-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OalHD7J0Zoe/oJe7I1GKiJDYGFhI2AYsh2g/JpDhstThGux613Ar23pEtH04HH/J rOUyVuEKvfk3pw1N3qkw9g== 0000881975-98-000001.txt : 19980401 0000881975-98-000001.hdr.sgml : 19980401 ACCESSION NUMBER: 0000881975-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTA INCORPORATED CENTRAL INDEX KEY: 0000881975 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 840797618 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-44510 FILM NUMBER: 98582690 BUSINESS ADDRESS: STREET 1: 6116 EXECUTIVE BLVD STREET 2: STE 800 CITY: ROCKVILLE STATE: MD ZIP: 20852 BUSINESS PHONE: 3018161200 MAIL ADDRESS: STREET 1: 6116 EXECUTIVE BLVD STREET 2: STE 800 CITY: ROCKVILLE STATE: MD ZIP: 20852 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number 33-44510 CTA INCORPORATED (Exact name of registrant a specified in its charter) Colorado 84-0797618 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6116 Executive Boulevard, Rockville, MD 20852 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (301)816-1200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.[ X ] Yes[ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of February 28, 1998, there were outstanding 8,701,014 shares of the registrant's common stock, par value $.01, which is the only class of common or voting stock of the registrant. The aggregate market value of the common stock held by non-affiliates of the registrant as of that date was $43,940,121 as determined by independent appraisal. CTA INCORPORATED ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS PART I PAGE ITEM 1. BUSINESS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K SIGNATURES PART I Item 1. Business The Company provides advanced Information Technology (IT) services to the federal government, state and local government and commercial markets. The Company focuses on providing turn-key solutions to the IT service needs of its customers, with emphasis on legacy system modernization, secure computing and network solutions, applications software and database maintenance and embedded computer applications. In addition to its strong technical and program management capabilities, the Company has established a reputation for consistently high levels of customer satisfaction based on service, quality and value. Company History The Company was founded in 1979 as Computer Technology Associates Inc., specializing in consulting services related to the evaluation of computer systems embedded in larger systems such as spacecraft, missiles and aircraft. In the mid-1980's, the Company's consulting business expanded into systems integration of avionics, command and control, and other decision support systems. Originally qualified to receive small business related support from the federal government, the Company established major relationships with U.S. military operations at the Defense Department's Cheyenne Mountain Complex, the Naval Air Warfare Center, Weapons Division, NASA's Goddard Space Flight Center and the Air Force's Consolidated Space Operations Center. In 1992, the Company ended its eligibility for government programs that assist small businesses, with the last significant contract awarded under these programs completed in early 1996. Since 1992, the Company has replaced contracts awarded under these assistance programs with contracts awarded under full and open competition. The share of IT revenues derived from competitive awards grew from 19% in 1992 to 100% in 1997. In the 1990's, the Company targeted U.S. government IT contracts that have allowed it to broaden the Company's base of skills to include a number of business oriented IT disciplines equally applicable to the federal civil agency and state government IT markets. The Company then established strategic alliances with certain specialized software companies that enabled it to enter the commercial IT market and win contracts with commercial customers such as Cessna, Reynolds Metals and Allied-Signal. In 1992, the Company acquired a 79% interest in CTA Space Systems (CTASS) to expand its business from providing IT services related to space systems to providing full turn-key space systems. In 1994, CTA acquired the remaining minority interest in CTASS. CTASS pioneered small satellite-based store-and-forward technology, which it originally developed to interrogate dispersed buoys equipped with acoustic sensors. In 1994, the Company entered the commercial GEO communications satellite market with CTASS' award of the contract for the Indostar turn-key direct-to-home (DTH) system from PT MediaCitra Indostar. The contract provided for the Company to build a small, three-axis stabilized commercial communications satellite, which was launched in 1997, and a complete facility in Jakarta, Indonesia including broadcast and subscriber management software, communications uplinking systems and hardware/software systems for spacecraft telemetry, tracking and control. In late 1997, the Company sold CTASS and certain related businesses to Orbital Sciences Corporation in order to focus on its core IT business. See Note 2 of Notes to Consolidated Financial Statements. Corporate Organization and Strategy In 1997, the Company realigned its corporate organization to maximize its focus on the rapidly growing market for commercial and governmental IT services. A streamlined corporate management structure supports the Federal Information Systems Company, a division of the Company which addresses the federal government market for IT services, and CTA Commercial Systems, Inc., a wholly-owned subsidiary which addresses the state government and commercial markets for IT services. The Federal and Commercial companies are, therefore, free to tailor the Company's IT products and services to the unique needs and business practices of their respective markets. Information Technology Services The Company believes that it possesses a level of IT technical and project management experience and expertise that allows it to offer high value solutions to a wide range of client IT requirements. The Company's principal business focus is in the areas of 1) legacy information system modernization, to include Year 2000 compliance upgrades and electronic commerce implementations, 2) information security, to include the engineering and implementation of secure and highly reliable computer and network systems, 3) the maintenance and upgrade of applications software and associated large scale databases and 4) a range of IT services associated with complex embedded computer systems. The Company believes that it is one of the industry leaders in the rapidly growing market for federal, state and commercial Year 2000 compliance upgrades based on its combination of direct Year 2000 conversion experience, use of automated tools and its ability to offer its customers solutions to both their embedded and non-embedded Year 2000 compliance requirements. The Company expects that it will continue to receive increased revenues from additional Year 2000 engagements during the next two years. However, these engagements and related revenues are expected to peak prior to calendar year 2000 as customers address their needs. Thereafter, the Company expects that revenues derived from year 2000 engagements will steadily decline. The Company believes that current Year 2000 related business will be replaced with similar conversion business (e.g. Euro conversion beginning in 1999) and legacy modernization projects including "middleware" integration and client-server conversions. INFORMATION TECHNOLOGY SERVICES--INDUSTRY OVERVIEW FEDERAL GOVERNMENT The U.S. government is the largest single buyer of IT services in the world, with an estimated IT services market of $29 billion in 1997 with a growth rate of 1% in 1998 and 3% in 1999. STATE AND LOCAL GOVERNMENT Industry sources estimate the state and local government IT services market to be $13 billion in 1997 with an expected annual growth rate of 20% in each of the next five years. Of the $13 billion, professional services is estimated at $5.3 billion with a CAGR of 16%, systems integration is estimated at $2.0 billion with a CAGR of 20% and outsourcing is estimated at $4.4 billion with a CAGR of 21% COMMERCIAL Industry sources estimate the U.S. professional services segment, including consulting, custom software development and training, at $37 billion in 1997 growing at 16% per year, systems integration at $19 billion growing at 21% and outsourcing at $26 billion growing at 19%. YEAR 2000 COMPLIANCE SERVICES The Gartner Group estimates the worldwide costs of correcting the Year 2000 problem will range between $300 billion and $600 billion with $30 billion required by the U.S. federal government alone. Information Technology Services--Business Strategy The principal strategies that the Company is pursuing to expand its IT services business include: INCREASING PENETRATION OF EXISTING CUSTOMER BASE. The Company focuses on customer satisfaction and technical excellence. Due to its long-term incumbent position as a key systems integrator for some of the nation's largest and most complex information systems, the Company has gained a unique and profound understanding of those systems. The Company believes this knowledge provides it with a substantial advantage in terms of cost, technical expertise and demonstrated past performance in competing for future work related to these systems. The Company believes that its Year 2000 conversion initiative will provide it with similar competitive advantages with respect to a wide range of new customers. PENETRATING NEW MARKETS BY LEVERAGING CORE COMPETENCIES. The Company seeks out and exploits opportunities to market the expertise it has gained in past IT assignments to new customers. The Company's experience in federal and state government Year 2000 conversions and information systems security has proven to be a key factor differentiating the Company in competitive bidding situations with new customers. The Company plans to use such engagements to establish relationships with an expanded base of customers that can be used for marketing the Company's expertise in additional areas such as legacy system modernization and software and database applications maintenance and outsourcing. Also, the methodology and tools required to accomplish Year 2000 compliance are directly applicable to that required to upgrade computer software to properly handle the upcoming common European Currency conversion. The market for such Euro currency upgrades may exceed the Euoropean Year 2000 market in total cost. ESTABLISHING MARKETING ALLIANCES TO OFFER COMPLETE SOLUTIONS. The Company has established, and needs to continue to establish, marketing alliances with a number of software product and tool providers which allow the Company to offer turn-key solutions for such applications as automated scheduling of manufacturing processes and large-scale electronic document management. ACQUIRING STRATEGIC IT SERVICES BUSINESSES. The Company intends to pursue acquisitions that will expand the Company's commercial IT services customer base and provide specialized capabilities that enhance the Company's penetration of the commercial IT services market. Information Technology Services--Contracts and Programs Certain of the Company's significant IT contracts and programs are described below. Total contract values include both realized and unrealized revenues. These contracts are typically funded annually and there are no assurances that funding will continue beyond the current fiscal year or, if they are funded beyond the current fiscal year, for how many additional years. U.S. GOVERNMENT--DOD RANGE SYSTEMS MANAGEMENT. In 1993, the Company was awarded the Range Instrumentation Development ("RID") contract, pursuant to which the Company supports a wide variety of aircraft range system activities for the Naval Air warfare Center (NAWC) located at China Lake, California , including software development, test and evaluation, system integration and fabrication of electronic threat simulators. The RID contract is a cost-plus-award-fee contract (with an average award fee score in excess of 90%), has a total value of $88 million and is scheduled for completion in October 1998. AVIONICS SYSTEMS INTEGRATION. The Company participates in the design, development, fabrication, modification and testing of hardware for the NAWC, performing a wide range of support activities. These activities include systems engineering, systems analysis, software development, configuration management, verification and validation, maintenance and operation services for various naval aircraft and the development and maintenance of large-scale hybrid simulators (which integrate computer simulations with actual aircraft avionics). The Company has performed this work since its first NAWC contract, awarded in 1985. In 1995, this contract was recompeted under a program reserved for small businesses and the Company successfully teamed with a small business contractor, which was awarded the prime contract. The current NAWC contract is a cost-plus-award-fee contract (with an average award fee score in excess of 90%), has a total value of $33 million and is scheduled for completion in March 2000. NETWORK MANAGEMENT. In 1993, the Air Force's Electronic Systems Center at Hanscom Air Force Base in Bedford, Massachusetts awarded CTA the Technical Engineering and Management Support IV ("TEMS IV") contract pursuant to which the Company provides technical engineering and management support to various DOD command and control system procurement programs, including the Integrated Tactical Warning and Attack Assessment System, during all phases of the procurement cycle. The TEMS IV contract is a time-and-materials contract, has a total value of $54 million and is scheduled for completion in June 1998. INFORMATION SYSTEMS SECURITY. The Company, as a subcontractor to SAIC, is a member of the team awarded the Center for Information Systems Security contract in 1995 by the Defense Information Systems Agency. Under this five-year omnibus security engineering contract, the Company will continue to provide technical support to information systems security activities within the DOD and other U.S. government departments and agencies. Activities under this contract include designing and implementing the measures necessary to detect, document and counter a wide range of threats to on-line and stored information. The Information Systems Security contract is a time-and-materials contract, has a total value of $8 million and is scheduled for completion in July 2000. In addition, the Company's clients for information system security services include the Department of Treasury, General Services Administration, Defense Finance and Accounting Service as well as several commercial companies. DEFENSE ENTERPRISE INTEGRATION SERVICES. In 1995, CTA won a subcontract from Unisys to provide a variety of services, including business process re-engineering, systems development and installation and support for the Defense Information System Agency of the DOD. Under this program, called the Defense Enterprise Integration Services ("DEIS") program, CTA is currently performing engineering and integration services to implement the Cheyenne Mountain Training and Simulation System, assisting