<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997
REGISTRATION NO. 333-37179
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONDOR TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 54-1814931
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1650 TYSONS BOULEVARD, SUITE 600
MCLEAN, VIRGINIA 22102
(703) 847-3290
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
KENNARD F. HILL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONDOR TECHNOLOGY SOLUTIONS, INC.
1650 TYSONS BOULEVARD, SUITE 600
MCLEAN, VIRGINIA 22102
(703) 847-3290
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
CHRISTOPHER T. JENSEN, ESQ. DOUGLAS R. NEWKIRK, ESQ.
Morgan, Lewis & Bockius LLP Sachnoff & Weaver, Ltd.
101 Park Avenue 30 S. Wacker Drive, 29th Floor
New York, New York 10178 Chicago, Illinois 60606-7484
(212) 309-6000 (312) 207-1000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1997
5,900,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the 5,900,000 shares of Common Stock offered hereby are being sold by
Condor Technology Solutions, Inc. (the "Company"). Prior to this Offering, there
has been no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between $13.00 and
$15.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for listing on The Nasdaq National Market under the symbol
"CNDR," subject to official notice of issuance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total (3)................................................ $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $4,900,000.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 885,000 additional shares of Common Stock on the same terms and
conditions set forth above solely to cover over-allotments, if any. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the certificates for the shares of Common Stock will be available for delivery
at the offices of Volpe Brown Whelan & Company, LLC, One Maritime Plaza, 11th
Floor, San Francisco, California, on or about , 1997.
VOLPE BROWN WHELAN & COMPANY FURMAN SELZ
The date of this Prospectus is , 1997
<PAGE>
[PICTURES OF IT SERVICE PROFESSIONALS PERFORMING CONSULTING
SERVICES, SYSTEM SERVICES AND DESKTOP SERVICES]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
------------------------
The Company owns or otherwise has rights to trademarks and trade names that
it uses in conjunction with the sale and licensing of its products. The Safari
InfoTools-TM- trademark mentioned in this Prospectus is owned by the Company.
All other trademarks or trade names referred to in this Prospectus are the
property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. SIMULTANEOUSLY WITH AND AS
A CONDITION TO THE CLOSING OF THIS OFFERING, CONDOR TECHNOLOGY SOLUTIONS, INC.
WILL ACQUIRE, IN SEPARATE TRANSACTIONS (THE "MERGERS") IN EXCHANGE FOR CASH AND
SHARES OF ITS COMMON STOCK, PAR VALUE $.01 PER SHARE (THE "COMMON STOCK"), EIGHT
INFORMATION TECHNOLOGY ("IT") SERVICE COMPANIES (EACH, A "FOUNDING COMPANY" AND,
COLLECTIVELY, THE "FOUNDING COMPANIES"). UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE "COMPANY" HEREIN INCLUDE CONDOR TECHNOLOGY SOLUTIONS, INC. AND
THE FOUNDING COMPANIES, AND REFERENCES HEREIN TO "CONDOR" MEAN CONDOR TECHNOLOGY
SOLUTIONS, INC. PRIOR TO THE CLOSING OF THE MERGERS. FOR MORE INFORMATION ABOUT
THE MERGERS, SEE "CERTAIN TRANSACTIONS."
UNLESS OTHERWISE INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION
IN THIS PROSPECTUS: (I) HAS BEEN ADJUSTED TO GIVE EFFECT TO THE MERGERS; (II)
ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $14.00 PER SHARE; (III) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND (IV) GIVES EFFECT TO A
ONE-FOR-5.26227 REVERSE STOCK SPLIT TO BE EFFECTIVE ON THE DAY IMMEDIATELY
PRECEDING THE DATE OF THIS PROSPECTUS. EXCEPT AS INDICATED OTHERWISE, ALL
REFERENCES TO THE COMMON STOCK ALSO INCLUDE THE RESTRICTED COMMON STOCK, PAR
VALUE $.01 PER SHARE (THE "RESTRICTED COMMON STOCK"), OF THE COMPANY. SEE
"DESCRIPTION OF CAPITAL STOCK."
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE FOLLOWING SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Condor was established to create a leading provider of IT services and
solutions to companies with revenues ranging from $100 million to $1 billion,
divisions of larger companies and governmental entities (collectively, 'middle
market organizations'). In order to provide a single-source IT solution, the
Company has entered into agreements (the "Merger Agreements") to acquire,
simultaneously with and as a condition to the closing of this Offering, eight
established IT service providers. The Founding Companies are (i) Management
Support Technology Corp. ("MST"); (ii) Computer Hardware Maintenance Company,
Inc. ("CHMC"); (iii) Federal Computer Corporation ("Federal"); (iv) Corporate
Access, Inc. ("Corporate Access"); (v) Interactive Software Systems Incorporated
("ISSI"); (vi) U.S. Communications, Inc. ("USComm"); (vii) InVenture Group, Inc.
("InVenture"); and (viii) MIS Technologies, Inc. ("MIS"). The Founding Companies
provide a comprehensive range of IT services, including strategic planning and
management consulting; strategic marketing communications; development,
integration and installation of IT systems; contract staffing and recruiting;
training and continuing education; desktop systems maintenance and support; and
procurement. The Founding Companies, on a pro forma combined basis, had net
revenues of approximately $103.2 million for the year ended December 31, 1996
and approximately $105.7 million for the nine months ended September 30, 1997.
The Company will focus on marketing its comprehensive IT offerings to middle
market organizations, which typically spend from $2 million to $30 million
annually on their IT needs. The IT service industry has
evolved into a highly fragmented environment with a small number of large,
national service providers and a large number of small- and medium-sized service
providers, usually only regional in scope. Large IT service providers typically
address the IT needs of large organizations with substantial IT requirements for
a wide range of services, whereas smaller IT service firms provide specialized
services of limited scope. Consequently, middle market organizations rely on
multiple, often specialized, smaller IT service providers
3
<PAGE>
to help implement and manage their systems. The Company believes that a
single-source IT service provider will help middle market organizations reduce
cost and management complexity and increase the quality and compatibility of IT
solutions.
The Company will seek to deliver comprehensive IT offerings to the financial
services, healthcare, technology and governmental markets. These markets are
typically characterized by (i) reliance on legacy systems; (ii) platform
migration to client/server architectures; (iii) changing competitive dynamics,
such as globalization and deregulation; and (iv) heavy dependency on database
and proprietary applications. The Company believes that middle market
organizations in these markets have been underserved by large IT vendors which,
due to economic and high cost structures, cannot address the requirements of the
middle market adequately. The Company intends to market its services through
each of the sales forces at the Founding Companies as well as through the
Company's corporate sales force. This approach will allow the Company to market
its services independently or in combination to provide a solution to a client's
specific IT needs.
As part of its strategy, the Company intends to leverage its high-level
planning and strategic consulting services to foster long-term relationships
with clients and to implement technology strategies in order to achieve the
clients' desired IT solutions. The Company also believes it can increase its
revenues from existing clients by cross-selling its services and securing
full-service contracts to a larger group of potential clients. In addition, by
focusing on recruiting, training and retaining highly skilled IT professionals,
the Company can effectively respond to the shortage of and significant
competition for such professionals.
Another key element of the Company's strategy is the expansion of service
offerings and the addition of new businesses in order to offer new and existing
clients access to a more complete range of services. The Company also will
operate with a decentralized management structure to provide superior client
service and a motivating environment for its various subsidiaries, and will seek
to acquire IT service companies to strengthen its core competencies, to offer
complementary services and to facilitate its expansion into new geographic
areas.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 5,900,000 shares
Common Stock to be outstanding after this
Offering...................................... 10,100,000 shares (1)
Use of proceeds................................. To pay the cash portion of the purchase
price for the Founding Companies, to
repay expenses incurred in connection
with the Mergers and this Offering and
for working capital and other general
corporate purposes, including future
acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol................... CNDR
</TABLE>
- ------------------------
(1) Includes 2,153,355 shares of Common Stock to be issued in connection with
the Mergers (assuming an initial public offering price of $14.00 per share).
