciences
Corporation ("Orbital") 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. Net sales of the Space and Telecommunications Systems
business prior to its disposition were $66.8 million in 1997.
There were no sales for the Mobile Information and
Communications Services business prior to its disposition.
The loss from discontinued operations was $3.3 million in
1997 and $1.1 million in 1998, net of income tax. The 1997
gain from the disposal of the businesses was $3.9 million,
net of income tax. The 1998 loss from the disposal of the
businesses was $1.4 million in 1998. The income tax benefit
related to these discontinued segments was $2.1 million in
1997 and $1.5 million in 1998.
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 $.4 million. The
net contract revenues of AIS prior to its disposition were
$.9 million in 1997 and is included in continuing operations.
F-12
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements
(continued)
2. DISPOSAL OF SEGMENTS (CONTINUED)
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 $.2 million. In 1998, the
Company received $.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%. Subsequent
capital transactions by SIM have resulted in a decrease of
the Company's minority interest to 7.0%.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
-------- --------
Accounts receivable: (IN THOUSANDS)
U.S. Government:
<S> <C> <C>
Billed $ 20,746 $ 19,691
Unbilled:
Contracts in progress 1,012 2,060
Amounts awaiting contractual 3,505 1,073
coverage
Revenue awaiting government
approval of final indirect rates 286 396
or contract close-out
Commercial customers:
Billed 15,555 4,353
Unbilled:
Contracts in progress 10,071 5,313
51,175 32,886
Less allowances (2,266) (1,109)
$ 48,909 $ 31,777
</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.
F-13
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
3. ACCOUNTS RECEIVABLE (CONTINUED)
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, 1998 and 1999,
approximately $2.2 million and $1.0 million, respectively, were related
to situations in which disputes regarding the extent of contractual
coverage have resulted in legal actions or formal claims. The Company
has provided allowances that it believes adequately provide for the
resolution of these and other matters. The Company expects to realize
substantially all billed and unbilled receivables within one year.
4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT BALANCES
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------- --------
(IN THOUSANDS)
Other current assets:
<S> <C> <C>
Receivables from employees and $ 46 $ 828
stockholders (NOTE 10)
Prepaid expenses 584 591
Other 515 263
------- -------
$ 1,145 $ 1,682
======= =======
Furniture and equipment:
Data processing equipment $ 6,545 $ 7,028
Office furniture and equipment 1,848 1,974
Leasehold improvements 547 553
------- -------
8,940 9,555
Accumulated depreciation and (5,192) (6,627)
amortization ------- -------
$ 3,748 $ 2,928
======= =======
Other assets:
Intangible pension asset (NOTE 6) $ 1,900 $ 1,239
Company-owned life insurance - 608
Investment in and notes receivable from 200 188
SIM (NOTE 2)
Deferred tax asset (NOTE 8) 835 1,003
Other 611 671
------- --------
$ 3,546 $ 3,709
======= ========
Accrued expenses:
Salaries and incentives $ 3,735 $ 2,762
Employee benefit plans 357 363
Other 64 56
-------- --------
$ 4,156 $ 3,181
======== ========
</TABLE>
F-14
<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. The agreement also included a
facility for letters of credit up to $4 million and provides a $5 million term
facility. The agreement was further amended in 1999 to increase the
availability to borrow up to $21 million on the revolving credit facility. At
December 31, 1998 and 1999, there was $16.2 million and $13.1 million,
respectively, outstanding under the revolving credit facility, and $3.3 million
and $1.25 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 2.0% to 2.5% (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 1999 was approximately 7.7% and 8.5%,
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 an aggregate principal amount of $15 million
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-15
<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 1999, the Board elected to make
supplemental contributions of approximately $1.1 million and $1.6 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, 1999, no shares of the Company's common stock have been
distributed by the ESOP. At December 31, 1998 and 1999, 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 109,225 shares of
the Company's common stock at December 31, 1998 and 1999.