the Space and Warning Systems Center in the planning, scheduling, conduct and reporting of software testing and providing support to Air Force Space Command for the Command, Control, Communications and Computer Upgrade program. The DEIS contract is a time-and-materials contract, has a total value of $16 million and is scheduled for completion in November 2000. In 1996, CTA won a follow-on DEIS contract as a subcontractor to Computer Sciences Corporation (CSC). This contract is also a time-and-materials contract and is scheduled for completion in August 2001. MEDICAL INFORMATION SYSTEMS. The Company is providing medical information systems expertise to the DOD Department of Health Affairs Consolidated Health Care System. This second generation medical information system implements the most advanced technology available in the industry today. Its goal is a paperless, globally accessible electronic patient record system that provides authorized medical professionals with vital patient medical histories in near real time, regardless of where the patient data may have been collected or stored, or where the patient may be physically located when medical attention is required. This technology not only enables more accurate record keeping but also reduces the response time required to obtain medical information from days or weeks to literally seconds. This contract is a cost-plus- fixed-fee contract, has a total value of $30 million and is scheduled for completion in March 2001. U.S. GOVERNMENT--CIVILIAN AGENCIES FEDERAL AVIATION ADMINISTRATION. For the FAA, the Company provides services related to the design, development, integration and test of the U.S. air traffic control ("ATC") system and has been supporting the FAA automation programs since 1982. Currently, the Company is performing on the following programs for the FAA: (i) providing engineering support to the FAA as a subcontractor to TRW under the AUA Technical Assistance contract in implementing its programs to replace the ATC system. This contract is a time-and-materials contract, has a total value of $40 million and is scheduled for completion in December 2002. (ii) providing support to the FAA as a subcontractor to TRW under the ASD SETA contract for the overall architectural design and evolution of the National Airspace System. This contract is a time-and-materials contract, has a total value of $17 million and is scheduled for completion in September 2001. (iii) assisting the FAA, as a subcontractor to TRW under the Weather Technical Assistance contract in the areas of program engineering, hardware and software engineering, program and project management, system test and evaluation, system implementation and human factors. This contract is a cost-plus-fixed-fee contract, has a total value of $3 million and is scheduled for completion in March 2000. (iv) providing engineering and management support services to the FAA as a subcontractor to SRC under the ANN Technical Assistance contract. This contract is a cost-plus-award-fee contract, has a total value of $5 million and is scheduled for completion in September 2000. DEPARTMENT OF JUSTICE. In February 1994, the Department of Justice (DOJ) awarded the Company a contract to assist the FBI in its program to streamline, consolidate and automate its Criminal Justice Information System, which serves over 80,000 law enforcement users. Under this seven-year contract, the Company is assisting the FBI in virtually every aspect of the engineering process, from procurement of new information systems to the re- engineering of the processes that this system supports. The DOJ contract is a combined fixed-price and cost-plus contract, has a total value of $40 million and is scheduled for completion in September 2001. TREASURY DEPARTMENT. Under a contract awarded in 1995, the Company provides system engineering and technical analysis support to the Treasury Department, primarily for the Internal Revenue Service's computer-based information processing system modernization effort. The Company's support functions include engineering services and telecommunication and security services. In the longer term, the Company will be developing and assessing advanced user interface concepts, technologies and prototypes (such as hypertext and speech recognition) and assessing and recommending tools and environments to support future software development. This contract is a time-and-materials contract, has a total value of $40 million and is scheduled for completion in June 2000. GENERAL SERVICES ADMINISTRATION. The Company provides support for the Federal Supply Service's central offices, its eleven regional offices and its various commodity centers and depots. The Company provides applications software and database maintenance and upgrades, network administration, mainframe to client-server conversions and implementation of electronic commerce applications. The initial Federal Supply Service contract was atime-and-materials contract, with a total value of $27 million and was completed in September 1996. The Company was awarded the follow-on contract to the original Federal Supply Service contract that was awarded to the Company in 1992. This contract has a total value of $31 million and is scheduled for completion in September 2001. STATE GOVERNMENT AND COMMERCIAL YEAR 2000 CONVERSION. The Company believes it is a leading provider of Year 2000 compliance services to both state and local governments. The Company currently has contracts to provide such services to 22 state governments. Some states include all applications under such a contract (e.g. Nebraska ($22 million) and Kansas ($25 million) while others include only a portion of the state's overall needs. In addition, the Company is currently under contract to provide both embedded and non- embedded Year 2000 compliance services to several commercial clients. IT SYSTEMS ENGINEERING. In June 1996, the Company was awarded a contract by USAA, a San Antonio, Texas-based provider of insurance, banking and investment services, to provide technical and engineering support to the USAA Information Technology Division. The Company's functions include (i) project management support, including resource forecasting and tracking and scheduling, (ii) systems engineering, including configuration management, systems requirements management and test planning and execution, (iii) procurement support, including the development of procurement strategies, evaluation criteria and requests for proposals and (iv) development of cost estimates for USAA procurement. The USAA contract is a time-and-materials contract, and is scheduled for completion in March 2000. EMERGING COMMERCIAL PROGRAMS. Through strategic business agreements with knowledge-based tool vendors, the Company has developed a generalized system transformation practice that enables it to cost effectively perform a wide range of information system upgrades to include Year 2000 conversions, Euro-currency implementation, telephone area code expansion, replatforming of existing applications and migrating from mainframe to client-server architectures. The Company believes that the knowledge and experience it applies to help clients meet the Year 2000 challenge positions the Company to meet the broader long-term information system needs of its clients. INFORMATION TECHNOLOGY SERVICES--COMPETITION The IT services industry in which the Company operates is highly fragmented with no single company or small group of companies in a dominant position. The Company's competitors include large, diversified firms with substantially greater financial resources and larger technical staffs than the Company, such as BDM, Cap Gemini, CSC, EDS, IBM, Lockheed Martin, PRC, SAIC, as well as firms that receive preferences under government programs for small businesses. The firms that compete with the Company include consulting firms, computer services firms, applications software companies and accounting firms, as well as the computer service arms of computer manufacturing companies and defense and aerospace firms. In addition, the internal staffs of client organizations, non-profit federal contract research centers and universities are, in effect, competitors of the Company. The primary competitive factors in the information services industry include technical, management and marketing competence, as well as price. The Company competes for commercial work by identification of unique market niches in which the Company believes it has superior technical service capability. U.S. Government Contracting TYPES OF CONTRACTS. The Company's services are provided primarily through three types of contracts: fixed-price, time-and-material and cost-reimbursable contracts. Fixed-price contracts require the Company to perform services under the contract at a stipulated price. Time-and-material contracts reimburse the Company for the number of labor hours expended at established hourly rates negotiated in the contract and the cost of materials incurred. Cost-reimbursable contracts reimburse the Company for all actual costs incurred in performing the contract, to the extent that such costs are within a specified maximum and allowable under the terms of the contract, plus a fee or profit. The following table shows the approximate percentage of revenue by contract type recognized by the Company's continuing operations during the indicated periods:
YEAR ENDED DECEMBER 31, TYPE OF CONTRACT 1995 1996 1997 Fixed-price 8% 11% 14% Time-and-materials 52% 53% 54% Cost-reimbursable 40% 36% 31% 100% 100% 100% Total
GOVERNMENT CONTRACT REQUIREMENTS. Many of the government programs in which the Company participates as a contractor or subcontractor may extend for several years, but they are normally funded on an annual basis. The Company's U.S. government contracts and subcontracts are subject to modification, curtailment and termination in the event of changes in government funding. Accordingly, all of the Company's contracts and subcontracts involving the U.S. government may be terminated at any time by the U.S. government, without cause, for the convenience of the U.S. government. If a U.S. government contract is terminated for convenience, the Company would be entitled to receive compensation for the services provided or costs incurred at the time of termination and a negotiated amount of the profit on the contract. Among the factors that could materially adversely affect the Company's U.S. government contracting business are budgetary constraints, changes in fiscal policies or available funding, reduction of defense or aerospace spending, changes in U.S. government programs or requirements, curtailment of the U.S. government's use of technology services firms, the adoption of new laws or regulations, technological developments and general economic conditions. In addition, increased competition and U.S. government budget constraints in the defense area, and in areas not related to defense, may limit future growth in Company revenues from U.S. government agencies and contractors. The Company's costs and revenues under government contracts are subject to adjustment as a result of annual audits performed by the DCAA on behalf of the DOD. Audits of the Company by the DCAA and other agencies have been completed for all years through 1992 without material adjustment. Backlog The Company's total backlog was approximately $284 million at December 31, 1997. The Company's backlog is comprised of the unrealized portions of the Company's U.S. government contracts, U.S. government-related contracts and commercial contracts. Backlog for government and government-related contracts consists of either funded or unfunded backlog. Funded backlog consists of the dollar portion of contracts that is currently appropriated by the government client or other clients and allocated to the contract by the purchasing government agency or otherwise authorized for payment by the client upon completion of a specified portion of work. Unfunded backlog consists of the total unrealized award value of the contract less the contract value funded by the customer, and includes multi-year incrementally funded contracts, delivery orders, and task orders which remain at the customers' discretion to fund. Unfunded government backlog comprised approximately 81% of total backlog at December 31, 1997. Commercial and other backlog comprised approximately 33% of total backlog at December 31, 1997. No individual contract or program represents more than 10% of total backlog at December 31, 1997. The Company expects that approximately 31% of the Company's total backlog as of December 31, 1997 will result in revenues in the year ending December 31, 1998. Although unfunded backlog can include up to the stated award value of the contract including renewals or extensions that have been priced but still remain at the discretion of the customer whether to fund, the Company, to be conservative, often recognizes only a portion of stated award values on multi-year contracts into its backlog records. Because many of the Company's contracts are multi-year contracts, total backlog may include revenues expected to be realized several years into the future. The unfunded backlog may not be an indicator of future contract revenues or earnings because there is no assurance that the unfunded portion of the Company's backlog will be funded. In addition, many of the contracts included in backlog are subject to termination for the convenience of the government customer. Item 2. Properties The Company leases its corporate headquarters in Rockville, Maryland under a lease expiring in 1999. The Company currently owns a 6.75% fixed ownership interest in the partnership that owns the corporate headquarters building. In addition, the Company has principal leased facilities in Ridgecrest, California and Colorado Springs, Colorado. The Company believes that these properties are adequate to serve the Company's present business operations, however, the Company is currently exploring other options with respect to its corporate headquarters. The Company believes that if it were unable to renew the leases on any of its facilities, other suitable facilities would be available to meet the Company's needs. Item 3. Legal On October 10, 1996, Thomas van der Heyden ("Plaintiff"), an employee of the Company, filed suit against the Company in the Circuit Court of Maryland for Montgomery County. In his complaint, Plaintiff alleged breach of contract, breach of fiduciary duty, tortious interference with contractual and business relationships, fraud, and breach of duty of good faith and fair dealing, all in connection with a Profit Sharing Agreement dated July 6, 1993 ("Profit Sharing Agreement") between van der Heyden and the Company. Specifically, the complaint alleged that the Company failed and refused to make payments purportedly due and owing to him under the Profit Sharing Agreement with respect to the Indostar contract, failed to reimburse him for expenses relating to his employment, and made certain misrepresentations to him which caused him to modify his then-existing profit sharing arrangement with the Company to his detriment and interfered with his ability to develop new business. The Profit Sharing Agreement provides for the Plaintiff to receive 25% of the