Excludes (x) up to an aggregate of 2,790,238 additional shares (assuming a
stock price of $14.00 per share at the time the additional shares are
issued) that may be issued in connection with the Mergers of six Founding
Companies pursuant to certain earn-out provisions if such Founding Companies
achieve specified earnings thresholds; and (y) 912,163 shares of Common
Stock issuable upon exercise of options to be granted by the Company in
connection with the Mergers and this Offering. See "Management--1997
Long-Term Incentive Plan," "Certain Transactions--Organization of the
Company," "Description of Capital Stock" and "Shares Eligible for Future
Sale."
------------------------
4
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Condor will acquire the Founding Companies simultaneously with and as a
condition to the closing of this Offering. In July 1996, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 97 ("SAB 97") relating
to business combinations immediately prior to an initial public offering. SAB 97
requires that these combinations be accounted for using the purchase method of
accounting. In accordance with SAB 97, MST has been identified as the
"accounting acquiror" for financial statement presentation purposes. The pro
forma combined table below presents unaudited pro forma combined financial data
for the Company that give effect to the completion of the Mergers and certain
pro forma adjustments to the historical financial statements described below and
as adjusted to reflect the closing of this Offering and the application of the
net proceeds therefrom. The summary pro forma combined financial data are not
necessarily indicative of operating results or financial position that would
have been achieved had the events described above been consummated during the
periods presented and should not be construed as representative of future
operating results or financial position of the Company. See "Selected Financial
Data," the Unaudited Pro Forma Combined Financial Statements and the related
Notes thereto and the Founding Companies' Historical Financial Statements and
the related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
---------------------------------------------
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED --------------------------
DECEMBER 31, 1996 1996 1997
----------------- ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
STATEMENT OF OPERATIONS DATA (1):
Revenues........................................................... $ 103,202 $ 73,627 $ 105,723
Gross profit....................................................... 26,818 19,546 25,572
Selling, general and administrative expenses (2)................... 19,063 13,177 16,291
Goodwill amortization (3).......................................... 1,396 1,047 1,047
Income from operations............................................. 6,359 5,322 8,234
Interest and other income, net..................................... 1,119 763 631
Income before income taxes......................................... 7,478 6,085 8,865
Net income (4)..................................................... $ 3,824 $ 3,195 $ 4,853
Net income per share............................................... $ 0.47 $ 0.39 $ 0.59
Shares used in computing pro forma net income
per share (5).................................................... 8,171,043 8,171,043 8,171,043
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
<S> <C> <C>
AS
PRO FORMA ADJUSTED
COMBINED (6) (7)
------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 4,343 $ 27,856
Working capital................................................................. (38,911)(8) 32,799
Total assets.................................................................... 76,449 98,723
Long-term debt, net of current maturities....................................... 96 96
Stockholders' equity............................................................ 4,253 75,963
</TABLE>
- ------------------------
(1) The pro forma combined statement of operations data assume that the Mergers
and this Offering were consummated on January 1, 1996.
(2) The pro forma combined statement of operations data reflect pro forma
reductions in salaries, bonuses and benefits to the stockholders and
management of the Founding Companies that have been
5
<PAGE>
agreed to prospectively (the "Compensation Differential"). The Compensation
Differential amounted to approximately $1,896,000, $1,422,000 and $3,091,000
for the year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997, respectively.
(3) Consists of amortization of $42,740,000 of identifiable intangibles and
goodwill to be recorded as a result of the Mergers over a seven to 35-year
period and computed on the basis described in the Notes to the Unaudited Pro
Forma Combined Financial Statements.
(4) Assumes all income is subject to an effective corporate income tax rate of
40% and all goodwill is not tax-deductible.
(5) Includes (i) 2,153,355 shares to be issued to the stockholders of the
Founding Companies; (ii) 2,046,645 shares issued to founders, consultants
and management of Condor; and (iii) 3,971,043 of the 5,900,000 shares sold
in this Offering necessary to pay the cash portion of the Merger
consideration, S corporation distributions, underwriting discounts and
commissions and estimated expenses of this Offering.
(6) The pro forma combined and as adjusted balance sheet data assume that the
Mergers were consummated on September 30, 1997.
(7) Adjusted to reflect the sale of the 5,900,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
(8) Includes $48,155,000 payable to the stockholders of the Founding Companies,
representing the cash portion of the Merger consideration to be paid from a
portion of the net proceeds of this Offering.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION. Condor was
founded in August 1996 to acquire the Founding Companies. Condor is a holding
company and has conducted no operations and generated no revenues to date.
Condor has entered into definitive agreements to acquire the Founding Companies
simultaneously with, and as a condition to, the closing of this Offering. The
Founding Companies have been operating as separate independent entities, and
there can be no assurance that Condor will be able to successfully integrate the
operations of these businesses or institute the necessary Company-wide systems
and procedures to successfully manage the combined enterprise on a profitable
basis. The Company's management group has been assembled only recently, and
there can be no assurance that the management group will be able to successfully
manage the combined entity or effectively implement the Company's internal
growth strategy and acquisition program. In this regard, the Company may need to
add members to its management group, but there is no assurance that the Company
will be able to attract and retain such additional members of management. The
pro forma financial results of the Company cover periods when the Founding
Companies and Condor were not under common control or management and, therefore,
may not be indicative of the operating results or financial position that would
have been achieved had Condor and the Founding Companies been under common
control and management during the periods covered by such pro forma financial
results and may not be indicative of the Company's future results of operations,
financial condition and business.
A number of the Founding Companies offer different services, utilize
different capabilities and technologies and target different geographic markets
and client segments. These differences increase the risk inherent in
successfully completing such integration. Further, there can be no assurance
that the Company's strategy to establish a single-source provider of IT services
will be successful, or that the Company's targeted clients will accept the
Company as a provider of such services. In addition, there can be no assurance
that the operating results of the Company will match or exceed the combined
individual operating results achieved by the Founding Companies prior to this
Offering. The inability of the Company to successfully integrate the Founding
Companies would have a material adverse effect on the Company's results of
operations, financial condition and business. See "The Company,"
"Business--Strategy" and "Management."
RISKS OF SUBSTANTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS. The
Company's revenues, gross profit, operating income and net income are likely to
vary in the future from quarter to quarter, perhaps substantially. Factors that
may affect this quarter-to-quarter variability include the short-term nature of
certain client commitments; patterns of capital spending by clients; loss of a
major client; seasonality that may accompany private or governmental sector
budget cycles; the timing, size and mix of service and product offerings; the
timing and size of significant software sales; the timing and size of new
projects; the timing and magnitude of required capital expenditures; pricing
changes in response to various competitive factors; market factors affecting the
availability of qualified technical personnel; timing and client acceptance of
new service offerings; changes in the trends affecting the outsourcing of IT
services; additional selling, general and administrative expenses to acquire and
support new business; increased levels of technological change in the industry;
and general economic conditions. The Company's operating results will be
affected by changes in technical personnel billing and utilization rates.
Technical personnel utilization rates may be adversely affected during periods
of rapid and concentrated hiring in anticipation of future revenues. Gross
margin may also be adversely affected if the Company is required to use contract
personnel rather than Company personnel to complete certain assignments.