In August 1998, the Company adopted a Supplemental Executive Retirement Plan
("SERP" or "the Plan"). 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 SERP for 1998 and 1999 was comprised of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Service cost $ 43 $ 96
Interest cost 95 285
Amortization of prior service
cost, net 97 252
----- -----
Net periodic benefit cost $ 235 $ 633
===== =====
</TABLE>
F-16
<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 1999 and the
reconciliation of the benefit obligation to accrued pension cost at December
31, 1998 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Benefit obligation at $ 3,270 $ 3,395
Plan inception
Service cost 43 96
Interest cost 95 285
Actuarial gain (13) (466)
Change in Plan assumptions - (302)
-------- --------
Benefit obligation at 3,395 3,008
year end
Unrecognized net 13 800
actuarial gain
Unrecognized prior (3,173) (2,940)
service cost
Minimum pension liability 1,900 1,239
recorded ------- -------
Accrued pension cost $ 2,135 $ 2,107
======= =======
</TABLE>
Accrued pension cost is equal to the Company's accumulated benefit obligation
under the Plan. An intangible asset of $1.9 million and $1.2 million was
recorded during 1998 and 1999, respectively, equal to the minimum pension
liability, which represents the difference between the accumulated benefit
obligation at December 31, 1998 and 1999, 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 for
1998, and an 8% discount rate and a 5% average increase in compensation levels
for 1999.
Amounts charged to expense under the above plans were approximately $4.2
million, $3.3 million and $2.2 million (including the supplemental
contributions) for the years ended December 31, 1997, 1998 and 1999,
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-17
<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, 1999, options for
1,839,327 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, 1997, 1998 and 1999 was $1.60, $2.38 and $2.52,
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 0.199 and no expected dividends. The Company recognized
no compensation expense for stock option grants during the three years in the
period ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES
YEAR ENDED DECEMBER 31,
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Options outstanding at beginning
of year (weighted average exercise
price of $3.96 in 1997, $4.08 in
1998, and $4.59 in 1999 1,282,126 847,880 1,691,718
Granted (weighted average exercise
price of $5.05 in 1997, $5.49 in
1998, and $7.13 in 1999) 13,574 906 768 392 803
Canceled (weighted average
exercise price of $4.61 in 1997,
$4.70 in 1998, and $5.16 in 1999) (357,950) (48,930) (197,140)
Exercised (weighted average
exercise price of $2.24 in 1997,
$2.09 in 1998, and $3.83 in 1999) (89,870) (14,000) (48,054)
---------- -------- ---------
Options outstanding at end of year
(weighted average exercise price
of $4.08 in 1997, $4.59 in 1998,
and $5.26 in 1999) 847,880 1,691,718 1,839,327
======= ========= =========
Options exercisable at end of year
(weighted average exercise price
of $3.16 in 1997, $3.76 in 1998,
and $4.34 in 1999) 462,648 705,035 958,509
======= ======= =======
</TABLE>
F-18
<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,
1999
------------
<S> <C>
$2.01-$3.58:
Options outstanding:
Number of shares 224,000
Weighted average exercise price $2.18
Weighted average remaining contractual 2.9
life (in years)
Options exercisable:
Number of shares 224,000
Weighted average exercise price $2.18
$4.36-$5.84:
Options outstanding:
Number of shares 1,304,272
Weighted average exercise price $5.19
Weighted average remaining contractual 4.1
life (in years)
Options exercisable:
Number of shares 734,509
Weighted average exercise price $5.00
$7.80:
Options outstanding:
Number of shares 311,055
Weighted average exercise price $7.80
Weighted average remaining contractual 6.4
life (in years)
Options exercisable: None
</TABLE>
F-19
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
7. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
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 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,
1997 1998 1999
------- ------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Pro forma income (loss) from
continuing operations $ (964) $ 2,964 $(1,613)
======= ======= ========
Pro forma earnings (loss) per
share
Basic $ (.10) $ .34 $ (.18)
======= ======= ========
Diluted $ (.10) $ .34 $ (.18)
======= ======= ========
</TABLE>
8. INCOME TAXES
The provision (benefit) for income taxes attributable to continuing operations
consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
Current:
<S> <C> <C> <C>
Federal $(2,400) $ 600 $ 690
State (200) 130 200
-------- ------ ------
(2,600) 730 890
======== ====== ======
Deferred:
Federal $2,000 1,225 (1,778)
State 100 270 (520)
------ ------ ------
2,100 1,495 (2,298)
====== ====== ======
$ 500 $ 2,225 $(1,408)
</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-20
<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,
1998 1999
------ ------
(IN THOUSANDS)
Current deferred tax
liabilities:
<S> <C> <C>
Unbilled receivables $5,843 $2,961
Other 118 88
------ ------
5,961 3,049
Current deferred tax assets:
Contract provisions and allowances 1,350 475
Accrued vacation 762 682
Other accruals 27 46
----- -----
2,139 1,203
----- -----
Net current deferred tax liabilities $3,822 $1,846
====== ======
Long-term deferred tax assets:
Depreciation $ 480 $ 524
Net operating loss carryforward 350 -
Other 355 479
----- ------
1,185 1,003
Less: valuation allowance (350) -
------- ------
Net long-term deferred tax assets $ 835 $1,003
====== ======
</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,
1997 1998 1999
----- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory
rate $(398) $1,910 $ (824)
State income taxes, net of
federal tax benefit (60) 255 (74)
Other (42) 60 (510)
------ ------ --------
$ 500 $2,225 $(1,408)
===== ====== ========
</TABLE>
F-21
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The "Other" category for 1999 includes the impact of a net operating loss
benefit related to the sale of the Space and Telecommunications Systems and its
Mobile Information and Communications Services businesses, partially offset by
other permanent differences.