profit (as defined therein) on a certain contract pursuant to which CTASS provided products and services to a customer in Indonesia. The Company has denied all of the allegations. On October 18, 1996, the Company obtained a stay of the proceeding on the grounds that the Profit Sharing Agreement provides that all disputes regarding the Profit Sharing Agreement are to be decided by binding arbitration. The matter has been submitted to arbitration which is expected to be completed by mid-1998. The Company believes that the outcome of this matter will not have a material adverse effect on the financial condition or future results of operations of the Company. The Company is currently involved in certain other legal proceedings incidental to the ordinary course of its business. The Company does not believe that any liabilities relating to the legal proceedings to which it is a party are likely to be, individually or in the aggregate, material to its consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters There is no established public trading market for the stock of the Company or its subsidiaries. However, the Company has maintained a limited market ("Limited Market") as described below to provide liquidity for its Common Stock. The Limited Market Since its inception, the Company has pursued a policy of remaining essentially employee owned and, therefore, there has never been a public market for the Common Stock. Prior to September 1992, the Company has offered to repurchase shares from shareholders on several occasions primarily for contribution to the Company's Employee Stock Ownership Plan ("ESOP"). In order to provide liquidity for its shareholders, however, the Company established a Limited Market through an agreement with Capitol Securities Management, Inc. ("Capitol") whereby Capitol maintains the Limited Market. From September 1992 through December 1997, the Company has conducted five trades in the Limited Market, one each in 1992, 1993 and 1995 and two in 1994. There were no trades conducted in 1996 or 1997. It is anticipated that the Limited Market will continue to permit existing shareholders to sell shares of Common Stock on at least one predetermined date each year (the "Trade Date"). Such sales will be made at the prevailing Formula Price, or such other price as determined by the Board of Directors with the advice of the Company's independent appraiser, to employees, consultants and directors of the Company who have been approved by the Board of Directors or the Stock Option Committee of the Board of Directors, pursuant to the 1991 Plan, as being entitled to purchase up to a specified number of shares of Common Stock. In addition, the Company will be authorized, but not obligated, to purchase shares of Common Stock in the Limited Market to satisfy its requirements (including for sale to the trustees of the Company's ESOP), but only if and to the extent that the number of shares offered for sale by shareholders exceeds the number of shares sought to be purchased by authorized buyers. In the event that the aggregate number of shares offered for sale by the sellers is greater than the aggregate number of shares sought to be purchased by authorized buyers and the Company, offers to sell will be treated in the following manner: Offers to sell 1,000 shares or less of Common Stock or up to the first 1,000 shares if more than 1,000 shares of Common Stock are offered by any seller will be accepted first. Offers to sell shares in excess of 1,000 shares of Common Stock will be accepted on a pro-rata basis based on the number of shares owned by those shareholders wanting to sell shares. If, however, there are insufficient purchase orders to support the primary allocation of 1,000 shares of Common Stock or less per seller, then the purchase orders will be allocated equally among all of the proposed sellers up to the total number of shares offered for sale. Subject to applicable legal or contractual restrictions and the availability of funds, the Company currently intends to purchase sufficient shares on each Trade Date so that each shareholder wishing to sell shares will be able to sell at least 1,000 shares. Such restrictions include those contained in the Colorado Corporation Code which limit repurchases of Common Stock to the Company's available surplus and restrictions in contracts, currently in existence or which may be entered into, such as the Company's credit agreement, which might restrict the Company's ability to buy back Common Stock in the future under certain circumstances. To the extent that the aggregate number of shares sought to be purchased exceeds the aggregate number of shares offered for sale, the Company may, but is not obligated to, sell authorized but unissued shares of Common Stock in the Limited Market. All sellers in the Limited Market, other than the Company, pay Capitol a commission generally equal to 1.5 percent of the proceeds from such sales. No commission is paid by purchasers in the Limited Market. Prior to each Trade Date, Capitol will receive sell orders from shareholders and buy orders from authorized purchasers and the Company. On each Trade Date, Capitol will match sellers and buyers of the Company's Common Stock (including, to the extent applicable, the Company) according to the proration rules described above. Capitol will then forward payments to sellers, minus the commission, and will issue in book-entry form, the shares of Common Stock to the purchasers. Capitol will not buy or sell shares of Common Stock for its own account or as an agent for the Company. While the Company established the Limited Market to attempt to provide liquidity to shareholders, there can be no assurance that there will be sufficient liquidity to permit shareholders to resell their shares in the Limited Market. All persons who purchase shares of Common Stock in the Limited Market will be required to enter into Stock Restriction Agreements with the Company. Such agreements provide that, if the purchaser is an employee, consultant or director of the Company, upon the purchaser's termination of employment or affiliation with the Company, the Company will have the right to repurchase all of the shares purchased pursuant to that agreement which such person owns of record or beneficially owns at the time of such termination, generally at the prevailing Formula Price at the time of such termination; provided, however, that to the extent such Formula Price is less than the price paid by such purchaser for any of his shares, the Company will not repurchase such shares without the shareholder's consent. Such repurchase, if elected by the Company, will be effected within one year following such termination. The Stock Restriction Agreements also afford the Company a right of first refusal with respect to the shares of Common Stock in the event that the holder desires to sell or transfer his or her shares other than in the Limited Market. The Formula The purchase price of the shares of Common Stock, other than certain shares issuable upon exercise of previously granted options, will be at the formula price described below (the "Formula Price"). The Formula Price is established by the Board of Directors of the Company based on the performance of the Company as measured by certain factors listed below as well as certain other factors also listed below which are determined based on the recommendation of an independent appraiser. The Formula Price will be redetermined at least annually. The price is determined according to the following formula (the "Formula"): the price per share is equal to the product of (i) a number representing one minus the discount for the limited liquidity of the stock ("D") and (ii) a fraction, the denominator of which is the number of outstanding shares and share equivalents ("Wi") and the numerator of which is the sum of (A) the book value of the Company at the end of the applicable period ("BV") and (B) a number which is the product of (a) 5.08 ("K") and (b) a number equal to the product of (I) a market index ("MI") based on certain comparable companies, (II) the after tax profits from operations for the last 12 month period ("P") and (III) a fraction, the denominator of which is 2 and the numerator of which is the sum of (A) the change in contract margin ("CM"), which is a number equal to the contract margin for the last 12 months divided by the contract margin for the prior 12 month period, where contract margin is the contract fee as a percentage of contract cost adjusted for program reserves and allowances and (B) the change in revenue growth ("R"), which is a number equal to a fraction, the numerator of which is revenue for the last 12 months and the denominator of which is the revenue for the prior 12 month period times the change in the consumer price index for that period. The Formula Price of the Common Stock expressed as an equation, is as follows: (CM+R) BV+K (MI) (P) ----- 2 Formula Price D equals ------------------------------ Wi The "discount factor" is a number which is intended to reflect the discount for the limited liquidity of the Common Stock and the "market index" is a number which is intended to reflect existing securities market conditions. Both of these factors are established annually by the Board of Directors based upon the recommendation of an independent appraisal firm. The 5.08 multiplier is a constant representing the factor necessary to equalize the initial stock price calculated by the Formula to the appraised price for the Common Stock on the date the Formula was adopted. The remainder of the factors will be based on the Company's historical financial data. Procedures for Determining Share Price The Formula Price is used to determine the Offering Price at which the Common Stock will be sold and will trade in the Limited Market. The Formula was adopted by the Board of Directors on November 15, 1991, with the advice of the Company's independent appraiser. The Board of Directors believes the Formula will result in a fair market value for the Common Stock within a broad range of financial criteria. Annually, the Company provides audited financial statements and other data as requested by the independent appraiser. The independent appraiser analyzes that data and recommends two factors of the Formula: the market index ("MI") and the discount factor ("D"). Based on this recommendation, the Board of Directors will determine the Formula Price. An independent appraisal is used by the Board of Directors to validate that the Formula has resulted in a price which fairly and reasonably reflects the fair market value of the Common Stock. In those circumstances when the formula does not result in a fair market value for the Common Stock, the Company establishes a price for the Common Stock based solely on an independent appraisal. The price of $5.05 per share at June 30, 1997 and at December 31, 1997 was based solely on an independent appraisal as were all share prices prior to the adoption of the Formula. Such appraisal was required on an annual basis for purposes of valuing the assets contained in the Company's ESOP and for determining the price at which the ESOP could purchase shares of Common Stock. Price Range of Common Stock The following table sets forth the price per share (after giving effect for all years presented for a 2 for 1 split of the Company's common stock in February 1998) at which the Common Stock was appraised by the Company's independent appraiser, Legg Mason Wood Walker, Inc., for the last ten years. The 1992, 1993, both 1994 and 1995 appraisal prices were also the prices at which shares were sold in the Limited Market for each of the following periods ending on the dates set forth below.
EFFECTIVE DATE OF APPRAISAL PRICE PER SHARE 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 Legg Mason Wood Walker, Inc. ("Legg Mason") was engaged by the Company to act as an independent appraiser for the Company. Legg Mason was selected because it is a nationally recognized investment banking firm that has extensive experience in the valuation of securities of all types, including closely-held and seldom traded securities. In connection with the Board's determination of the Formula Price, Legg Mason was asked to recommend to the Board of Directors (i) the discount factor ("D") to reflect the limited liquidity of the Company's Common Stock and (ii) the market index ("MI") to reflect existing securities market conditions and provide to the Board of Directors an assessment as to whether the Formula Price calculated was within a range which Legg Mason considered reasonable. Division of Market Regulation The Company has had discussions with the staff of the Division of Market Regulation concerning the operation of the Limited Market in compliance with the Securities Exchange Act of 1934. While the Commission has not formally indicated to the Company any specific concerns regarding the operation of the Limited Market, they may do so in the future. If the Commission should raise specific concerns with the Company in the future, the Company will take requisite action to address the Commission's concerns. Holders of Common Stock As of February 28, 1998, there were approximately 290 common stockholders of the Company. Dividends It is the current policy of the Company to retain all earnings to provide funds for the Company's growth. Therefore, the Company has no current intention of paying cash dividends on the Common Stock. The Company has not made any distributions to its shareholders since 1988. The Company's bank credit agreement also prohibits the payment of cash dividends. Item 6. Selected Financial Data The following selected consolidated financial data for each of the years in the five year period ended December 31, 1997 and as of December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the consolidated financial statements of the Company. The consolidated financial statements for the five years ended December 31, 1993 through 1997 have been audited by Ernst & Young LLP, independent auditors. The data (in thousands, except for per share data) should be read in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this document.
Income Statement Data 1993 1994 1995 1996 1997 Contract revenues $92,072 $107,471 $105,224 $96,246 $92,239 Cost of contract revenues 77,394 90,102 96,633 87,644 80,503 Selling, general and administrative expenses 5,277 6,723 4,117 5,431 7,649 Other expenses 1,492 833 (292) 2,447 3,668 ----- ----- ----- ----- ----- Operating profit 7,909 9,813 4,766 724 419 Interest expense 248 907 850 969 1,589 ----- ----- ----- ----- ----- Income (loss) before income taxes 7,661 8,906 3,916 (245) (1,170) Provision (benefit) for income taxes 3,370 3,830 1,567 (80) (500) ----- ----- ----- --- --- Income (loss) from continuing operations 4,291 5,076 2,349 (165) (670) Income (loss) from discontinued operations, net of income taxes(1)(2) 259 (617) (403) (10,872) 648 ----- ----- ----- ------ ---- Net income (loss) $4,550 $4,459 $1,946 $(11,037) $(22) Basic earnings (loss) per share: Continuing operations $0.48 $0.53 $0.27 $(0.02) $(0.07) Discontinued operations 0.03 (0.06) (0.05) (1.22) 0.07 ---- ----- ----- ----- ----- Earnings (loss) per share $0.51 $0.47 $0.22 $(1.24) $0.00 Diluted earnings (loss) per share: Continuing operations $0.46 $0.50 $0.25 $(0.02) $(0.07) Discontinued operations 0.03 (0.06) (0.04) (1.22) 0.07 ----- ----- ----- ----- ----- Earnings (loss) per share-diluted $0.49 $0.44 $0.21 $(1.24) $0.00 Weighted average number of shares outstanding 8,853 9,567 8,863 8,875 9,092 Diluted average number of shares outstanding 9,378 10,092 9,418 8,875 9,092