Operating results may also be materially and adversely affected by the cost,
timing and other effects of acquisitions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
7
<PAGE>
DEPENDENCE ON AVAILABILITY, RECRUITMENT AND RETENTION OF TECHNICAL
PERSONNEL. The Company depends upon its ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet the
Company's own personnel needs and the staffing requirements of its clients.
Competition for individuals with proven technical skills is intense. In
addition, the IT industry in general experiences a high rate of attrition of
such personnel. The Company competes for such individuals with other systems
integrators, providers of outsourcing services, temporary personnel agencies,
computer systems consultants, clients and potential clients. Many large
competitors have recently announced extensive campaigns to hire additional
technical personnel. Competition for quality technical personnel has continued
to intensify, resulting in increased personnel costs for many IT service
providers. There can be no assurance the Company will be able to recruit or
retain the technical personnel necessary to execute its strategy. Failure to do
so would have a material adverse effect on the Company's results of operations,
financial condition and business. See "Business--Strategy."
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY. The Company
intends to grow through the acquisition of additional IT service companies. The
market for acquisitions of IT service companies is highly competitive. If
competition intensifies, there may be fewer acquisition opportunities available
to the Company as well as higher prices for acquisitions. There can be no
assurance that the Company will be able to identify, acquire on terms favorable
to the Company, profitably integrate and manage additional IT service companies
without substantial costs, delays or other operational or financial problems.
Failure to acquire and integrate such companies may adversely affect the
Company's ability to bid successfully on certain engagements and otherwise to
grow its business. Client dissatisfaction or performance problems at a single
acquired company could have an adverse effect on the reputation of the Company
as a whole, resulting in increased difficulty in marketing services or acquiring
companies in the future. In addition, there can be no assurance that the
Founding Companies or other IT service companies acquired in the future will
operate profitably. Acquisitions involve a number of additional risks, including
diversion of management's attention, failure to retain key acquired clients or
personnel, risks associated with unanticipated events or liabilities and
amortization of goodwill and acquired intangible assets, some or all of which
could have a material adverse effect on the Company's results of operations,
financial condition and business. See "Business--Strategy."
RISKS ASSOCIATED WITH THE MANAGEMENT OF GROWTH. The Company expects to
expend significant time and effort to attempt to expand its existing businesses
and to acquire additional IT service companies. There can be no assurance that
the Company's systems, procedures, controls and management resources will be
adequate to support the Company's future operations. Any future growth also will
impose significant added responsibilities on members of senior management,
including the need to identify, recruit and integrate new senior level managers
and executives. There can be no assurance that such additional management will
be identified and retained by the Company. To the extent that the Company is
unable to manage its growth efficiently and effectively, or is unable to attract
and retain additional qualified management, the Company's results of operations,
financial condition and business could be materially and adversely affected. See
"Business--Strategy" and "Management."
PROJECT RISKS. The nature of the Company's engagements exposes the Company
to a variety of risks. Many of the Company's engagements involve projects that
are critical to the operations of its clients' businesses. The Company's failure
or inability to meet a client's expectations in the performance of its services
and in the timeframe required by such client could result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. Service providers, such as the Company, are in
the business of employing people and placing them in the workplace of other
businesses. Therefore, the Company is also exposed to liability with respect to
actions taken by its employees while on assignment, such as damages caused by
employee errors and omissions, misuse of client proprietary information,
misappropriation of funds, discrimination and harassment, theft of client
property, other criminal activity or torts and other claims. Although the
Company maintains general liability insurance coverage, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large claims, or
that the
8
<PAGE>
insurer will not disclaim coverage as to any future claim. The successful
assertion of one or more large claims against the Company that exceed available
insurance coverage or changes in the Company's insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on the Company's results of
operations, financial condition and business.
COMPETITION. The market for the Company's services is highly competitive.
The Company's competitors vary in size and in the scope of the products and
services that they offer. Primary competitors generally include consulting and
systems implementation firms, "Big Six" accounting firms, applications
development firms, service groups of computer equipment companies, general
management consulting firms, programming companies, temporary staffing firms and
other IT service providers. Traditionally, the largest service providers have
principally focused on providing full-service solutions to international Fortune
500 companies. There is an emerging group of smaller service companies (in terms
of market share and scope and size of contracts) that are exploring
opportunities in broader markets, including Cambridge Technology Partners, Perot
Systems Corporation, The Registry and Technology Solutions Corp.
There are relatively low barriers to entry into the Company's markets, and
the Company expects to face competition from established and emerging companies.
Increased competition may result in greater pricing pressure, which could
adversely affect the Company's gross margins. In addition, many of the Company's
competitors have greater financial, development, technical, marketing and sales
resources than the Company. As a result, the Company's competitors may be able
to adapt more quickly to new or emerging technologies and to changes in client
requirements or to devote greater resources than the Company to the development,
promotion, sale and support of IT products and services. In addition, there is a
risk that clients may elect to increase their internal IT resources to satisfy
their IT solutions needs. The Company also intends to enter new markets and
offer new services, and expects to face intense competition from existing and
new competitors, particularly since barriers of entry in the IT service industry
are relatively low. There can be no assurance that the Company will continue to
provide IT services and products demanded by the market or be able to compete
successfully with existing or new competitors. An inability to compete in its
market effectively would have a material adverse effect on the Company's results
of operations, financial condition and business. See "Business--Competition."
DEPENDENCE ON CONTINUED AUTHORIZATION TO RESELL AND PROVIDE
MANUFACTURER-AUTHORIZED SERVICES. The Company's future success with IT service
offerings and product sales depends in part on its continued authorization as a
service provider and its continued status as a certified reseller of certain
hardware and software products. Without such sales and service authorizations,
the Company would be unable to provide the range of services and products
currently offered by the Company. In general, the agreements between the Company
and such manufacturers include termination provisions, some of which are
immediate. There can be no assurance that such manufacturers will continue to
authorize the Company as an approved reseller or service provider, and the loss
of one or more of such authorizations could have a material adverse effect on
the Company's results of operations, financial condition and business.
DEPENDENCE ON SUPPLIERS. Although the Company has not experienced
significant problems with its suppliers of hardware, software and peripherals,
there can be no assurance that such relationships will continue or that, in the
event of a termination of its relationships with any given supplier, it would be
able to obtain alternative sources of supply without a material disruption in
the Company's ability to provide products and services to its clients.
Furthermore, as is typical in the industry, the Company receives credits or
allowances from many manufacturers for market development which are used to
offset a portion of the Company's cost of products sold. Changes in the
availability, structure or timing of these credits or allowances or any material
disruption in the Company's supply of products could have a material adverse
effect on the Company's results of operations, financial condition and business.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS. The IT service
industry is characterized by rapid technological change, evolving industry
standards, changing client preferences and new product and service
introductions. The Company's success will depend in part on its ability to
develop IT solutions
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that keep pace with continuing changes in the IT service industry. There can be
no assurance that the Company will be successful in adequately addressing these
developments on a timely basis or that, if these developments are addressed, the
Company will be successful in the marketplace. In addition, there can be no
assurance that products or technologies developed by others will not render the
Company's services non-competitive or obsolete. The Company's failure to address
these developments could have a material adverse effect on the Company's results
of operations, financial condition and business. See "Business-- Services."
NEED FOR ADDITIONAL FINANCING. The Company intends to finance future
acquisitions and contingent purchase prices for the acquisition of the Founding
Companies in part by using shares of its Common Stock. In the event that its
Common Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to utilize more of its cash resources, if available, in order to pursue its
acquisition program and to pay the contingent purchase prices for the
acquisition of the Founding Companies. If the Company does not have sufficient
cash resources, its growth could be limited unless it is able to obtain
additional capital through debt or equity financings. The Company has obtained a
commitment from a major commercial bank, subject to a diligence review, for a
$30.0 million line of credit. There can be no assurance that the Company will be
able to obtain such line of credit or any other financing it will need on terms
it deems acceptable. If the Company's financial resources are inadequate to
support its acquisition activities, the Company's future operating results could
be materially and adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-- Pro Forma Combined Liquidity
and Capital Resources."