The Company is currently undergoing an examination by the Internal Revenue
Service for tax years 1996 and 1997. This examination is in its early stage
and future findings, if any, and their ultimate resolution and subsequent
impact on the Company cannot be determined at this time.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
-------- -------- ---------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
Numerator:
<S> <C> <C> <C>
Income (loss) from continuing
operations $ (670) $ 3,392 $ (1,012)
Income (loss) from discontinued
operations 648 (2,482) -
--------- ---------- ----------
Net income (loss) for both
basic and diluted earnings
per share $ (22) $ 910 $ (1,012)
========= ========= ==========
Denominator:
Denominator for basic earnings
per share -
Weighted average shares
outstanding 9,092,214 8,694,133 8,830,055
Dilutive potential common
shares:
Employee stock options - 121,333 -
--------- --------- ---------
Denominator for diluted earnings
per share -
Adjusted weighted average
shares and assumed
conversions 9,092,214 8,815,466 8,830,055
========= ========= =========
</TABLE>
Due to a loss from continuing operations in 1997 and 1999, employee stock
options are considered anti-dilutive and not included in the denominator for
diluted earnings per share.
F-22
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
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.
On September 13, 1999, the Company approved a loan to a principal shareholder
of the Company of up to $750,000 for the purchase of a new home related to his
relocation to the Company's California offices. The note is payable upon
demand not later than September 13, 2004 and bears no interest. The note is
collateralized by a like amount of value in the principal shareholder's shares
of the Company's stock. As of December 31, 1999, approximately $689,000 of the
approved loan amount had been disbursed and this amount is currently
outstanding.
F-23
<PAGE>
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, 1997, 1998 and 1999 was
$2.4 million, $2.2 million and $2.4 million, respectively.
At December 31, 1999, total future minimum rental commitments under non-
cancelable leases are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- -------
<S> <C> <C>
2000 $ 1,780
2001 1,791
2002 1,397
2003 1,083
2004 726
2005 and after 296
-------
$ 7,073
=======
</TABLE>
F-24
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
11. COMMITMENTS AND CONTINGENCIES
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.
In the first quarter of 2000, P.T. Media Citra Indostar ("MCI") commenced
arbitration proceedings against Orbital Sciences Corporation ("Orbital") for
rescission and damages associated with MCI's purchase of a satellite. The
contract to purchase the satellite was assigned to Orbital when it acquired
the assets of the Company's subsidiary, CTA International, Inc. ("CTAI"), in
August of 1997. The Company is not a party to the arbitration proceeding, but
Orbital has informed the Company that it may seek indemnification from the
Company if it is found liable to MCI.
The rescission claim for the refund of the approximately $163 million that MCI
claims it paid for the satellite is based primarily on the allegation that MCI
was fraudulently induced to enter into the contract. MCI also seeks damages
in connection with alleged breaches of the purchase contract. The contract
between MCI and Orbital (as CTAI's successor) contains provisions limiting
general damages to five million dollars and prohibiting the award of
consequential damages. Management believes that MCI's allegations are without
merit and that the Company would have substantive defenses against claims from
Orbital as well as MCI. The Company will vigorously defend itself against these
allegations. Based on the information that is currently available, the
Company believes that the likelihood of the rescission claim succeeding is
remote and that this matter will not have a material adverse effect on the
financial position or future operations of the Company.