DECEMBER 31, ------------ Balance Sheet Data: 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- Cash and cash equivalents....... $ 1,390 $ 3,902 $ 235 $ 16 $ - Working capital... 24,987 20,638 19,713 13,721 12,588 Total assets...... 74,346 89,816 91,530 92,690 45,288 Short-term debt... 5,524 15,750 17,074 28,335 9,112 Long-term debt.... 20,418 17,765 17,431 18,510 3,333 Total stockholders' equity........... 24,417 27,950 28,773 17,793 15,810
(1) During 1997, the Company sold its Space and Telecommunications Systems and its Mobile Information and Communications Services businesses to Orbital Sciences Corporation. Results of operations have been restated to exclude revenues and expenses of discontinued operations from captions applicable to continuing operations. See Note 2 to the Consolidated Financial Statements. (2) During 1995, the Company discontinued the operations of its Simulation Systems Division, which manufactured aircraft flight simulators for sale or lease, and sold its assets to a company principally owned by one of the Company's principal stockholders. Results of operations have been restated for the sale of the Simulation Systems Division. See "Certain Transactions" and Note 2 to the Consolidated Financial Statements. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements This filing may contain "forward-looking" statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements concerning expectations of the Company's future performance in terms of revenue and earnings. There can be no assurance that actual results will not differ materially from those projected or suggested in such forward-looking statements. Factors which could cause a material difference in results include, but are not limited to, the following: regional and national economic conditions; changes in interest rates; changes in government spending policies and/or decisions concerning specific programs; individual business decisions of customers and clients; developments in technology; competitive factors and pricing pressures; changes in government laws and regulations; acts of God; and the Company's ability to achieve the objectives of its business plans. The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this document. Results of Operations The following tables set forth certain items in the Company's Statements of Operations as a percentage of contract revenues:
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 1997 ----- ----- ----- Contract revenues 100.0% 100.0% 100.0% Cost of contract revenues 91.8 91.1 87.3 Selling, general and administrative expenses 3.9 5.6 8.3 Supplemental ESOP contribution 0.0 0.0 3.2 Other expenses (0.3) 2.5 0.8 ----- ----- ----- Operating profit 4.5 0.8 0.4 Interest expense 0.8 1.0 1.7 ---- ---- ---- Income (loss) before income taxes 3.7 (0.2) (1.3) Provision (benefit) for income taxes 1.5 (0.0) (0.6) ---- ---- ---- Income (loss) from continuing operations 2.2 (0.2) (0.7) Income (loss) from discontinued operations, net of income taxes (0.4) (11.3) 0.7 ---- ----- ---- Net income (loss) 1.8% (11.5)% (0.0)%
The following tables set forth certain items in the Company's Statements of Operations by operating segment:
Year ended December 31, ------------------------ 1995 1996 1997 (In thousands of dollars) Contract revenues: Federal $105,224 $91,953 $73,464 Commercial - 4,293 18,775 -------- ------- ------- $105,224 $96,246 $92,239 Operating profit (loss): Federal $4,474 $2,442 $2,933 Commercial - 729 1,154 Other expenses 292 (2,447) (3,668) ------ ------ ------ $4,766 $ 724 $ 419
1997 Compared with 1996 CONTRACT REVENUES. Contract revenues decreased 4.2% to $92.2 million in 1997 from $96.2 million in 1996. Contract revenues from the Company's Year 2000 Century Date Change conversion contracts increased 467% to $15.8 million in 1997 from $3.4 million in 1996. The Company performed such services in 1997 for the States of Nebraska, Kansas, Iowa and others as well as Cessna Aircraft and Virginia Tech. A new contract in 1997, providing program management and integration for the Assistant Secretary of Defense for Health Affairs, generated revenues of $7.1 million. Another new program, the Defense Enterprise Integration Services (DEIS) subcontract to Computer Sciences Corporation (CSC) generated revenues of $4.1 million in 1997. Contract revenues on the Company's contact with the General Services Administration's Federal Supply Service increased 65% from $6.5 million in 1996 to $10.8 million in 1997. These increases in contract revenues were offset by decreases on the Technical Engineering and Management Support IV (TEMS IV) program at Hanscom Air Force Base of $10.4 million in 1997 compared to 1996 as the program winds down. Revenues on the Naval Air Weapons Center (NAWC) contract at China Lake, California decreased in 1997 by $5.2 million compared to 1996. In the first quarter of 1996, the Company completed its five-year contract with the NAWC, the last of the Company's significant contracts awarded during its period of eligibility for small business awards which ended in 1992. Although it was ineligible to rebid for this contract as the prime contractor, the Company is a major subcontractor to the small business prime contractor who was awarded the NAWC follow-on contract, from which the Company receives approximately 45% of the contract revenues. Contract revenues on the NAWC subcontract increased by $0.3 million in 1997 compared to 1996. Contract revenues in 1997 decreased by $2.0 million on the Range Instrumentation Development contract and by $1.3 million on the AUA technical assistance contract. Contracts which ended in 1997, such as the Systems Engineering Analysis Contract for NASA and the GSA Eastern Zone contract, contributed to the decline in contract revenues as did the sale of the Advanced Information Systems Division. Contracts which ended in 1996, such as the Air Force Warning System integration contract, also contributed to the overall decline in contract revenues in 1997. The Company revised its estimates of the full contract value and profitability of its Eastern Zone contract with the GSA, resulting in a reduction in revenues and operating profit in 1996 of $2.6 million, reflecting the Company's current estimate of the contract's profit at completion. The Eastern Zone contract incurred significant start-up costs related to the establishment of nine new facilities required for contract performance and to difficulties encountered in cost-effective staffing of the personnel required under the contract. The use of subcontract personnel to fill critical positions resulted in cost overruns. The Company initially expected that future contract performance over the full contract term at originally anticipated staffing levels would result in profit sufficient to offset early program losses. However, revenues on the contract were not sufficient to offset these losses. The Company has submitted claims against the U.S. government seeking recovery of $1.5 million of the overrun. The Company has recorded these claims as an unbilled receivable, against which it has certain reserves. COST OF CONTRACT REVENUES. Cost of contract revenues decreased 8.2% to $80.5 million, or 87.3% of contract revenues, in 1997 from $87.6 million, or 91.1% of contract revenues, in 1996. The decrease in cost of contract revenues as a percentage of contract revenues resulted primarily from the effect of changes in the estimated contract value and profitability of the Eastern Zone contract in 1996. Without giving effect to the reduction in revenues due to the Eastern Zone contract, the cost of contract revenues as a percentage of contract revenues for 1996 was 88.7%. The decrease in cost of contract revenues in 1997 would have been even more significant were it not for the indirect cost impact of $0.9 million related to the sale of the Space and Telecommunications business and start-up costs of $1.0 million related to certain commercial contracts. SG&A. Selling, general and administrative expenses ("SG&A") for 1997 increased 40.8% to $7.6 million, or 8.3% of contract revenues, from $5.4 million, or 5.6% of contract revenues, in 1996. Higher costs and reduced revenues accounted for the increase in SG&A as a percentage of contract revenues in 1997. The increase in SG&A reflects the Company's continued investment in infrastructure and in the initiatives required to implement the Company's marketing strategies and increased focus on commercial markets as well as the indirect cost impact of $0.3 million related to the sale of the Space and Telecommunications business. SUPPLEMENTAL ESOP CONTRIBUTION. During 1997, the Board of Directors elected to make a one-time supplemental contribution of approximately $3.0 million to the Company's employee stock ownership plan (ESOP). The ESOP allows employees to share in the Company's profitability and helps the Company attract and retain a quality workforce. OTHER EXPENSES. Other expenses decreased to $0.7 million in 1997 from $2.4 million in 1996. The decrease is due primarily to the write-off in the fourth quarter of 1996 of capitalized software costs of $0.8 million and $0.9 million related to the Company's unsuccessful initial public offering. OPERATING PROFIT (LOSS). As a result of the foregoing, the Company had an operating profit of $0.4 million in 1997 compared to an operating profit of $0.7 million in 1996. INTEREST EXPENSE. Interest expense increased to $1.6 million in 1997 from $1.0 million in 1996 due to the payment of additional interest on the subordinated debt as a result of the sale of the Space and telecommunications Systems business to Orbital. Interest expense allocated to discontinued operations was $2.1 million in 1997 and $3.3 million in 1996. INCOME (LOSS) FROM DISCONTINUED OPERATIONS. The income from discontinued operations in 1997 was $0.6 million, net of tax benefits of $1.4 million, compared to a loss from discontinued operations of $10.9 million, net of tax benefits of $5.6 million in 1996. The income in 1997 includes a gain on the sale of the segments to Orbital Sciences Corporation of $3.9 million. The loss in 1996 includes charges totaling $9.2 million related to lower profitability on a contract and the write- off of the investment in GEMnet. 1996 Compared with 1995 CONTRACT REVENUES. Contract revenues decreased 8.5% to $96.2 million in 1996 from $105.2 million in 1995. An increase in revenue of $3.6 million on the RID contract, $3.4 million on the Nebraska contract and $1.3 million on the Maritech contract was more than offset by the decrease of $11.2 million on the NAWC and NAWC follow-on contracts and $6.5 million on the Eastern Zone contract. Revenues from contracts awarded in full and open competition increased to $96.9 million or 96.9% of contract revenues in 1996 from $89.1 million or 81.4% in 1995. In the first quarter of 1996, the Company completed its five-year prime contract with the NAWC at China Lake, California. This represented the last of the Company's significant contracts awarded during its period of eligibility for small business awards, which ended in 1992. This contract represented $20.4 million in revenues in 1995. Although it was ineligible to rebid for this contract as the prime contractor, the Company is a major subcontractor to the small business prime contractor who was awarded the NAWC follow-on contract in April 1996, from which the Company receives approximately 45% of the contract revenues. In 1996, the Company received revenues of $5.1 million from the original NAWC contract and $4.1 million in revenues from the follow-on contract. The Company revised its estimates of the full contract value and profitability of its Eastern Zone contract with the GSA, resulting in a reduction in revenues and operating profit in 1996 of $2.6 million, reflecting the Company's current estimate of the contract's profit at completion. The Eastern Zone contract incurred significant start-up costs related to the establishment of nine new facilities required for contract performance and to difficulties encountered in cost-effective staffing of the personnel required under the contract. The use of subcontract personnel to fill critical positions resulted in cost overruns. The Company initially expected that future contract performance over the full contract term at originally anticipated staffing levels would result in profit sufficient to offset early program losses. However, revenues on the contract were not sufficient to offset these losses. The Company has submitted claims against the U.S. government seeking recovery of $1.5 million of the overrun. The Company has recorded these claims as an unbilled receivable, against which it has certain reserves. COST OF CONTRACT REVENUES. Cost of contract revenues decreased 9.3% to $87.6 million, or 91.1% of contract revenues, in 1996 from $96.6 million, or 91.8% of contract revenues, in 1995. Without giving effect to the reduction in revenues due to the Eastern Zone contract, the cost of contract revenues as a percentage of contract revenues for 1996 was 88.7%. SG&A. Selling, general and administrative expenses ("SG&A") for 1996 increased 31.9% to $5.4 million, or 5.6% of contract revenues, from $4.1 million, or 3.9% of contract revenues, in 1995. Higher costs and reduced revenues accounted for the increase in SG&A as a percentage of contract revenues in 1996. The increase in SG&A reflects the Company's continued investment in infrastructure and in the initiatives required to implement the Company's marketing strategies and increased focus on commercial markets. OTHER EXPENSES. Other expenses increased to $2.4 million in 1996 from $(0.3) million in 1995. The increase is due primarily to the write- off in the fourth quarter of 1996 of capitalized software costs of $0.8 million and $0.9 million related to the Company's unsuccessful initial public offering. Lower expenses in 1995 resulted from a reversal of certain amounts in reserves in 1995 set aside in 1994. OPERATING PROFIT (LOSS). As a result of the foregoing, the Company had an operating profit of $0.7 million in 1996 compared to an operating profit of $4.8 million in 1995. INTEREST EXPENSE. Interest expense increased to $1.0 million in 1996 from $0.8 million in 1995 due to higher average balances on the Credit Facility due to increased capital expenditures. Interest expense allocated to discontinued operations was $3.3 million in 1996 and $3.2 million in 1995. INCOME (LOSS) FROM DISCONTINUED OPERATIONS. The loss from discontinued operations in 1996 was $10.9 million, net of tax benefits of $5.6 million, compared to a loss from discontinued operations of $0.4 million, net of tax benefits of $0.3 million in 1995. The loss in 1996 includes charges totaling $9.2 million related to lower profitability on a contract and the write-off of the investment in GEMnet. The loss in 1995 includes a loss of $0.5 million from the disposal of the Simulation Systems Division. Liquidity and Capital Resources The Company's net