In addition, most of the Company's project-based contracts are terminable by
the client with limited advance notice, typically not more than 60 days, and
without significant penalty (generally limited to fees earned and expenses
incurred by the Company through the date of termination). The cancellation or
significant reduction in the scope of a large project could have a material
adverse effect on the Company's results of operations, financial condition and
business. Although the Company's principal method of billing a project is on a
time and materials basis, the Company also undertakes projects billed on a
fixed-bid basis. The failure of the Company to complete a fixed-bid project
within budget would expose the Company to risks associated with cost overruns,
which could have a material adverse effect on the Company's results of
operations, financial condition and business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Introduction" and
"Business--Services."
DEPENDENCE ON KEY PERSONNEL. The Company's operations are dependent on the
continued efforts of its executive officers and the senior management of the
Founding Companies, in particular Kennard F. Hill and Daniel J. Roche.
Furthermore, the Company will likely be dependent on the senior management of
any businesses acquired in the future. If any of these persons becomes unable to
continue in his or her role with the Company, or if the Company is unable to
attract and retain other qualified employees, the Company's results of
operations, financial condition and business could be adversely affected.
Although each of the executive officers of the Company and individual Founding
Companies will enter into an employment agreement with the Company or a Founding
Company, which will include confidentiality and non-compete provisions, there
can be no assurance that any individual will continue in his or her present
capacity with the Company or such Founding Company for any particular period of
time. The Company intends to obtain an insurance policy on the life of Kennard
F. Hill. The Company does not presently maintain key person life insurance on
any of its executive officers. See "Management."
RISKS OF FEDERAL GOVERNMENT BUSINESS AND CONTRACTING. Approximately 25% of
the Company's pro forma combined revenues for the nine months ended September
30, 1997 was derived from business with the federal government. Changes in the
federal budget could have an adverse effect on the availability and timing of
government funding for IT programs. The Company's federal government contracts
can generally be canceled, delayed or modified at the sole option of the
government. The Company believes that any future federal government contracts
will be structured similarly. In addition, under the terms of
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future federal government contracts, if any, the federal government may be in a
position to obtain greater rights with respect to the Company's intellectual
property than the Company would grant to other entities. As a result of engaging
in the federal government contracting business, the Company has been and will be
subject to audits, and may be subject to investigation, by governmental
entities. The failure by the Company to comply with the terms of any of its
government contracts could result in substantial civil and criminal fines and
penalties or the Company's suspension or debarment from future government
contracts for a significant period of time. The fines and penalties that could
result from noncompliance with appropriate standards and regulations, or the
Company's suspension or debarment, could have a material adverse effect on the
Company's results of operations, financial condition and business.
INTELLECTUAL PROPERTY RIGHTS. The Company derives a portion of its net
revenues from the licensing to third parties of software that it owns. The
Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights in its software. The Company typically enters into
confidentiality agreements with its employees and limits distribution of
proprietary information. The Company's standard licensing agreement contains
nondisclosure provisions. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of its
software or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO FOUNDING COMPANY
STOCKHOLDERS. In connection with this Offering and the Mergers, the
stockholders of the Founding Companies will receive an aggregate of 2,153,355
shares (which number will increase or decrease to the extent the initial public
offering price differs from $14.00 per share) and $48.2 million in cash, or
approximately 67.0% of the net proceeds of this Offering. Net proceeds available
for working capital and other uses by the Company will be approximately $23.5
million, or 32.7% of the net proceeds of this Offering (approximately $35.0
million, or 42.0% of the net proceeds of this Offering, if the Underwriters'
over-allotment is exercised in full). See "Use of Proceeds" and "Certain
Transactions."
BENEFITS TO INSIDERS. In connection with the Merger of MST into the
Company, C. Lawrence Meador, who will be an executive officer, director and
holder of more than 5% of the outstanding shares of Common Stock of the Company
upon the closing of this Offering, will receive 560,714 shares of Common Stock
and approximately $9.8 million in cash.
Prior to this Offering, SCM LLC d/b/a The Commonwealth Group
("Commonwealth"), owned 1,310,271 shares of Common Stock of the Company, which
it distributed to its members, Mr. Coleman, James J. Martell, Jr. and Charles F.
Smith, in November 1997. As of the closing of this Offering, such persons will
own beneficially in the aggregate approximately 13.0% of the Company's Common
Stock. Assuming an initial public offering price of $14.00 per share, the
aggregate market value of the shares of Common Stock owned beneficially by
Messrs. Coleman, Martell and Smith as of the closing of this Offering would be
approximately $18.3 million. Such persons acquired such shares in return for
financial advisory, consulting and related services valued at $75,000 in the
aggregate. See "Principal Stockholders."
A portion of the net proceeds of this Offering will be used to repay
indebtedness of the Company to Commonwealth. As of September 30, 1997, such
indebtedness was approximately $1.0 million, and the Company expects such
advances will aggregate approximately $2.2 million as of the closing of this
Offering. See "Use of Proceeds" and "Certain Transactions."
Pursuant to employment agreements, C. Lawrence Meador, Kennard F. Hill,
Daniel J. Roche, Santanu Sarkar and William J. Caragol, Jr., who will be the
executive officers of the Company upon the closing of this Offering, will
receive annual base salaries of $431,815, $300,000, $220,000, $150,000 and
$110,000, respectively, and potential annual bonuses. In addition, in connection
with this Offering, Messrs. Hill, Roche, Sarkar and Caragol purchased 190,032,
152,025, 66,511 and 9,502 shares of Common Stock of the Company, respectively,
for consideration equal to the par value per share. See "Management-- Executive
Compensation; Employment Agreements" and "Principal Stockholders."
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Messrs. Meador, Hill, Roche, Sarkar and Caragol will each be eligible to
participate in the Company's 1997 Long-Term Incentive Plan, which was amended in
November 1997, which provides for, among other things, the award of options to
purchase shares of Common Stock. Such option awards may take the form of
incentive stock options (which must be granted at an exercise price not less
than the fair market value per share of Common Stock on the date of grant) or
non-qualified stock options (which may, but need not, be granted at an exercise
price less than the fair market value per share of Common Stock on the date of
grant). Messrs. Hill, Roche, Sarkar and Caragol will receive grants of
non-qualified stock options to purchase 100,000, 75,000, 50,000 and 37,500
shares of Common Stock, respectively, at an exercise price equal to the initial
public offering price per share. See "Management--1997 Long-Term Incentive
Plan."
Each non-employee director of the Company is to receive an annual retainer
fee of $5,000 and, pursuant to the 1997 Long-Term Incentive Plan, automatic
initial and annual grants of stock options. Each person serving or who has
agreed to serve as a non-employee director at the commencement of this Offering
will be granted automatically an initial option to purchase 10,000 shares of
Common Stock, and thereafter each person who becomes a non-employee director
will be granted automatically an initial option to purchase 10,000 shares of
Common Stock upon such person's initial election to the Board of Directors. In
addition, each such non-employee director will be granted, subject to a certain
exception, an automatic annual grant of options to purchase 5,000 shares. Each
such option will have an exercise price equal to the fair market value per share
of Common Stock on the date of grant. J. Marshall Coleman, Edward J. Mathias,
Peter Garahan and William M. Newport will each receive such initial grants on
the Effective Date. See "Management--Director Compensation."