F-25
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
12. OPERATING SEGMENTS
Litigation (continued)
The Company operated in two principal operating segments through 1999: Federal
and Non-Federal. The Federal Segment focuses on systems engineering, network
development and integration, information security and complex embedded computer
systems. The Non-Federal Segment focuses on IT services, a major component of
which was Year 2000 compliance services in 1998 and 1999 and e-commerce
applications. The following table provides certain financial information for
each operating segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
------ ------- -------
(IN MILLIONS)
Contract revenues:
<S> <C> <C> <C>
Federal $ 73.4 $ 73.6 $ 54.4
Non-Federal 18.8 43.6 50.5
------ ------- -------
$ 92.2 $117.2 $ 104.9
====== ====== =======
Operating profit:
Federal $ 3.0 $ 5.2 $ 4.4
Non-Federal 1.1 4.6 (1.8)
Other expense (3.7) (3.0) (3.7)
------ ------ -------
$ 0.4 $ 6.8 $ (1.1)
======= ====== =======
Depreciation and amortization
expense:
Federal $ 0.8 $ 0.6 $ 1.1
Non-Federal 0.4 0.9 1.4
Discontinued operations 1.6 - -
Capital expenditures:
Federal $ 0.4 $ 1.5 $ 0.6
Non-Federal 1.4 0.9 0.8
Discontinued operations 1.8 - -
Identifiable assets:
Federal $ 27.4 $27.4 $ 16.7
Non-Federal 12.0 23.8 16.3
General corporate assets 5.9 6.2 12.9
------- ----- -------
$ 45.3 $57.4 $ 45.9
======= ===== =======
</TABLE>
F-26
<PAGE>
COMPUTER TECHNOLOGY ASSOCIATES, INC.
Notes to Consolidated Financial Statements (continued)
12. OPERATING SEGMENTS (CONTINUED)
The percentages of Federal contract revenues from U.S. Government customers
that comprise 10% or more of total revenues were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Department of Defense 47% 26% 19%
General Services Administration 16% 19% 20%
</TABLE>
13. SUBSEQUENT EVENTS
On January 27, 2000, the Company purchased Touchscreen Media Group, Inc. for
$2.1 million, comprised of $750,000 in cash and $1.35 million of the Company's
common stock. The Company issued 173,671 shares of stock valued at $7.80 per
share in this exchange. Approximately $2.0 million of goodwill will be
recorded associated with this transaction which will be amortized on a
straight-line basis over 10 years.
F-27
<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
31, 1997 $3,108 $600 $94 $334 $3,468
------ ---- ---- ---- ------
For the year
ended December
31, 1998 $3,468 $1,019 $325 $2,546 $2,266
------ ------ ---- ------ ------
For the year
ended December
31, 1999 $2,266 $300 $ 0 $1,457 $1,109
------ ---- ---- ------ ------
</TABLE>
F-28
<PAGE>
Exhibit 23(a)
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 14, 2000, 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, 1999.
/s/ Ernst & Young LLP
Washington, D.C.
June 9, 2000
F-29
<PAGE>
Exhibit 23(b)
June 14, 2000
Mr. Gregory H. Wagner
Executive Vice President, Chief Financial Officer
Computer Technology Associates, Inc.
6903 Rockledge Drive, Suite 800
Bethesda, MD 20817
Dear Mr. Wagner:
We consent to the incorporation by reference, in the Annual Report and
Form 10K for Computer Technology Associates, Inc. ("CTA"), with respect
to the fair market value of minority holdings of the Common Stock of CTA
as of December 31, 1999.
By:/s/Robert D. Kipps
---------------------
Robert D. Kipps
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
F-30
<PAGE>
Page 1
March 24, 2000
Mr. Gregory H. Wagner
Executive Vice President, Chief Financial Officer
Computer Technology Associates, Inc.
6903 Rockledge Drive, Suite 800
Bethesda, MD 20817
Dear Mr. Wagner:
At your request, on behalf of Computer Technology Associates, Inc., we have
analyzed certain financial information regarding Computer Technology
Associates, Inc. (hereinafter sometimes referred to as "CTA" or the
"Company") as set forth herein, and submit this letter on our findings.
The purpose of this analysis was to express an opinion (the "Opinion") on
the fair market value, as of December 31, 1999, regarding the Company, on a
minority interest basis for purposes of administration of the Company's
Employee Stock Ownership Plan ("ESOP" hereinafter) and other stock
transactions on the Company's internal market.
CTA is an information technology services firm that combines web-based
services, strategic planning, systems experience and knowledge of embedded
devices to help clients in the government and commercial sectors develop
their e-business, systems and networks. The Company's services are
provided through its Vivace and ITS&S business units.
The term "fair market value," as used herein, is defined as the price at
which an asset would change hands between a willing buyer and a willing
seller when the former is not under any compulsion to buy and the latter is
not under any compulsion to sell, and both parties are able, as well as
willing, to trade and are well-informed about the asset and the market for
that asset.