income (loss) was ($0.02 million), ($11.0 million), and $1.9 million in 1997, 1996 and 1995, respectively. Its cash flow provided by (used in) operating activities was $(10.2 million), $(5.6 million), and $2.4 million in 1997, 1996 and 1995, respectively. The principal factors accounting for the provision (use) of cash in operating activities in 1997 were $(3.9 million) non-cash gain on disposal of segments, $2.8 million of depreciation and amortization expense, ($3.6) million payment of previously accrued interest, and changes in working capital accounts using $5.6 million of cash. The principal factors accounting for the provision (use) of cash in operating activities in 1996 was the net loss of $11.0 million and an increase in accounts receivable and other net assets of $6.6 million, offset by $5.6 million of depreciation and amortization expense and the $6.4 million write-off of the investment in GEMnet. The principal factors accounting for the provision (use) of cash in operating activities in 1995 were a $0.7 million loss on the disposal of the Simulation Systems Division, $3.2 million of depreciation and amortization expense, $1.0 million provision for receivable allowances, $1.1 million of accrued interest and changes in working capital accounts using $4.0 million of cash. Cash provided by (used in) investing activities totaled $14.4 million, $(6.2 million), and $(5.2 million) in 1997, 1996 and 1995, respectively. Proceeds from the sale of segments provided $18 million in 1997. Additions to furniture and equipment were $3.6 million, $6.5 million, and $4.3 million in 1997, 1996 and 1995, respectively. Software development expenditures were $0.1 million in 1996 and $0.8 million in 1995. Cash provided by (used in) financing activities was $(4.2 million), $11.5 million, and $(0.9 million) in 1997, 1996 and 1995, respectively. Financing was primarily provided by borrowings under the Credit Facility and offset by the repayment of subordinated debt and acquisition notes and the purchase of treasury stock for the employee stock purchase plan. The Company's net borrowings (payments) under the Credit Facility were $(3.7 million), $12.0 million and $1.3 million for 1997, 1996 and 1995, respectively. The 1997 amount is net of $5 million proceeds from a new three-year term loan. In connection with the sale of the segments to Orbital, $27 million in debt was assumed by the purchaser. Net purchases of treasury stock were $0.1 million, $0.5 million, and $2.0 million in 1997, 1996 and 1995, respectively. In November 1997, the Company entered into a new three-year agreement with a bank for a credit facility providing the availability to borrow up to $20 million, including a revolving facility of $15 million, which includes a facility for letters of credit up to $4 million, and a new $5 million term facility. At December 31, 1997, there was $7.4 million outstanding under the revolving credit facility and $5 million outstanding under the term facility, to be repaid in equal quarterly payments. Borrowings under the credit facility are secured by substantially all of the Company's assets and bear interest at either the lender's prime rate or LIBOR plus 1.5% to 2.25% (based on the Company's ratio of total funded debt to earnings before interest, taxes, depreciation and amortization) at the Company's discretion. The weighted average rate in effect for short-term borrowings at December 31, 1997 was approximately 7.7%. Under the agreement, the Company pays an annual commitment fee on the unused credit line and an annual administration fee on the total revolving credit line. The credit facility requires advance approval by the bank for the Company to pay cash dividends. The agreement also includes financial covenants which require the Company to maintain certain financial ratios and restricts capital expenditures. In January 1998, the Company completed the $2.0 million tender offer accrued for as of December 31, 1997. The Company believes that cash flow from operations and available bank borrowings will provide adequate funds for continued operations for the next twelve months. Other Matters The "Year 2000" issue concerns the potential exposures related to existing computer programs that use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Company has evaluated, and continues to evaluate, the potential cost associated with becoming Year 2000 compliant. The Company believes that its principal payroll and human resources related systems, which are licensed from and maintained by third party software development companies, are Year 2000 compliant. The Company is in the process of selecting new financial systems which management expects to be Year 2000 compliant. Management does not anticipate that the remaining costs associated with assuring that its internal systems will be Year 2000 compliant will be material to its business, operations or financial condition. Item 8. Financial Statements and Supplementary Data The information required by this item is included under Item 14(a) of this document. Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information regarding the directors and executive officers of the Company as of December 31, 1997:
NAME AGE POSITION --- ------------------ C.E. Velez 57 President, Chief Executive Officer and Chairman of the Board Gregory H. Wagner 49 Executive Vice President, Chief Financial Officer and Treasurer Terry J. Piddington 54 President, CTA Federal Information Systems Company Harvey D. Kushner(1) 67 Director David R. Mackie (1) 59 Director Raymond V. McMillan (1) 64 Director George W. Morgenthaler(1) 70 Director James M. Papada, III(1) 49 Director Arturo Silvestrini(1) 67 Director
___________ (1) Member of the Compensation Committee and the Audit Committee of the Board of Directors. ___________ Dr. C.E. "Tom" Velez, a founder of the Company, has been President and Chairman of the Board since the Company's organization in 1979. Prior to founding the Company, Dr. Velez was employed by Martin Marietta Aerospace for three years as Director, Software Engineering Research and Development, and was previously employed at the NASA Goddard Space Flight Center for 12 years in various positions including Chief of the Systems Development and Analysis Branch. Dr. Velez is also a director of Constellation and EarthWatch. Gregory H. Wagner has been Executive Vice President and Chief Financial Officer and Treasurer of the Company since November 1992. From 1988 to 1992, he was Vice President of Finance of the Company. Mr. Wagner was previously employed with Martin Marietta Aerospace for ten years in various positions, most recently as Director of Business Management. Terry J. Piddington has been President of the Company's Federal Information Systems Company since October 1997 and before that had been Executive Vice President of the Company since February 1987. From 1985 to 1987, he was a Vice President of the Company's Systems Engineering Services Division. Harvey D. Kushner has been a Director of the Company since July 1989. Mr. Kushner formed Kushner Management Planning Corporation in 1988 which is a professional services firm advising in management, business and technology development. From 1987 to 1988, he was an officer of Atlantic Research Corporation. Prior to 1987, Mr. Kushner had been employed by the ORI Group for 33 years, having served as Chairman of the Board of Directors, Chief Executive Officer, and President for 20 years. David R. Mackie has been a Director of the Company since 1997. Since 1985 he has been an independent consultant and is currently a Partner in Diplomatic Resolutions, Inc. Prior to 1985, he held various positions with Tandem Computers, where he was one of the co-founders, and Hewlett- Packard. Raymond V. McMillan has been a Director of the Company since August 1996 and President of Information Technology Services from April 1996 to his retirement in October 1997 and before that had been Executive Vice President of the Company since February 1991. From 1988 to 1991, he was a Vice President of the Company. From 1984 to 1987, he was a Brigadier General in the Air Force responsible for management of the integration and test of the DOD's Integrated Tactical Warning and Attack Assessment System. George W. Morgenthaler has been a Director of the Company since August 1991. From 1986 to the present, he has served on the faculty of the University of Colorado at Boulder as Professor, Aerospace Engineering Sciences. He previously served four years as Department Chairman and Associate Dean of the College of Engineering and Applied Science. From 1960 to 1986, he was with Martin Marietta; his last position was as Vice President of Energy, Technology and Special Products. He is on the Board of Directors of Dynamic Materials Corp., a NASDAQ company. James M. Papada, III has been a Director of the Company since August 1996. Since prior to 1991, he has been a senior partner in the corporate department of the law firm of Stradley, Ronon, Stevens & Young, a limited liability partnership in Philadelphia, Pennsylvania, specializing in merger and acquisition transactions. He is also the Chairman of the Board of Technitrol, Inc., a multi-national, diversified manufacturing company listed on the New York Stock Exchange. He is also a Director of ParaChem Southern, Inc., a manufacturer of specialty chemical products and GlassTech, Inc., a manufacturer of glass tempering and bending systems. From February 1983 until December 1987, Mr. Papada was President and Chief Operating Officer of Hordis Brothers, Inc., a privately held glass fabricator. Arturo Silvestrini has been a Director of the Company since August 1991. Since November 1991 he has been President and CEO of Earth Observation Satellite Corporation. From 1965 to 1991, he was with Computer Sciences Corporation, most recently as Senior Vice President for European operations. Executive officers are reviewed annually by the Board of Directors and serve at the pleasure of the Board. Item 11. Executive Compensation The following table sets forth information regarding the compensation for 1997, 1996 and 1995 of the Company's Chief Executive Officer and the four other most highly compensated executive officers in 1997 (the "Executive Officer Group") for services rendered in all capacities to the Company:
SUMMARY COMPENSATION TABLE LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------------- -------------------------- Other Res- Annual tricted Compen Stock Option Compen NAME AND PRINCIPAL Salary Bonus sation Awards Awards sation POSITION(S) Year ($)) ($) ($)(1) ($) (#) ($)(2) ---- ------- ----- ------ ----- ------- ------- C.E. Velez 1997 280,000 -- 2,090 -- -- 14,480 (1)President, 1996 276,743 -- 1,870 -- 59,010 5,700 Chief Executive 1995 253,454 -- 1,691 -- -- 6,300 Officer and Chairman of the Board Ricardo de 1997 175,108 -- 1,540 44,339 -- 11,835 Bastos(3) 1996 134,616 -- 1,441 125,000 102,684 338,960(4) President-Space 1995 -- -- -- -- -- -- and Telecommunications Systems and Director Terry J. 1997 155,000 -- 1,396 -- -- 14,028 Piddington- 1996 153,350 -- 1,221 -- 32,666 5,700 Executive Vice 1995 139,412 38,453 1,107 -- -- 4,800 President Raymond V. 1997 142,308 90,000 2,346 -- -- 50,759 McMillan 1996 182,779 -- 2,815 -- 178,988 12,180 President- 1995 166,385 -- 2,616 -- -- 16,915 Information Technology Services (5) Services (5) Gregory H. Wagner 1997 167,900 85,000 927 -- -- 32,461 Executive Vice 1996 167,900 -- 856 -- 85,828 5,700 President, Chief 1995 150,007 -- 768 -- -- 27,085 Financial Officer and Treasurer
___________ (1) Represents long term disability premiums and group life insurance premiums for amounts in excess of $50,000. (2) Includes amounts of the Company's contributions allocated to participants' accounts pursuant to the Company's 401(k) plan and ESOP, other relocation reimbursements and miscellaneous cash payments pursuant to the Company's cafeteria plan. (3) Mr. de Bastos joined the Company in April 1996 at an annual salary of $200,000 and resigned effective August 15, 1997. (4) Includes $125,000 (after tax) and relocation expense of $131,003 paid in connection with hiring. (5) Mr. McMillan resigned in October 1997. Option Grants During 1997 There were no options granted in fiscal 1997 to any member of the Executive Officer Group. Fiscal Year-End Option Values The following table sets forth information concerning the exercise of stock options during fiscal 1997 and the number and value of unexercised stock options held at year end by each member of the Executive Officer Group.
Number of Securities Value of Underlying Unexercised Shares Unexercised In-the-Money Acquired Options at Options at on Value FY-End (#) FY-End ($)(1) Exercise Realized Exercisable/ Exercisable/ NAME (#) ($) UNEXERCISABLE UNEXERCISABLE ----- -------- -------- ------------- ------------- C.E. Velez -- -- 19,670/39,340 5,999/11,999 Ricardo de Bastos -- -- -- -- Terry J. -- -- 10,888/21,778 3,321/6,642 Piddington Raymond V. -- -- 106,994/115,994 14,120/2,824 McMillan Gregory H. Wagner -- -- 11,942/73,886 1,821/22,535
___________ (1) There was no public trading market for the Common Stock on December 31, 1997. Accordingly, solely for purposes of this table, the values in this column have been calculated on the basis of an estimated market price of $5.05 per share, less the aggregate exercise price of the options. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information with regard to the beneficial ownership of the Common Stock as of December 31, 1997 by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director, each executive officer and each member of the Executive Officer Group and (iii) all current directors and executive officers of the Company as a group:
Shares Beneficially Percent Beneficially OWNED (1) OWNED(2) NAME OF BENEFICIAL OWNER 5% Stockholders: C.E. Velez 4,661,750 (3) 50.6% ESOP 1,615,318 17.5 B.A. Claussen 919,634 (4) 10.0 Directors and executive officers: C.E. Velez 4,661,750 (3) 50.6% Terry J. Piddington 442,890 (5) 4.8 Gregory H. Wagner 135,520 (6) 1.7 Raymond V. McMillan 123,782 (7) 1.5 George W. Morgenthaler 17,454 * Harvey D. Kushner 12,912 (8) * James M. Papada, III 4,446 * Arturo Silvestrini 3,034 * David R. Mackie 496 * All current directors and executive officers as a group (9 persons as of December 31, 1997) 5,402,284 (9) 58.6%