CONSIDERATION FOR FOUNDING COMPANIES MAY EXCEED ASSET VALUE; AMORTIZATION
CHARGES. The purchase price of the Founding Companies was not established by
independent appraisals, but generally through arms'-length negotiations between
Condor management and representatives of these companies. The consideration paid
for each company was based primarily on the value of such company as a going
concern and not on the value of the acquired assets. Valuations of these
companies determined solely by appraisals of the acquired assets would likely be
less than the consideration that is being paid for these companies. The future
performance of such companies may not be commensurate with the consideration
paid.
The Company expects to incur significant amortization charges resulting from
the consideration paid in excess of the fair value of the net assets
("goodwill") of the companies acquired in business combinations accounted for
under the purchase method of accounting. The Company will be required to
amortize the goodwill from acquisitions accounted for under the purchase method
over a period of time, with the amount amortized in a particular period
constituting an expense that reduces the Company's net income for that period.
The amount amortized, however, will not give rise to a deduction for tax
purposes. The Company expects to record $42.7 million of goodwill and other
intangibles in connection with the acquisition of the Founding Companies, $1.9
million of which will be amortized during the Company's fiscal year ended
December 31, 1998. See Note 2 of the Unaudited Pro Forma Combined Financial
Statements of the Company. If the Company makes additional acquisitions, the
Company's amortization charges, however, could be substantially greater than the
amount of amortization charges expected to be incurred by it. A reduction in net
income resulting from amortization charges may have a material and adverse
impact upon the market price of the Company's Common Stock.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK. The market price of the Common Stock may be adversely affected by the
sale, or availability for sale, of substantial amounts of the Common Stock in
the public market following this Offering. The 5,900,000 shares being sold in
this Offering will be freely tradable unless held by affiliates of the Company.
Upon completion of this Offering, the holders of Common Stock who did not
purchase shares in this Offering will own 4,200,000 shares of Common Stock,
including (i) the stockholders of the Founding Companies, who will receive, in
the aggregate, 2,153,355 shares of Common Stock (assuming a $14.00 initial
public offering price) as a portion of the consideration for the sale of their
businesses to Condor; and (ii) founders, consultants and management of Condor,
who will own 2,046,645 shares. These shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and, therefore, may
not be sold unless
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registered under the Securities Act or sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144. The Company's
executive officers and directors and existing stockholders have agreed not to
offer, sell, contract to sell, make any short sale or otherwise dispose of any
shares of Common Stock, options to acquire shares of Common Stock or securities
convertible into or exchangeable for, or any rights to purchase or acquire,
shares of Common Stock during the one-year period following the date of this
Prospectus, without the prior written consent of Volpe Brown Whelan & Company,
LLC. The Company also has agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for, or any rights to purchase or acquire, any shares of
Common Stock during the one-year period following the date of this Prospectus
without the prior written consent of Volpe Brown Whelan & Company, LLC, except
for the granting of options pursuant to the Plan or the issuance of shares of
Common Stock upon the exercise of outstanding options, in connection with
acquisitions or in connection with any conversion of the Restricted Common
Stock. Volpe Brown Whelan & Company, LLC, in its discretion, may waive the
foregoing restrictions in whole or in part, with or without a public
announcement of such action. The Company has agreed to provide piggyback
registration rights with respect to the Common Stock issued to the Founding
Companies and existing Company stockholders. The Company plans to register an
additional 5,000,000 shares of its Common Stock under the Securities Act within
90 days after the closing of this Offering for use by the Company as
consideration for future acquisitions. Upon such registration, these shares
generally will be freely tradable after issuance, unless the resale thereof is
contractually restricted or unless the holders thereof are subject to the
restrictions on resale provided in Rule 145 under the Securities Act. The
piggyback registration rights described above will not apply to the registration
statement to be filed with respect to these 5,000,000 shares. See "Shares
Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
Offering, there has been no public market for the Common Stock and there can be
no assurance that an active trading market will develop and continue subsequent
to this Offering or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price for
the Common Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters and may bear no relationship to the price at
which the Common Stock will trade after this Offering. See "Underwriting" for
the factors to be considered in determining the initial public offering price.
Application has been made to have the Common Stock quoted on the Nasdaq National
Market. After this Offering, the market price of the Common Stock may be subject
to significant fluctuations in response to numerous factors, including
variations in the annual or quarterly financial results of the Company or its
competitors, timing of announcements of acquisitions by the Company or its
competitors, changes by financial research analysts in their recommendations or
estimates of the earnings of the Company, conditions in the economy in general
or in the IT service sectors in particular, announcements of technological
innovations or new products or services by the Company or its competitors,
proprietary rights development, unfavorable publicity or changes in applicable
laws and regulations (or judicial or administrative interpretations thereof)
affecting the Company or IT service sectors. Moreover, from time to time, the
stock market experiences significant price and volume volatility that may affect
the market price of the Common Stock for reasons unrelated to the Company's
performance.
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
pro forma combined net tangible book value of their shares of $10.71 per share
(assuming a $14.00 initial public offering price). In the event the Company
issues additional Common Stock in the future, including shares issued in
connection with future acquisitions or pursuant to the earn-out provisions of
the Merger Agreements, purchasers of Common Stock in this Offering may
experience further dilution. See "Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS. The
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the Board of Directors of the Company to issue
preferred stock in one or more series without stockholder action. The existence
of this "blank-check" preferred stock could render more difficult or discourage
an attempt to
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obtain control of the Company by means of a tender offer, merger, proxy contest
or otherwise. In addition, the Certificate of Incorporation provides for a
classified Board of Directors, which may also have the effect of inhibiting or
delaying a change in control of the Company. Certain provisions of the Delaware
General Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. The Company's By-Laws contain other
provisions that may have an anti-takeover effect. See "Management--Board
Classification" and "Description of Capital Stock."
UNALLOCATED NET PROCEEDS. A portion of the anticipated net proceeds of this
Offering has not been designated for specific uses. Therefore, the Board of
Directors of the Company will have broad discretion with respect to the use of
the undesignated net proceeds of this Offering. See "Use of Proceeds."
ABSENCE OF DIVIDENDS. The Company intends to retain future net income, if
any, to fund internal growth and to help fund future acquisitions and,
therefore, does not anticipate paying any dividends on its Common Stock in the
foreseeable future. See "Dividend Policy."
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THE COMPANY
The Company was established to create a leading single-source IT service
company that provides strategic IT business solutions to middle market
organizations. In order to become a single-source provider of a wide range of IT
services and solutions, Condor has entered into the Merger Agreements to
acquire, simultaneously with and as a condition to the closing of this Offering,
the eight businesses described below. The Founding Companies will become
wholly-owned subsidiaries of the Company. These businesses provide a broad range
of IT services, including strategic planning and management consulting;
strategic marketing communications; development, integration and installation of
IT systems; contract staffing and recruiting; training and continuing education;
desktop systems maintenance and support; and procurement. The Company believes
the breadth of IT services provided by these eight businesses will result in
cross-selling opportunities and synergies, foster long-term client relationships
with middle market organizations and minimize the Company's dependence on any
single technology. The Founding Companies, on a pro forma combined basis, had
revenues of approximately $103.2 million for the year ended December 31, 1996
and approximately $105.7 million for the nine months ended September 30, 1997.
MANAGEMENT SUPPORT TECHNOLOGY CORP.--MST, a Delaware corporation founded in
1992, provides strategic IT management consulting, systems integration and
project management services to major U.S., European and Asia-Pacific companies
and governmental agencies. By utilizing corporate strategy and IT, MST helps
organizations improve their productivity and competitive position. Among the
services offered by MST are IT needs analysis, technology infra-structure
design, business process reengineering, designing strategic IT initiatives in
mission critical business processes, developing requirements for executive
information system and decision support applications and Year 2000 renovation.