It is the understanding of Houlihan Lokey Howard & Zukin Financial
Advisors, Inc. ("Houlihan Lokey"), upon which it is relying, that the
Company's Board of Directors and any other recipient of the Opinion will
consult with and rely solely upon their own legal counsel with respect to
said definitions. No representation is made herein, or directly or
indirectly by the Opinion, as to any legal matter or as to the sufficiency
of said definitions for any purpose other than setting forth the scope of
Houlihan Lokey's Opinion hereunder.
F-31
<PAGE>
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
1. reviewed the Company's audited financial statements for the two fiscal
years ended December 31, 1997 and 1998, audited statements for fiscal
1999, proforma financial statements for the Company, incorporating the
TMG acquisition, and Company-prepared financial statements for the
fiscal year ended December 31, 1999 for the Vivace and ITS&S groups
which the Company's management has identified as the most current
financial statements available;
2. reviewed documentation for the acquisition of Rey Consulting Group, Inc.
and the proposed acquisition of Touchscreen Media Group;
3. met with certain members of the senior management of the Company, to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company;
4. reviewed forecasts and projections prepared by the Company's management
with respect to ITS&S for the years ended December 31, 2000 and 2001 and
the Vivace business plan and projections for the years ended December
31, 2000 through 2002;
5. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company;
6. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company, and that there has been no
material change in the assets, financial condition, business or prospects
of the Company since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume
any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
the Company.
It is our understanding that the ESOP contains a "put" option that allows
employees receiving such distributions upon termination, retirement, death
or disability, to resell the shares either to the ESOP or the Company at
the then fair market value. The effect of the ESOP and its contributions
have been considered in our analysis. The subject securities are considered
to represent a less-than-controlling interest in the enterprise.
In our analysis of the Company, we have taken into consideration the
income- and cash-generating capability of the Company. Typically, an
F-32
<PAGE>
investor contemplating an investment in a company with income- and cash-
generating capability similar to CTA will evaluate the risks and returns of
its investment on a going-concern basis. Accordingly, after due
consideration of other appropriate and generally accepted valuation
methodologies, the value of CTA has been developed primarily on the basis
of the market capitalization approach and the discounted cash flow
approach.
Furthermore, we valued CTA as a going-concern, meaning that the underlying
tangible assets of the Company are presumed, in the absence of a qualified
appraisal of such assets, to attain their highest values as integral
components of a business entity in continued operation and that liquidation
of said assets would likely diminish the value of the whole to the
shareholders and creditors of CTA.
All valuation methodologies that estimate the worth of an enterprise as a
going-concern are predicated on numerous assumptions pertaining to
prospective economic and operating conditions. Our opinion is necessarily
based on business, economic, market and other conditions as they exist and
can be evaluated by us as of the valuation date. Unanticipated events and
circumstances may occur and actual results may vary from those assumed. The
variations may be material.
The Company, like other companies and any business entities analyzed by
Houlihan Lokey or which are otherwise involved in any manner in connection
with this Opinion, could be materially affected by complications that may
occur, or may be anticipated to occur, in computer-related applications as
a result of the year change from 1999 to 2000 (the "Y2K Issue"). In
accordance with long-standing practice and procedure, Houlihan Lokey's
services are not designed to detect the likelihood and extent of the effect
of the Y2K Issue, directly or indirectly, on the financial condition and/or
operations of a business. Further, Houlihan Lokey has no responsibility
with regard to the Company's efforts to make its systems, or any other
systems (including its vendors and service providers), Year 2000 compliant
on a timely basis. Accordingly, Houlihan Lokey shall not be responsible for
any effect of the Y2K Issue on the matters set forth in this Opinion.
In accordance with recognized professional ethics, our fees for this
service are not contingent upon the opinion expressed herein, and neither
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. nor any of its
employees have a present or intended financial interest in the Company.
Based upon the investigation, premises, provisos, and analyses outlined
above, and subject to the attached Limiting Factors and Other Assumptions,
and more fully described in the accompanying report, it is our opinion
that, as of December 31, 1999, the fair market value of the Common Stock of
CTA, on a minority interest basis, is reasonably stated in the amount of
SEVEN DOLLARS AND EIGHTY CENTS PER SHARE ($7.80), based on 10,531,998
million fully-diluted shares outstanding.