___________ * Less than 1%. (1) Except as otherwise indicated, the persons in this table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and subject to the information contained in the footnotes to this table. Shares not outstanding but deemed beneficially owned by virtue of the right of a person or group to acquire them as of December 31, 1997 are treated as outstanding only for purposes of determining the number of and percent owned by such person or group. All share amounts are exclusive of shares beneficially owned through the ESOP. (2) The number of shares of Common Stock deemed outstanding as of December 31, 1997 was 9,213,668 shares, which includes non-qualified options to purchase 462,648 shares of Common Stock granted under the 1991 Plan, which are currently exercisable as of December 31, 1997. (3) Includes non-qualified options to purchase 19,670 shares of Common Stock granted under the 1991 Plan, which are currently exercisable as of December 31, 1997. (4) Includes non-qualified options to purchase 200,000 shares of Common Stock granted under the 1991 Plan which are currently exercisable as of December 31, 1997. (5) Includes non-qualified options to purchase 10,888 shares of Common Stock granted under the 1991 Plan which are currently exercisable as of December 31, 1997. (6) Includes non-qualified options to purchase 11,942 shares of Common Stock granted under the 1991 Plan which are currently exercisable as of December 31, 1997. (7) Includes non-qualified options to purchase 106,994 shares of Common Stock granted under the 1991 Plan which are currently exercisable as of December 31, 1997. (8) Includes non-qualified options to purchase 3,240 shares of Common Stock granted under the 1991 Plan which are currently exercisable as of December 31, 1997. (9) Includes non-qualified options to purchase 152,734 shares of Common Stock granted under the 1991 Plan which are currently exercisable as of December 31, 1997. Item 13. Certain Relationships and Related Transactions During 1995, the Company discontinued the operations of its Simulation Systems Division, which manufactured aircraft flight simulators for sale or lease. The assets of the division consisted primarily of a cockpit flight simulator and various fixed assets, which had an aggregate value of $3.1 million, net of accumulated depreciation. These assets were sold on September 1, 1995 to a company principally owned by Mr. Claussen, one of the Company's principal stockholders, for two notes secured by the assets with an aggregate principal amount of $2.2 million, bearing interest at the Company's borrowing rate which has ranged between 6.00% and 7.75% per annum, and a 15% minority interest in the entity purchasing the division, which has been assigned a value of $0.2 million. In March 1991, the Company made a loan to Mr. Claussen of $368,623 for the purchase of his new residence. The interest rate on this loan varied from 4.69% to 7.75% per annum and equaled the interest rate on the Company's revolving line of credit under the Credit Facility. Mr. Claussen paid all outstanding principal and accrued interest on the loan in January 1996. During 1997, the Company and Mr. Claussen entered into an employee separation and non-competition agreement under which he will be paid $175,000 per year for a period of five years. Between May 1993 and July 1995, the Company made loans aggregating $500,000 to Dr. Velez for the purchase and construction of a new residence, evidenced by a revolving promissory note due August 2000 bearing interest at the same rates applicable to the Company under its Credit Facility. Dr. Velez paid all outstanding principal and accrued interest on the loan in November 1997. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 14(a) Consolidated Financial Statements and Schedules: PAGE Report of Independent Auditors F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-10 Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts and Reserves F-28 All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted. Exhibits: (23a) Consent of Ernst & Young LLP F-29 (23b) Consent and Report of Legg Mason Wood Walker, Inc. F-30 14(b) Reports on Form 8-K. There were no reports on Form 8-K filed during the fourth quarter of 1997. 14(c) Financial Data Schedule Report of Independent Auditors The Board of Directors and Shareholders CTA INCORPORATED We have audited the accompanying consolidated balance sheets of CTA INCORPORATED and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CTA INCORPORATED and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/Ernst & Young LLP Washington, D.C. February 28, 1998 F-1 CTA INCORPORATED Consolidated Balance Sheets
December 31 1996 1997 -------- ------ (IN THOUSANDS, EXCEPT FOR SHARE DATA) Assets Current assets: Cash and cash equivalents $ 16 $ - Accounts receivable (NOTES 1 AND 3) 30,665 33,300 Net assets of discontinued operations (NOTE 2) 34,484 - Other current assets (NOTE 4) 1,690 1,222 Recoverable income taxes (NOTE 8) 3,537 3,576 ------ ------ Total current assets 70,392 38,098 Furniture and equipment (NOTES 1 AND 4) 11,795 11,110 Accumulated depreciation and amortization (8,888) (8,066) ------- ------- 2,907 3,044 Costs in excess of net assets acquired 5,048 - Other assets (NOTES 1, 4, AND 8) 5,110 4,146 ------- ------- Total assets $83,457 $45,288 ======= =======
F-2 CTA INCORPORATED Consolidated Balance Sheets
December 31 1996 1997 -------- -------- (IN THOUSANDS, EXCEPT FOR SHARE DATA) Liabilities and stockholders' equity Current liabilities: Notes payable - line of credit(NOTE 5) $28,335 $ 7,445 Current portion of long-term debt - 1,667 Accounts payable 10,266 5,788 Accrued expenses (NOTE 4) 3,686 3,156 Excess of billings over costs and contract prepayments 2,733 2,738 Other current liabilities 757 270 Accrued tender offer (NOTE 7) - 2,019 Deferred income taxes (NOTE 8) 1,377 2,427 ------ ------ Total current liabilities 47,154 25,510 Long-term debt, less current portion (NOTE 5) 15,000 3,333 Other long-term liabilities 3,510 635 Commitments and contingencies (NOTE 11) - - Stockholders' equity (NOTE 7): Preferred stock, $1.00 par value, 1,000,000 shares authorized and none issued - - Common stock, $.01 par value, 20,000,000 shares authorized and 10,000,000 issued 100 100 Capital in excess of par value 7,943 7,869 Retained earnings 14,550 14,528 ------ ------ 22,593 22,497 Notes receivable from employees (NOTE 10) (698) (698) Treasury stock, at cost (894,704 shares in 1996 and 1,248,980 shares in 1997) (4,102) (5,989) ------- ------- Total stockholders' equity 17,793 15,810 ------- ------- Total liabilities and stockholders' equity $83,457 $45,288 ======= =======
SEE ACCOMPANYING NOTES. F-3 CTA INCORPORATED Consolidated Statements of Operations
Year ended December 31 1995 1996 1997 ------- ------- -------- (IN THOUSANDS, EXCEPT FOR SHARE DATA) (S) (C) Contract revenues $105,224 $96,246 $92,239 Cost of contract revenues 96,633 87,644 80,503 Selling, general and administrative expenses 4,117 5,431 7,649 Supplemental ESOP contribution (NOTE 6) - - 2,958 Other expenses (292) 2,447 710 -------- ------- ------ Operating profit 4,766 724 419 Interest expense 850 969 1,589 ----- --- ----- Income (loss) before income taxes 3,916 (245) (1,170) Income taxes (benefit) (NOTE 8) 1,567 (80) (500) ----- ---- ------ Income (loss) from continuing operations 2,349 (165) (670) Discontinued operations(NOTE 2): Income (loss) from discontinued operations, net of income taxes 62 (10,872) (3,272) Gain (loss) on disposal of segments, net of income taxes (465) - 3,920 ---- ------- ------ Income (loss) from discontinued operations (403) (10,872) 648 ----- -------- ---- Net income (loss) $1,946 $(11,037) $(22) Earnings (loss) per share (NOTE 9): Continuing operations $ .27 $ (.02) $ (.07) Discontinued operations (.05) (1.22) .07 ------ -------- -------- Earnings (loss) per share $ .22 $ (1.24) $ .00 Earnings (loss) per share - assuming dilution (NOTE 9): Continuing operations $ .25 $ (.02) $ (.07) Discontinued operations (.04) (1.22) .07 ------ -------- -------- Earnings (loss) per share - assuming dilution $ .21 $ (1.24) $ .00
SEE ACCOMPANYING NOTES. F-4 CTA INCORPORATED Consolidated Statements of Stockholders' Equity
Common Stock Capital Notes --------------- in Rcv Treasury Stock Par Excess Retained from ----------------- Shares Value Par Earnings Empl Shares Cost ---------- ----- ----- ------- ---- --------- ------ (IN THOUSANDS, EXCEPT FOR SHARE DATA) Balance at January 1, 1995 10,000,000 $100 $8,872 $23,641 $ - 1,108,370 $4,663 Purchase of treasury stock - - - - - 147,684 684 Exercise of stock options - - (46) - - (79,000) (283) Compensatory issuance of common stock to employees/ directors - - 58 - - (52,274) (187) Issuance of stock for acquisition notes payable - - 89 - - (79,872) (286) Purchase of treasury stock from ESOP - - - - - 276,200 1,296 Net income - - - 1,946 - - - ---------- ------ ----- ------ ----- ------- ----- Balance at December 31, 1995 10,000,000 100 8,973 25,587 - 1,321,108 5,887 Purchase of treasury stock - - - - - 125,368 590 Sale of treasury stock - - 8 - - (7,826) (28) Exercise of stock options - - (1,452) - - (449,340) (1,935)
F-5
Compensatory issuance of common stock to employees/ directors - - 7 - - (15,576) (67) Issuance of stock for acquisition notes payable - - 30 - - (79,030) (345) Tax benefit of non-qualified stock options exercised - - 377 - - - - Issuance of stock to employees for notes receivable - - - - 698 - - Net loss - - - (11,037) - - - ------------ ---- ------- -------- ---- -------- ------ Balance at December 31, 1996 10,000,000 100 7,943 14,550 698 894,704 4,102 Purchase of treasury stock (NOTE 7) - - - - - 466,500 2,381 Exercise of stock options - - (191) - - (89,870) (392) Compensatory issuance of common stock to employees/ directors - - 12 - - (22,354) (102) Tax benefit of non-qualified stock options exercised - - 105 - - - - Net loss - - - (22) - - - ---------- ---- ------ ------- ---- --------- ------- Balance at December 31, 1997 10,000,000 $100 $7,869 $14,528 $698 1,248,980 $ 5,989
SEE ACCOMPANYING NOTES. F-6 CTA INCORPORATED Consolidated Statements of Cash Flows
Year Ended December 31 ------------------------------- 1995 1996 1997 ------- --------- --------- (IN THOUSANDS) Operating activities Net income (loss) $ 1,946 $(11,037) $ (22) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss on disposal of SIM 718 - - Gain on disposal of segments - - (3,920) Depreciation and amortization: Furniture and equipment 2,877 3,734 2,612 Capitalized software development costs 131 1,108 76 Other noncurrent assets 610 1,018 390 Deferred lease incentives (382) (292) (271) Provision for receivable allowances (990) 300 360 Accrued interest on subordinated debt 1,063 1,034 (3,590) Other noncash expenses 432 (8) (224) Changes in assets and liabilities: Accounts receivable (233) (4,106) 901 Recoverable income taxes (2,707) (639) (906) Other assets 933 (2,353) 463 GEMnet investment (1,011) 6,437 - Accounts payable and accrued expenses 5,089 1,595 (5,017) Excess of billings over costs and contract prepayments (4,816) 1,556 (3,180) Deferred income taxes, net (1,299) (3,900) 2,100 ------ ------ ------ Net cash provided by (used in) operating activities 2,361 (5,553) (10,228) Investing activities: Investments in furniture and equipment (4,327) (6,469) (3,584) Proceeds from sale of segments - - 18,000 Capitalized computer software (832) (87) - Other - 351 - ------ ------ ------ Net cash provided by (used in) investing activities (5,159) (6,205) 14,416
F-7 CTA INCORPORATED Consolidated Statements of Cash Flows (continued)
Year Ended December 31 1995 1996 1997 ------ -------- ------ (IN THOUSANDS) Financing activities Net borrowings (payments) under bank line of credit agreement 1,324 12,011 (8,684) Proceeds from term loan - - 5,000 Repayment of subordinated debt - - (450) Repayment of acquisition notes (375) (375) - Proceeds from deferred lease incentives 150 315 - Purchase of treasury stock (1,980) (458) (104) Proceeds from exercise of stock options 12 10 34 Other - 36 - ------ ------ ------ Net cash provided by (used in) financing activities (869) 11,539 (4,204) ------ ------ ------ Net decrease in cash and cash equivalents (3,667) (219) (16) Cash and cash equivalents at beginning of period 3,902 235 16 ----- --- --- Cash and cash equivalents at end of period $ 235 $ 16 $ - ======= ===== ===== Supplemental Information Cash paid during the year for: Income taxes $ 5,115 $ 226 $ 117 Interest $ 2,863 $ 2,836 $ 8,807 Noncash investing and financing activities: Debt assumed by purchaser (NOTE 2) $ - $ - $ 27,000 Purchase of treasury stock (NOTE 7)$ - $ - $ 2,019 Investment in EarthWatch $ - $ 2,038 $ - Conversion of note to common stock $ 375 $ 375 $ - Common stock issued for notes $ 225 $ 473 $ -
SEE ACCOMPANYING NOTES. F-8 CTA INCORPORATED Notes to Consolidated Financial Statements December 31, 1997 1. The Company and Significant Accounting Policies CTA INCORPORATED (the Company) provides information technology services to Federal, State and commercial markets including Year 2000 services, network design and implementation, mainframe to client-server conversions, software language upgrades, database development and maintenance, electronic data interchange and automated enterprise management technologies. During 1995, the Company disposed of its aircraft simulation systems business. During 1997, the Company disposed of its Space and Telecommunications Systems and its Mobile Information and Communications Services businesses. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, in particular, estimates of contract cost and revenues used in the earnings recognition process. Actual results could differ from those estimates. An important focus of the Company's efforts to pursue commercial markets is to assist state and local governments and commercial companies address the Year 2000 Issue with their information systems. The Year 2000 Issue arises because many electronic data processing systems will be unable to process year-date data accurately beyond the year 1999. The Company believes it has instituted reasonable contract management practices to control the financial risk of performance on these contracts. Cash and Cash Equivalents The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. F-9 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 1. The Company and Significant Accounting Policies (continued) Furniture and Equipment Furniture and equipment are carried at cost. Depreciation is computed based upon accelerated methods using estimated useful lives of three to seven years. Leasehold improvements are amortized on a straight-line basis over the terms of the leases, which range from one to ten years. Purchased computer software used by the Company is amortized on a straight-line basis over a three-year period. Contracts Revenues and Related Contract Costs Revenues result from services performed for the U.S. government and commercial customers under a variety of long- term contracts and subcontracts, some of which provide for reimbursement of costs plus fixed fees and/or award fees, and others which are fixed-price type. Revenues on cost-type contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect expenses and an allocable portion of a fixed fee. Award fees on cost-type contracts are recognized as earned. Revenues on fixed-price type contracts are recognized using the percentage-of- completion method of accounting, based on contract costs incurred to date compared with total estimated costs at completion or other measures of progress on the contract. Estimated contract revenue at completion includes contract incentive fees at estimated realizable amounts. Revenues from time and materials contracts are recognized based on hours worked at amounts represented by the agreed-upon billing amounts. When adjustments in contract value or estimated costs are determined, any changes from prior estimates are reflected in earnings in the current period. The effect of these adjustments could be material to interim or annual operating results. The Company provides for anticipated losses, if any, on contracts and allowances for receivables during the period in which they are first identified. Contract costs, including indirect costs for cost-type contracts, are subject to audit by government representatives. Such audits have been completed through 1992. Management believes that any adjustments resulting from determinations for subsequent periods and contract close-outs will not have a significant impact on the Company's consolidated financial position or results of operations. F-10 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 1. The Company and Significant Accounting Policies (continued) Stock-Based Compensation Compensation expense is recognized for stock options and other stock grants to the extent the exercise price is less than the fair market value of the Company's common stock at the date of grant. New Accounting Pronouncements In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods presented have been restated to conform to the SFAS No.128 requirements (see Note 9). The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, in 1997. SFAS No. 131 supercedes SFAS No. 14, replacing the "industry segment approach" with the "management approach," whereby companies report financial and descriptive information about their operating segments. Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and are subject to evaluation by the chief operating decision maker in deciding how to allocate resources to segments (see Note 13). Reclassifications Certain prior year balances have been reclassified to conform with the current period presentation. F-11 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 2. Disposal of Segments In August 1997, the Company sold its Space and Telecommunications Systems and its Mobile Information and Communications Services businesses to Orbital Sciences Corporation in exchange for $18 million in cash and assumption by Orbital of certain liabilities of the Company. In addition, Orbital paid to certain lenders of the Company an aggregate of $27 million in partial satisfaction of the Company's obligations to such lenders. The final purchase price is subject to certain adjustments, however, in the opinion of management, such adjustments, if any, will not have a material effect on the financial position or the fuure results of operations of the Company. The Company also is entitled to receive certain deferred consideration for future sales of STARBus satellites and satellite busses and 3% of all cumulative revenues attributable to the GEMtrak monitoring system in excess of a threshold amount of $50 million. The consolidated statements of operations exclude sales and expenses of discontinued operations from captions applicable to continuing operations. The discontinued operations include an allocation of interest expense based on the proportion of debt paid by Orbital to the Company's total debt outstanding at the time of the sale. Interest expense allocated to discontinued operations was $2.1 million in 1997, $3.3 million in 1996 and $3.2 million in 1995. Net sales of the Space and Telecommunications Systems business prior to its disposition were $66.8 million in 1997, $83.5 million in 1996 and $111.8 million in 1995. There were no sales for the Mobile Information and Communications Services business prior to its disposition. The income (loss) from operations of the disposed businesses was $(3.3) million in 1997, $(10.9) million in 1996 and $1.3 million in 1995, net of income tax. The operating loss in 1996 includes charges totaling $9.2 million related to lower profitability on a contract and the write-off of the investment in GEMnet. The 1997 gain from disposal of the businesses was $3.9 million, net of income tax. The income tax provision (benefit) related to these discontinued segments was $(1.4) million in 1997, $(5.6) million in 1996 and $0.9 million in 1995. F-12 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 2. Disposal of Segments (continued) During 1997, the Company also sold its Advanced Information Systems (AIS) division for approximately $0.4 million. The net contract revenues of AIS prior to its disposition were $0.9 million in 1997, $2.9 million in 1996 and $3.7 million in 1995 and are included in continuing operations. In September 1995, the Company sold its Simulation Systems Division (SIM) to a former director and a principal stockholder of the Company and other investors in exchange for two notes secured by the assets of the division with an aggregate principal amount of $2.2 million, bearing interest at the Company's borrowing rate and a 15% minority interest in the purchasing entity, valued at $0.2 million. The assets of the division consisted primarily of a cockpit flight simulator and various fixed assets, which had an aggregate net book value of $3.1 million. Realization of the investment and notes receivable totaling $0.2 million are dependent primarily on the future success of the business and/or the collateral securing the note, while the realization of a note totaling $1.8 million is dependent on the proceeds from the use or sale of the simulator. The investment and notes receivable are periodically reviewed by management for impairment considering, among other factors, the estimated fair value of the collateral. Net sales of SIM prior to its disposition were $0.5 million in 1995. The loss from operations of the SIM business, which is reported in discontinued operations, was $1.3 million in 1995, net of income tax. The 1995 loss from disposal of the business was $0.5 million, net of income tax. The income tax benefit related to this discontinued business was $1.2 million in 1995. F-13 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 3. Accounts Receivable
December 31 1996 1997 ------- ------- Accounts receivable: (IN THOUSANDS) U.S. Government: Billed $21,969 $17,556 Unbilled: Contracts in progress 6,106 4,659 Amounts awaiting contractual coverage 4,338 4,192 Revenue awaiting government approval of final indirect rates or contract close-out 1,360 242 Commercial Customers: Billed - 5,646 Unbilled: Contracts in progress - 4,473 33,773 36,768 Less allowances (3,108) (3,468) $30,665 $33,300
Contracts in progress consist primarily of revenues on long- term contracts that have been recognized under the percentage-of-completion method for accounting purposes but not billed to customers. These amounts generally will be billable upon product delivery or satisfaction of other contract requirements. Amounts awaiting contractual coverage include amounts for which the Company expects to obtain the necessary contract modifications in the normal course of business. At December 31, 1996 and 1997, approximately $2.9 million and $2.2 million respectively, is related to situations where disputes regarding the extent of contractual coverage have resulted in legal actions or formal claims. The Company has provided allowances that it believes adequately provide for the resolution of these and other matters. The Company expects to realize substantially all billed and unbilled receivables within one year. F-14 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 4. Composition of Certain Financial Statement Balances
December 31 1996 1997 ------ ------- (IN THOUSANDS) Other current assets: Receivables from employees and stockholders (NOTE 10) $1,175 $ 76 Prepaid expenses 253 495 Other 262 651 ------ ------ $1,690 $1,222 Furniture and equipment: Data processing equipment $8,353 $7,513 Office furniture and equipment 2,425 2,805 Other equipment 351 115 Leasehold improvements 666 677 ------ ----- 11,795 11,110 Accumulated depreciation and amortization (8,888) (8,066) ------- ------- $ 2,907 $3,044 Other assets: Investment in and notes receivable from SIM (NOTE 2) $2,138 $2,218 Capitalized software costs, net 525 - Deferred tax asset (NOTE 8) 1,385 935 Other 1,062 993 ------ ------ $5,110 $4,146 Accrued expenses: Salaries and incentives $3,253 $3,106 Employee benefit plans 147 - Other 286 50 $3,686 $3,156
F-15 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 5. Notes Payable and Subordinated Debt Bank Debt In November 1997, the Company entered into a new three-year agreement with a bank for a revolving credit facility providing the availability to borrow up to $15 million, which includes a facility for letters of credit up to $4 million and which also provides a new $5 million term facility. At December 31, 1997, there was $7.4 million outstanding under the revolving credit facility and $5 million outstanding under the term facility, to be repaid in equal quarterly payments. Borrowings under the credit facility are secured by substantially all of the Company's assets and bear interest at either the lender's prime rate or LIBOR plus 1.5% to 2.25% (based on the Company's ratio of total funded debt to earnings before interest, taxes, depreciation and amortization) at the Company's discretion. The weighted average rate in effect for short-term borrowings at December 31, 1997 was approximately 7.7%. Under the agreement, the Company pays an annual commitment fee on the unused credit line and an annual administration fee on the total revolving credit line. The credit facility requires advance approval by the bank for the Company to pay dividends. The agreement also includes financial covenants which require the Company to maintain certain financial ratios and restricts capital expenditures. The balance outstanding at December 31, 1996 under the previous credit facility was $28.3 million. The weighted average interest rate in effect for short-term borrowings at that date was approximately 7.6%. Subordinated Debt In December 1993, the Company entered into a note purchase agreement (the "Notes Agreement") providing for $15 million aggregate principal amount of unsecured, senior subordinated notes (the "Notes"). The Notes bore interest at 12.0% per annum (13.0% effective April 1, 1996), payable quarterly. The Company was required at the election of the holder to repurchase the Notes at the unpaid principal amount, plus accrued interest, at the occurrence of a transaction which resulted in a change in F-16 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 5. Notes Payable and Subordinated Debt (continued) control of ownership of the Company or a "Qualifying Sale" of the Company's common stock as defined by the Notes Agreement. The Notes also provided for payment of contingent interest over and above the 13.0% fixed rate upon the occurrence of a "Qualifying Sale." The sale of the Space and Telecommunications Systems business as described in Note 2 was a "Qualifying Sale." As a result, the subordinated debt was repaid along with accrued interest and contingent interest of $5.8 million. 6. Employee Benefit Plans Substantially all of the Company's employees are eligible to participate in the Company's employee stock ownership plan (ESOP). The ESOP is designed to enable participating employees to share in the growth and prosperity of the Company while providing them with the opportunity to accumulate capital for their future. The ESOP allows only Company contributions, in cash or in common stock, as determined by the Board of Directors. During 1997, the Board elected to make a one-time supplemental contribution of approximately $2.9 million. Contributions are proportionately allocated on the basis of each eligible participant's compensation. Employee vesting in benefits ranges from 40% at the end of two years to 100% at the end of four years. Shares of the Company's common stock which may ultimately be distributed by the ESOP to participants carry certain limited provisions for repurchase by the Company. Through December 31, 1997, no shares of the Company's common stock have been distributed by the ESOP. At December 31, 1996 and 1997, the ESOP owned 1,029,440 and 1,615,318 shares, respectively, of the Company's common stock, all of which have been allocated to plan participants. The Company and its subsidiaries maintain 401(k) savings plans which allow for Company and employee contributions based upon a percentage of the participating employee's salary. Employee vesting in Company contributions ranges from one to four years. The Company's 401(k) plan owned 140,000 shares of the Company's common stock at December 31, 1996 and 1997. Amounts charged to expense under the above plans were approximately $2.1 million, $2.0 million and $4.2 million (including the supplemental contribution) for the years ended December 31, 1995, 1996 and 1997, respectively. The Company currently provides no significant other post retirement benefits. F-17 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 7. Common Stock and Stock Options All of the Company's outstanding shares contain restrictions on transferability. Shares of common stock held by the Company's principal stockholder are subject to a buy-sell arrangement with the Company which contains repurchase features under specified circumstances. At December 31, 1997, none of the specified circumstances exist. The Company completed a tender offer for 399,946 shares at $5.05 per share on December 31, 1997 which resulted in a corresponding increase of treasury stock. The Board of Directors declared a two-for-one stock split for all shares outstanding on January 15, 1998 which is reflected for all periods presented in these financial statements. In December 1991, the Company adopted the 1991 Stock Option and Purchase Plan which reserves 2,600,000 common shares for the granting of incentive or non-qualified stock options or stock purchase rights through 2001. The Compensation Committee of the Board of Directors is authorized to grant options and purchase rights and to establish the respective terms, subject to certain restrictions. Options generally are for terms of five to ten years and provide for vesting periods of three years. As of December 31, 1997, options for 1,504,750 shares are available for grant under this plan. The weighted average grant date fair value of an option granted during the years ended December 31, 1995, 1996 and 1997 was $2.03, $1.91 and $1.60, respectively. The Company uses the Black-Scholes model to estimate the fair values of options, assuming a risk-free interest rate equal to the ninety-day U.S. Treasury Bill rate, expected lives of five to ten years, an expected volatility factor of .236 and no expected dividends. The Company recognized no compensation expense for stock option grants during the three years in the period ended December 31, 1997. F-18 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 7. Common Stock and Stock Options (continued)
Number of Shares Year ended December 31 1995 1996 1997 --------- ------- --------- Options outstanding at beginning of year (weighted average exercise price of $2.08 in 1995, $1.90 in 1996 and $3.96 in 1997) 1,175,950 934,450 1,282,126 Granted (weighted average exercise price of $4.68 in 1995, $4.74 in 1996 and $5.05 in 1997) 30,500 799,016 13,574 Canceled (weighted average exercise price of $3.04 in 1995, $2.09 in 1996 and $4.61 in 1997) (193,000) (2,000) (357,950) Exercised (weighted average exercise price of $3.00 in 1995, $1.07 in 1996 and $2.24 in 1997) (79,000) (449,340) (89,870) --------- -------- -------- Options outstanding at end of year (weighted average exercise price of $1.90 in 1995, $3.96 in 1996 and $4.08 in 1997) 934,450 1,282,126 847,880 ========= ========= ======== Options exercisable at end of year (weighted average exercise price of $1.66 in 1995, $2.48 in 1996 and $3.16 in 1997) 824,244 391,022 462,648 ======= ======= =======