Major clients include CIGNA Property & Casualty, Reinsurance Solutions
International, L.L.C., Hughes Aircraft and the U.S. Department of Defense. MST
had revenues of approximately $8.2 million and $5.5 million for the year ended
December 31, 1996 and for the nine months ended September 30, 1997,
respectively. MST had approximately 25 employees as of September 30, 1997 and is
headquartered in Framingham, Massachusetts, with an additional office in Seal
Beach, California.
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.--CHMC, a Pennsylvania
corporation founded in 1972, provides tailored, value-added computer technology
products and services to Fortune 1000 companies, educational institutions and
governmental agencies. CHMC's IT solutions include network design and support,
desktop systems and support, customized help-desk applications and support,
migration consulting and support services, project management services and asset
management services. CHMC maintains business alliances with original equipment
manufacturers ("OEMs") such as Microsoft, Novell, Inc. and IBM. Major clients
include Mack Truck and Aetna/U.S. Healthcare. CHMC had revenues of approximately
$44.7 million and $24.1 million for the year ended February 28, 1997 and for the
six months ended August 31, 1997, respectively. CHMC had approximately 230
employees as of September 30, 1997 and is headquartered in Langhorne,
Pennsylvania, with a sales and support network throughout the mid-atlantic
region.
FEDERAL COMPUTER CORPORATION--Federal, a Virginia corporation founded in
1982, provides computer products and services to governmental and commercial
entities. The IT services provided by Federal include integration,
implementation and support services, including network design and installation,
system upgrades and enhancements, hardware and software maintenance and on-site
technical support and relocation services. Federal maintains business alliances
with OEMs such as IBM and Hitachi. Significant clients include the U.S. Customs
Department, the U.S. Department of Justice and the U.S. Social Security
Administration. Federal had revenues of approximately $27.4 million and $31.1
million for the year ended October 31, 1996 and for the nine months ended July
31, 1997, respectively. Federal had approximately 43 employees as of September
30, 1997 and is headquartered in Falls Church, Virginia.
CORPORATE ACCESS, INC.--Corporate Access, a Massachusetts corporation
founded in 1986, offers hardware, software and peripheral products, along with
related configuration and installation services, to
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commercial clients and governmental entities in the Greater Boston metropolitan
area. Other IT services include network installation and services, system
management and custom applications. Major clients include PictureTel, Rockwell
Collins and Hewlett-Packard. Headquartered in Andover, Massachusetts, Corporate
Access had revenues of approximately $17.5 million and $4.7 million for the year
ended June 30, 1997 and for the three months ended September 30, 1997,
respectively. Corporate Access had approximately 25 employees as of September
30, 1997.
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED--ISSI, a Colorado corporation
founded in 1979, is a developer of end-user software solutions and tools for
information access, data management and report writing. ISSI's software products
enable users to manage information across virtually all databases (relational,
legacy and application proprietary), computing platforms and operating systems
in a three-tiered, client/ server environment. ISSI has developed a
comprehensive software solution through its Safari InfoTools suite that equips
users with complete, efficient access to any combination of data sources. ISSI
is expanding this product line by developing object visualization tools for the
next generation of applications. Major clients include AMD, Boeing, Motorola,
Pentastar, Citibank, Hughes and USDA. ISSI's products and services have been
provided to over 2,000 customers in 23 countries, representing 150,000
end-users. ISSI had revenues of approximately $9.0 million and $8.4 million, for
the year ended December 31, 1996 and for the nine months ended September 30,
1997, respectively. ISSI had approximately 94 employees as of September 30, 1997
and is headquartered in Denver, Colorado, with offices in California,
Massachusetts, The Netherlands and Germany.
U.S. COMMUNICATIONS, INC.--USComm, a Maryland corporation founded in 1994,
provides comprehensive IT training solutions and is a value-added reseller of
hardware and software products and services to mid-size companies and
governmental entities. USComm's training solutions include technical and
applications software training and Internet-based training programs. USComm's
training facility in Annapolis, Maryland is a Microsoft Authorized Technical
Education Center focused on Microsoft NT certification courses. Major clients
include the City of Baltimore, Maryland Environmental Services and Nationwide
Insurance. USComm had revenues of approximately $7.2 million and $6.0 million
for the year ended December 31, 1996 and for the nine months ended September 30,
1997, respectively. USComm had approximately 20 employees as of September 30,
1997 and is based in Annapolis, Maryland.
INVENTURE GROUP, INC.--InVenture, a Pennsylvania corporation founded in
1993, is a strategic marketing communications company that creates integrated
business plans, marketing strategies and brand development and promotion
strategies for IT service providers and resellers of IT products, as well as for
companies in other industries. InVenture's services also include Internet and
intranet development, direct mail and advertising and creating client
relationship programs. Major clients include XLSource, CIC Systems, Cisco, IBM
Software Spectrum and MicroAge. InVenture had revenues of approximately $5.4
million and $3.2 million for the year ended December 31, 1996 and for the nine
months ended September 30, 1997, respectively. InVenture had approximately 33
employees as of September 30, 1997 and is based in Pittsburgh, Pennsylvania.
MIS TECHNOLOGIES, INC.--MIS, an Oklahoma corporation founded in 1984, is a
recruiter of highly skilled IT consultants and professionals on both a permanent
and contract staffing basis. MIS, has access to a national database of
approximately 15,000 IT consultants and professionals and works with clients to
assess their management information systems and staffing needs. Major clients
include IBM Global Solutions, Express Personnel and Hertz. MIS had revenues of
approximately $2.6 million and $3.4 million for the year ended December 31, 1996
and for the nine months ended September 30, 1997. MIS had approximately 62
employees as of September 30, 1997, is headquartered in Tulsa, Oklahoma and has
six branches in the mid- and southwestern United States.
The aggregate consideration being paid by Condor to acquire the Founding
Companies is approximately $79.6 million, consisting of approximately $48.2
million in cash, 2,153,355 shares of Common Stock (based on an initial public
offering price of $14.00 per share) and the assumption of approximately $1.3
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million in outstanding indebtedness of the Founding Companies. In order to
maintain the dollar value of the stock consideration as of the closing of this
Offering, the total shares issuable in the Mergers will increase or decrease to
the extent the initial public offering price differs from $14.00 per share. In
addition, pursuant to earn-out arrangements with six of the Founding Companies,
an aggregate of 2,790,238 additional shares may be issued (assuming a stock
price of $14.00 per share at the time of such issuance; such number of shares to
increase or decrease to the extent that the fair market value of the Common
Stock at the time of issuance of such additional shares differs from $14.00 per
share), and approximately $18.8 million additional cash consideration may be
paid to stockholders of such Founding Companies if such companies achieve
specific earnings thresholds in specified periods following the closing of the
Mergers.
The closing of the Mergers is subject to customary conditions. These
conditions include, among others, the simultaneous closing of this Offering and
the transactions contemplated by the Merger Agreements; the accuracy on the
closing date of the Mergers of the representations and warranties made by the
Founding Companies, their principal stockholders and Condor; the performance of
each of the parties' respective covenants included in the Merger Agreements; the
nonexistence of a material adverse change in the results of operations,
financial condition or business of any of the Founding Companies; and the
execution of employment agreements between the principal executive officers of
each of the Founding Companies and the Company or such Founding Company. There
can be no assurance that the conditions to the closing of all the Mergers will
be satisfied or waived or that each Merger will close. If any of the Merger
Agreements is terminated for any reason, it is likely that the Company will not
close this Offering on the terms described herein.
For additional information regarding the employment agreement to be entered
into by the Company with one of the executive officers of the Founding
Companies, see "Management--Executive Compensation; Employment Agreements;
Covenants-Not-To-Compete." For a further description of the transactions
pursuant to which these businesses will be acquired, see "Certain
Transactions--Organization of the Company."