F-33
<PAGE>
The Opinion, expressed above, is advisory in nature only. The accompanying
documentation more fully presents the premises, analyses and logic upon
which the Opinion is founded. The abbreviated format of the Opinion, as
requested, may not conform to specific guidelines set forth in the Uniform
Standards of Professional Appraisal Practice (U.S.P.A.P.) pertaining only
to the narrative content of reports. Nonetheless, our work files contain
all necessary analyses and documentation to prepare a conforming narrative
report, if so requested, and our work product is otherwise in compliance
with applicable standards of U.S.P.A.P. Before relying upon the Opinion,
the accompanying documentation should be read and analyzed in their
entirety.
By:/s/Robert D. Kipps
---------------------
Robert D. Kipps
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Attachments
F-34
<PAGE>
LIMITING FACTORS AND OTHER ASSUMPTIONS
In accordance with recognized professional ethics, the professional fee for
this service is not contingent upon Houlihan Lokey Howard & Zukin Financial
Advisors, Inc.'s ("Houlihan Lokey") conclusion of value, and neither
Houlihan Lokey nor any of its employees has a present or intended financial
interest in the Company.
The opinion of value expressed herein is valid only for the stated purpose
and date of the letter.
The conclusions are based upon the assumption that present management would
continue to maintain the character and integrity of the enterprise through
any sale, reorganization, or diminution of the owners' participation.
This letter and the conclusions arrived at herein are for the exclusive use
of the Company. Furthermore, the letter and conclusions are not intended by
the author, and should not be construed by the reader, to be investment
advice in any manner whatsoever. The conclusions reached herein represent
the considered opinion of Houlihan Lokey based upon information furnished
to it by the Company and other sources. The extent to which the conclusions
and valuations arrived at herein should be relied upon, should be governed
and weighted accordingly.
No opinion, counsel or interpretation is intended in matters that require
legal or other appropriate professional advice. It is assumed that such
opinions, counsel or interpretations have been or will be obtained from the
appropriate professional sources.
F-35
<PAGE>
CERTIFICATION
The undersigned hereby certifies that we have no present or contemplated
future interest in the property that is the subject of this opinion and
have no personal interest or bias with respect to the parties involved;
neither our employment nor our compensation in connection with this opinion
is in any way contingent upon the conclusions reached or values estimated
and reflects our personal, unbiased professional judgment; this appraisal
has been prepared in conformance with the "Uniform Standards of
Professional Appraisal Practice" except as noted herein; no person or
persons other than those acknowledged below contributed significant
professional assistance to the undersigned.
Review Appraiser:
By:/s/ Robert D. Kipps
__________________________
Robert D. Kipps
Senior Vice President
Contributing Appraisers:
By:/s/ Chad D. Lucien, CFA
__________________________
Chad D. Lucien, CFA
Associate
/s/ Brian C. Dolan
__________________________
Brian C. Dolan
Financial Analyst
/s/ Daniel P. Kobayashi
__________________________
Daniel P. Kobayashi
Financial Analyst
F-36
<PAGE>
CONSENT OF LEGG MASON WOOD WALKER, INC., INDEPENDENT APPRAISERS
We consent to the incorporation by reference in the Registration Statement
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 Reports (Form 10-K) for the year ended December 31,
1999.
/s/ Legg Mason Wood Walker, Inc.
Baltimore, MD
March 27, 2000
F-37
<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: June 16, 2000 By:/S/ C.E. VELEZ
C.E. Velez
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:/S/ C.E. VELEZ
C.E. Velez
Chairman of the Board, President,
Chief Executive Officer and Director Date: June 16, 2000
By:/S/ GREGORY H. WAGNER
Gregory H. Wagner
Executive Vice President,
Chief Financial Officer, Principal
Accounting Officer and Treasurer Date: June 16, 2000
By:/S/ JOSEPH L. CINQUE
Joseph L. Cinque
Director Date: June 16, 2000
By:/S/ HARVEY D. KUSHNER
Harvey D. Kushner
Director Date: June 16, 2000
By:/S/ DAVID R. MACKIE
David R. Mackie
Director Date: June 16, 2000
By:/S/ RAYMOND V. MC MILLAN
Raymond V. Mc Millan
Director Date: June 16, 2000
By:/S/ JAMES M. PAPADA, III
James M. Papada, III
Director Date: June 16, 2000
By:/S/ ARTURO SILVESTRINI
Arturo Silvestrini
Director Date: June 16, 2000
By:/S/ GREGORY H. WAGNER
Gregory H. Wagner
As Attorney-in-Fact Date: June 16, 2000