F-19 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 7. Common Stock and Stock Options (continued)
Range of Exercise Prices December 31, 1997 $2.01-$3.00: Options outstanding: Number of shares 266,000 Weighted average exercise price $2.17 Weighted average remaining contractual life (in 1.7 years) Options exercisable: Number of shares 266,000 Weighted average exercise price $2.17 $3.58-$5.05: Options outstanding: Number of shares 581,880 Weighted average exercise price $4.95 Weighted average remaining contractual life (in 3.2 years) Options exercisable: Number of shares 196,648 Weighted average exercise price $4.49
Pro forma compensation expense associated with options granted subsequent to December 31, 1994 generally is recognized over a three year vesting period; therefore, the initial impact of applying SFAS No. 123 on pro forma net income (loss) for 1995 and 1996 is not representative of the impact on pro forma net income in 1997 and future years, when the pro forma effect is fully reflected. The Company's pro forma information follows:
Year ended December 31 1995 1996 1997 ------ ------ ------- (IN THOUSANDS, EXCEPT FOR SHARE DATA) Pro forma income (loss) from continuing operations $2,325 $(327) $(964) Pro forma earnings (loss) per share Basic $.26 $(.04) $(.10) Diluted $.24 $(.04) $(.10)
F-20 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 8. Income Taxes The provision (benefit) for income taxes attributable to continuing operations consisted of the following components:
Year ended December 31 1995 1996 1997 ------- ------ ------ (IN THOUSANDS) Current: Federal $ 2,140 $(20) $(2,400) State 410 - (200) ------- ---- ------- 2,550 (20) (2,600) Deferred: Federal (875) (50) 2,000 State (108) (10) 100 ------- ---- ------- (983) (60) 2,100 ------- ---- ------- $ 1,567 $(80) $(500) ======= ==== =======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: F-21 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 8. Income Taxes (continued)
December 31 1996 1997 ------ ------ (IN THOUSANDS) Current deferred tax liabilities: Unbilled receivables $5,820 $5,425 Other 185 135 ------ ------ 6,005 5,560 Current deferred tax assets: Contract provisions and allowances 3,707 2,482 Accrued vacation 704 510 Other accruals 217 141 ----- ------ 4,628 3,133 ------ ------ Net current deferred tax liabilities $1,377 $2,427 ====== ====== Long-term deferred tax assets: Accrued interest on subordinated debt $1,240 $ - Net operating loss carryforward 504 350 Other 145 935 ------ ------ 1,889 1,285 Less: valuation allowance (504) (350) ------ ------ Net long-term deferred tax assets $1,385 $ 935 ====== ======
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:
Year ended December 31 1995 1996 1997 ------ ----- ------ (IN THOUSANDS> Federal income taxes at statutory rate $1,331 $(83) $(398) State income taxes, net of Federal tax benefit 181 (31) (60) Other 55 34 (42) ------ ----- ----- $1,567 $(80) $(500) ====== ===== =====
F-22 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 9. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Year ended December 31 1995 1996 1997 -------- -------- -------- (IN THOUSANDS, EXCEPT FOR SHARE DATA) Numerator: Income (loss) from continuing operations $2,349 $ (165) $ (670) Income (loss) from discontinued operations (403) (10,872) 648 Net income (loss) for both basic and ------ -------- ------- diluted earnings per share $1,946 $(11,037) $ (22) Denominator: Denominator for basic earnings per share --- Weighted average shares outstanding 8,862,530 8,875,086 9,092,214 Dilutive potential common shares: Employee stock options 556,006 - - --------- --------- --------- Denominator for diluted earnings per share - --- Adjusted weighted average shares and assumed conversions 9,418,536 8,875,086 9,092,214
Due to a loss from continuing operations in 1996 and 1997, employee stock options are considered anti-dilutive and not included in the denominator for diluted earnings per share. F-23 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 10. Transactions with Related Parties The Company made loans in prior years to two of its principal stockholders for relocation costs that include the purchase of new residences. The loans were made in exchange for promissory notes and were secured by deeds of trust on residential property. The loans bore interest at the same rates applicable to the Company's revolving line of credit. The remaining indebtedness of approximately $111,000 on one of these loans was paid in 1996. The remaining outstanding loan of approximately $600,000 was repaid in 1997. The Company made loans in prior years totaling $884,000 to certain officers and employees related to the exercise of options to acquire common stock. Amounts related to the stock exercise price are presented as a reduction of stockholders' equity. The notes are for five years and bear interest at the same rates paid by the Company. 11. Commitments and Contingencies Operating Leases The Company has operating leases for all of its office space and various computer and office equipment. Most of the office space leases require the Company to pay maintenance and operating expenses such as taxes, insurance and utilities and also include provisions for renewal. Certain of the leases contain provisions for periodic rate escalations to reflect changes in the consumer price index. Total rent expense from continuing operations for the years ended December 31, 1995, 1996 and 1997 was $3.1 million, $2.7 million and $2.4 million, respectively. F-24 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 11. Commitments and Contingencies (continued) Operating Leases (continued) At December 31, 1997, total future minimum rental commitments under non-cancelable leases are summarized as follows (in thousands):
1998 $ 2,650 1999 1,743 2000 794 2001 544 2002 354 2003 and after 321 -------- $ 6,406 ========
At December 31, 1997, the Company had a 6.75% limited partnership interest in its corporate headquarters building in Rockville, Maryland that vests up to 9.5% over the life of the lease. Litigation In October 1996, a former employee of the Company filed suit against the Company alleging, among other things, breach of contract in connection with a profit sharing agreement. Subsequently, the litigation was stayed by agreement of the parties because the profit sharing agreement called for mandatory and binding arbitration. The Company intends to vigorously defend itself against the claims. Management of the Company, after reviewing developments with legal counsel, is of the opinion that the outcome of this matter will not have a material adverse effect on the financial position or future operations of the Company. The Company is involved in certain other litigation incidental to its business. Management of the Company, after reviewing developments with legal counsel, is of the opinion that the outcome of such matters will not have a material adverse effect on the financial position or future operations of the Company. F-25 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 12. Other Information Major Customers The percentage of contract revenues from U.S. Government customers that comprise 10% or more of total revenues were as follows:
Year ended December 31 1995 1996 1997 ---- ---- ---- Department of Defense 64% 63% 47% General Services Administration 17% 14% 16%
13. Operating Segments The Company has two principal operating segments: Federal and Commercial Information Technology Systems. Segment data has been adjusted from previously reported amounts to reflect treatment of the Space and Telecommunications Systems and the Mobile Information and Communications Services businesses and Simulation Systems Division as discontinued operations. The following table provides certain financial information for each operating segment:
Year ended December 31 1995 1996 1997 ------ ------ ------ (IN MILLIONS) Contract revenues: Federal $105.2 $91.9 $73.4 Commercial - 4.3 18.8 ------ ----- ----- $105.2 $96.2 $92.2 Operating profit (loss): Federal $ 4.5 $ 2.4 $ 3.0 Commercial - 0.7 1.1 Other expense 0.3 (2.4) (3.7) ------ ------ ------ $ 4.8 $ 0.7 $ 0.4
F-26 CTA INCORPORATED Notes to Consolidated Financial Statements (continued) 13. Operating Segments (continued)
Year ended December 31 1995 1996 1997 ------ ------ ------ (IN MILLIONS) Depreciation and amortization expense: Federal $ 1.6 $ 2.4 $ 0.8 Commercial - - 0.4 Discontinued operations 1.6 3.2 1.6 Capital expenditures: Federal $ 1.4 $ 1.0 $ 0.4 Commercial - - 1.4 Discontinued operations 3.8 5.5 1.8 Identifiable assets: Federal $ 42.4 $ 29.8 $ 27.4 Commercial - 3.0 12.0 Discontinued operations 39.5 42.8 - General corporate assets 9.7 7.8 5.9 ------ ------- ------ $ 91.6 $ 83.4 $ 45.3 ====== ======= ======
The operating profit in 1996 for the Federal operating segment was adversely impacted by a $2.6 million adjustment to the profitability of the General Services Administration - Eastern Zone contract. Other expenses in 1996 include $0.9 million related to an unsuccessful initial public offering. Other expenses in 1997 include $2.9 million for a supplemental ESOP contribution. F-27 Schedule II CTA INCORPORATED Valuation and Qualifying Accounts and Reserves ($000) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, Charged to Beginning Costs Charged to Balance, of and Other End of DESCRIPTION Period Expenses Accounts Deductions Period For the year ended December 31, 1995 $3,690 $200 $292 $1,482 $2,700 For the year ended December 31, 1996 $2,700 $300 $108 $ 0 $3,108 For the year ended December 31, 1997 $3,108 $600 $ 94 $ 334 $3,468
F-28 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-71128) pertaining to the Defined Contribution 401(k) Retirement Plan of CTA INCORPORATED and in the related prospectus of our report dated February 28, 1998, with respect to the consolidated financial statements of CTA INCORPORATED included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/Ernst & Young LLP Washington, D.C. March 26, 1998 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-71128) pertaining to the Defined Contribution 401(k) Retirement Plan of CTA INCORPORATED and in the related prospectus of our report dated February 28, 1998, with respect to the consolidated financial statements of CTA INCORPORATED included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/Ernst & Young LLP Washington, D.C. March 26, 1998 F-29 CONSENT OF LEGG MASON WOOD WALKER, INC., INDEPENDENT APPRAISERS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-71128) pertaining to the Defined Contribution 401(k) Retirement Plan of CTA INCORPORATED and in the related prospectus of our report dated February 28, 1998, with respect to the fair market value of minority holdings of Common Stock of CTA INCORPORATED as of December 31, 1997 included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/Legg Mason Wood Walker, Inc. Baltimore, MD March 26, 1998 F-30 REPORT OF LEGG MASON WOOD WALKER, INC., INDEPENDENT APPRAISERS Board of Directors CTA INCORPORATED 6116 Executive Boulevard Suite 800 Rockville, Maryland 20852 Members of the Board: You have requested our opinion (the "Opinion") as to the fair market value of minority holdings of Common Stock of CTA INCORPORATED ("CTA" or the "Company") as of December 31, 1997. We understand that the Company intends to use the Opinion for the purpose of contributing common stock to an employee stock plan. In rendering our Opinion we have, among other things: (i) reviewed the audited financial statements of CTA for each of the five years ended December 31, 1993 through December 31, 1997; (ii) reviewed certain other information relating to the business, earnings, cash flow, assets and prospects of the Company; (iii)reviewed contract backlog data and contract profiles prepared by management; (iv) reviewed certain data regarding the financial performance and market valuation of selected public companies we deemed to be engaged in operations similar to those of CTA; (v) reviewed data relating to recent merger and acquisition activity in relevant industry classifications; and (vi) met with senior management of CTA to discuss the operating performance and future prospects of the Company. We have relied without independent verification on information supplied to us by CTA and its employees, representatives and independent public accountants as well as information available from generally recognized public sources F-31 and, accordingly, do not assume responsibility for the accuracy or completeness of such information. Additionally, we have not made an appraisal of any assets of CTA. Our Opinion herein is necessarily based upon conditions and circumstances as they exist, have been disclosed to us and can be evaluated as of the date hereof. In recommending a 17.5% Discount Factor for the minority holdings of CTA Common Stock we note that while there is no active trading market for the Common Stock, there have been limited treasury stock purchases by the Company, its Employee Stock Option Plan and employees of CTA. Based upon our analysis of the foregoing and upon such other data as we have considered relevant to our analysis, it is our Opinion that the fair market value of minority holdings of CTA Common Stock falls in a range of $4.29 per share to $5.82 per share as of December 31, 1997, with an expected value of $5.05 per share. It should be noted that this valuation reflects the 2 for 1 Common Stock split that became effective February 2, 1998. Very truly yours, LEGG MASON WOOD WALKER, INCORPORATED Baltimore, MD February 28, 1998 By:/S/SCOTT R. COUSINO Scott R. Cousino Managing Director F-32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CTA INCORPORATED Date: March 31, 1998 By:/S/ C.E. VELEZ C.E. Velez Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By:/S/ C.E. VELEZ C.E. Velez Chairman of the Board, President, Chief Executive Officer and Director Date: March 31, 1998 By:/S/ GREGORY H. WAGNER Gregory H. Wagner Executive Vice President, Chief Financial Officer, Principal Accounting Officer and Treasurer Date: March 31, 1998 By:/S/ HARVEY D. KUSHNER Harvey D. Kushner Director Date: March 31, 1998 By:/S/ DAVID R. MACKIE David R. Mackie Director Date: March 31, 1998 By:/S/ RAYMOND V. MCMILLAN Raymond V. McMillan Director Date: March 31, 1998 By:/S/ GEORGE W. MORGANTHALER George W. Morganthaler Director Date: March 31, 1998 By:/S/ JAMES M. PAPADA, III James M. Papada, III Director Date: March 31, 1998 By:/S/ ARTURO SILVESTRINI Arturo Silvestrini Director Date: March 31, 1998 By:/S/ GREGORY H. WAGNER Gregory H. Wagner As Attorney-in-Fact Date: March 31, 1998 EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR THE 1997 10-K
5 1000 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 JAN-01-1997 JAN-01-1996 JAN-01-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 0 16 235 0 0 0 36768 33773 61286 3468 3108 2700 0 0 0 38098 70392 72301 11110 11795 21301 8066 8888 14517 45288 83457 91530 25510 47154 45326 0 0 0 100 100 100 0 0 0 0 0 0 15710 17693 28673 45288 83457 91530 92239 96246 105224 92239 96246 105224 80503 87644 96633 80503 87644 96633 11317 7878 3825 0 0 0 1589 724 850 (1170) (245) 3916 (500) ( 80) 1567 (670) (165) 2349 648 (10872) (403) 0 0 0 0 0 0 (22) (11037) 1946 0 (1.24) .22 0 (1.24) .01
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