Condor Technology Solutions, Inc. is a Delaware corporation. Its executive
offices are located at 1650 Tysons Boulevard, Suite 600, McLean, Virginia 22102,
and the Company's telephone number at that address is (703) 847-3290.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,900,000 shares of
Common Stock offered hereby are estimated to be approximately $71.9 million
($83.4 million if the Underwriters' over-allotment option is exercised in full)
at an assumed initial public offering price of $14.00 per share, after deducting
underwriting discounts and commissions and estimated expenses of this Offering.
Of the net proceeds, approximately $48.2 million will be used to pay the
cash portion of the purchase price for the Founding Companies, of which
approximately $9.8 million will be paid directly to Mr. Meador, a stockholder of
a Founding Company who will become an officer, director and holder of more than
5% of the Common Stock of the Company. Additional cash may be used to pay
contingent purchase prices that may be earned over the next three years if the
applicable earnings thresholds of six of the Founding Companies are achieved.
See "Risk Factors--Need for Additional Financing" and "Certain
Transactions--Organization of the Company."
The approximately $23.5 million of remaining net proceeds will be used for
working capital and for general corporate purposes, including future
acquisitions. Pending such uses, the net proceeds will be invested in
short-term, interest-bearing, investment-grade securities.
In addition to the net proceeds of this Offering, the Company will have
approximately $5.6 million in cash and marketable securities on a pro forma
combined basis. The Company has obtained a commitment
17
<PAGE>
from a major commercial bank, subject to a diligence review, for a $30.0 million
line of credit to be used for working capital and other general corporate
purposes, including future acquisitions. There can be no assurance that such
line of credit will be obtained or that, if obtained, it will be on terms that
are favorable to the Company. See "Risk Factors--Need for Additional Financing"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Combined Liquidity and Capital Resources."
Commonwealth, a Virginia-based merchant banking firm, of which J. Marshall
Coleman, a director of the Company, is a Managing Director, has agreed to
advance to Condor such funds as are necessary to effect the Mergers and this
Offering. The members of Commonwealth are significant stockholders of the
Company. Commonwealth will be reimbursed for these advances out of the proceeds
of this Offering, together with interest on such advances at the prime rate.
Such advances aggregated approximately $1.0 million as of September 30, 1997,
and the Company expects such advances will aggregate approximately $2.2 million
as of the closing of this Offering. See "Certain Transactions--Organization of
the Company" and "Principal Stockholders."
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, in the event the Company is
successful in obtaining one or more lines of credit, it is likely that any such
facility will include restrictions on the ability of the Company to pay
dividends without the consent of the lender.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and current maturities of
long-term debt and the capitalization at September 30, 1997 of the Company (i)
on a pro forma combined basis to give effect to the Mergers; and (ii) as
adjusted to give effect to the Mergers, this Offering and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
"Selected Financial Data," "Use of Proceeds" and the Unaudited Pro Forma
Combined Financial Statements of the Company and the related Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------
PRO FORMA COMBINED AS ADJUSTED
--------------------- -----------
<S> <C> <C>
(IN THOUSANDS)
Short-term debt and current maturities of long-term debt....................... $ 1,183 $ 1,183
------ -----------
------ -----------
Long-term debt, less current maturities........................................ 96 96
------ -----------
Stockholders' equity:
Preferred Stock: $0.01 par value, 1,000,000 shares authorized; none issued
or outstanding........................................................... - -
Common Stock: $0.01 par value, 49,000,000 shares authorized; 4,200,000
shares issued and outstanding, pro forma;
10,100,000 shares issued and outstanding, as adjusted (1)................ 42 101
Additional paid-in capital................................................. 3,264 74,915
Retained earnings.......................................................... 947 947
------ -----------
Total stockholders' equity............................................. 4,253 75,963
------ -----------
Total capitalization............................................... $ 4,349 $ 76,059
------ -----------
------ -----------
</TABLE>
- ------------------------
(1) Common Stock outstanding includes 2,046,645 shares of Restricted Common
Stock issued to founders, consultants and management of Condor. Excludes (x)
up to an aggregate of 2,790,238 additional shares (assuming a stock price of
$14.00 per share at the time the additional shares are issued) that may be
issued in connection with the Mergers of six Founding Companies pursuant to
certain earn-out provisions if such Founding Companies achieve specified
earnings thresholds; and (y) 912,163 shares of Common Stock issuable upon
exercise of options to be granted by the Company in connection with the
Mergers and this Offering. See "Management--1997 Long-Term Incentive Plan,"
"Certain Transactions--Organization of the Company," "Description of Capital
Stock" and "Shares Eligible for Future Sale."
19
<PAGE>
DILUTION
As of September 30, 1997, the Company had a pro forma combined net tangible
book value deficit of $39.7 million, or a deficit of $9.46 per share of Common
Stock. Pro forma combined net tangible book value per share represents the
Company's pro forma combined total tangible assets less its total liabilities,
divided by the number of shares of Common Stock to be outstanding after giving
effect to the Mergers. After giving effect to the sale of the 5,900,000 shares
of Common Stock offered hereby at an assumed initial public offering price of
$14.00, and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, the Company's pro forma combined net
tangible book value as of September 30, 1997 as adjusted would have been $33.2
million, or $3.29 per share. This represents an immediate increase in pro forma
combined net tangible book value of approximately $12.75 per share to existing
stockholders and an immediate dilution of approximately $10.71 per share to new
investors purchasing the shares in this Offering.
The following table illustrates this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 14.00
Pro forma combined deficit in net tangible book value per share
before this Offering............................................... (9.46)
Increase in pro forma combined net tangible book value per share
attributable to this Offering...................................... 12.75
---------
Pro forma combined net tangible book value per share after this
Offering........................................................... 3.29
---------
Dilution per share to new investors.................................. $ 10.71
---------
---------
</TABLE>
The following table summarizes, on a pro forma combined basis to give effect
to the Mergers as of September 30, 1997, the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and the new investors purchasing shares
of Common Stock from the Company in this Offering:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION (1) AVERAGE
------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders (2)............................ 4,200,000 41.6% $ (31,237,000) (60.8)% $ (7.44 )
New investors........................................ 5,900,000 58.4 82,600,000 160.8 $ 14.00
------------ ----- -------------- -----
Total.............................................. 10,100,000 100.0% $ 51,363,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
- ------------------------
(1) Total consideration for existing stockholders represents the combined
stockholders' equity, including the stockholders' equity of the Founding
Companies, before this Offering, adjusted to reflect the payment of $48.2
million in cash to the stockholders of the Founding Companies as part of the
consideration for the Mergers. See "Use of Proceeds" and "Capitalization."
(2) Excludes up to an aggregate of 2,790,238 shares (assuming a stock price of
$14.00 per share at the time the additional shares are issued) that may be
issued in connection with the Mergers of six Founding Companies pursuant to
certain earn-out provisions if such Founding Companies achieve specified
earnings thresholds. See "Certain Transactions--Organization of the
Company."
The foregoing tables assume no exercise of stock options. As of the closing
of this Offering, the Company will have outstanding 559,663 options issued to
stockholders of the Founding Companies and 352,500 options issued to directors,
employees and consultants of the Company, each of which will be exercisable at a
price per share equal to the initial public offering price.
20
<PAGE>
SELECTED FINANCIAL DATA
Condor will acquire the Founding Companies simultaneously with and as a
condition to the closing of this Offering. In July 1996, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 97 relating to business
combinations immediately prior to an initial public offering. SAB 97 requires
that these combinations be accounted for using the purchase method of
accounting. In accordance with SAB 97, MST, one of the Founding Companies, has
been identified as the "accounting acquiror" for financial statement
presentation purposes. The following selected historical financial data of MST
as of December 31, 1995 and 1996 and September 30, 1997 and for each of the
years ended December 31, 1994, 1995 and 1996 and the nine months ended September
30, 1997 have been derived from the audited financial statements of MST included
elsewhere in this Prospectus. The following selected historical financial data
for MST as of December 31, 1992, 1993 and 1994 and for the years ended December
31, 1992 and 1993 have been derived from audited financial statements of MST not
included in this Prospectus. The following selected historical data for MST for
the nine months ended September 30, 1996 have been derived from unaudited
financial statements of MST which have been prepared on the same basis as the
audited financial statements, and in the opinion of MST reflect all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of such data. The Statement of Operations Data below do not reflect
any provision for income taxes since, throughout the periods presented, MST was
an S corporation for tax purposes.
The pro forma combined table below presents unaudited pro forma combined
financial data for the Company that give effect to the completion of the Mergers
and certain pro forma adjustments to the historical financial statements
described below and as adjusted to reflect the closing of this Offering and the
application of the estimated net proceeds therefrom. The summary pro forma
combined financial data are not necessarily indicative of the operating results
or financial position that would have been achieved had the events described
been consummated during the periods presented and should not be construed as
representative of the future operating results or financial position of the
Company. See the Unaudited Pro Forma Combined Financial Statements and the
related Notes thereto and the Founding Companies' Historical Financial
Statements and the related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
MST STATEMENT OF OPERATIONS DATA:
Revenue.................................... $ 1,535 $ 2,049 $ 3,669 $ 6,193 $ 8,211 $ 6,452 $ 5,509
Cost of revenue............................ 626 813 1,463 2,415 3,783 2,895 2,934
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................... 909 1,236 2,206 3,778 4,428 3,557 2,575
General and administrative expenses........ 555 760 1,113 1,606 2,188 1,684 1,453
--------- --------- --------- --------- --------- --------- ---------
Income from operations..................... 354 476 1,093 2,172 2,240 1,873 1,122
Interest expense........................... -- (4) (2) (12) (29) (27) (11)
Interest income and other income, net...... 1 (4) -- (3) 3 1 2
--------- --------- --------- --------- --------- --------- ---------
Net income................................. $ 355 $ 468 $ 1,091 $ 2,157 $ 2,214 $ 1,847 $ 1,113
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED ----------------------
DECEMBER 31, 1996 1996 1997
----------------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
PRO FORMA COMBINED
STATEMENT OF OPERATIONS DATA (1):
Revenues........................................................ $ 103,202 $ 73,627 $ 105,723
Cost of revenues................................................ 76,384 54,081 80,151
Gross profit.................................................... 26,818 19,546 25,572
Selling, general and administrative expenses (2)................ 19,063 13,177 16,291
Goodwill amortization (3)....................................... 1,396 1,047 1,047
Income from operations.......................................... 6,359 5,322 8,234
Interest and other income, net.................................. 1,119 763 631
Income before income taxes...................................... 7,478 6,085 8,865
Net income (4).................................................. $ 3,824 $ 3,195 $ 4,853
Net income per share............................................ $ 0.47 $ 0.39 $ 0.59
Shares used in computing pro forma net income
per share (5)................................................. 8,171,043 8,171,043 8,171,043
</TABLE>
<TABLE>
<CAPTION>
COMBINED COMPANIES
------------------------
MST
-------------------------------------------------------------------- SEPTEMBER 30, 1997
------------------------
DECEMBER 31, SEPTEMBER 30, PRO FORMA AS
----------------------------------------------------- ------------- COMBINED ADJUSTED
1992 1993 1994 1995 1996 1997 (6) (7)
--------- --------- --------- --------- --------- ------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 110 $ 17 $ 6 $ 7 $ 102 $ 71 $ 4,343 $ 27,856
Working capital............ 223 436 105 (350) 847 316 (38,911)(8) 32,799
Total assets............... 448 753 2,043 2,547 2,426 1,858 76,449 98,723
Long-term debt, net of
current maturities....... - - - - - - 96 96
Stockholders' equity....... 275 520 790 880 1,551 949 4,253 75,963
</TABLE>
- ------------------------
(1) The pro forma combined statement of operations data assume that the Mergers
and this Offering were consummated on January 1, 1996.
(2) The pro forma combined statement of operations data reflect pro forma
reductions in salaries, bonuses and benefits to the stockholders and
management of the Founding Companies that have been agreed to prospectively.
The Compensation Differential amounted to approximately $1,896,000,
$1,422,000 and $3,091,000 for the year ended December 31, 1996 and the nine
months ended September 30, 1996 and 1997, respectively.
(3) Consists of amortization of $42,740,000 of identifiable intangibles and
goodwill to be recorded as a result of the Mergers over a seven to 35-year
period and computed on the basis described in the Notes to the Unaudited Pro
Forma Combined Financial Statements.
(4) Assumes all income is subject to an effective corporate income tax rate of
40% and all goodwill is not tax-deductible.
(5) Includes (i) 2,153,355 shares to be issued to the stockholders of the
Founding Companies; (ii) 2,046,645 shares issued to founders, consultants
and management of Condor; and (iii) 3,971,043 of the 5,900,000 shares sold
in this Offering necessary to pay the cash portion of the Merger
consideration, S corporation distributions, underwriting discounts and
commissions and estimated expenses of this Offering.
(6) The pro forma combined and as adjusted balance sheet data assume that the
Mergers were consummated on September 30, 1997.
(7) Adjusted to reflect the sale of the 5,900,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
(8) Includes $48,155,000 payable to the stockholders of the Founding Companies,
representing the cash portion of the Merger consideration to be paid from a
portion of the net proceeds of this Offering.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements of the
Company and the related Notes thereto and the Founding Companies' Historical
Financial Statements and the related Notes thereto appearing elsewhere in this
Prospectus. A number of statements in this Prospectus address activities, events
or developments which the Company anticipates may occur in the future, including
such matters as the Company's strategy for internal growth, additional capital
expenditures (including the amount and nature thereof), acquisitions of assets
and businesses, industry trends and other such matters. These statements are
based on certain assumptions and analyses made by the Company in light of its
perception of historical trends, current business and economic conditions and
expected future developments, as well as other factors the Company believes are
reasonable or appropriate. However, whether actual results and developments will
conform with the Company's expectations and predictions is subject to a number
of risks and uncertainties, including those set forth in "Risk Factors"; general
economic, market or business conditions; the business opportunities (or lack
thereof) that may be presented to and pursued by the Company; changes in laws or
regulations; and other factors, many of which are beyond the control of the
Company. Consequently, there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
INTRODUCTION
Condor Technology Solutions, Inc. was established to create a leading
provider of a wide range of IT services and solutions to middle market
organizations. The Company offers its clients a single source for a
comprehensive range of services, including strategic planning and management
consulting; strategic marketing communications; development, integration and
installation of IT systems; contract staffing and recruiting; training and
continuing education; desktop systems maintenance and support; and procurement.
Condor was formed in August 1996 and has conducted no operations to date. The
Founding Companies will become wholly-owned subsidiaries of the Company upon the
closing of this Offering.
The Company earns revenues from the provision of consulting services, system
services and desktop services. Historically, the Company has generated a
significant portion of its revenues through the resale of third-party hardware
and software as part of its desktop services. The Company's management believes,
however, that consulting and system services will generate an increasing
percentage of its revenues. Revenues from certain desktop services, such as the
procurement and provision of computer hardware and software, are recognized upon
shipment or acceptance of the equipment. The Company recognizes consulting and
system service revenues using formulas based on time and materials, whereby
revenues are recognized as costs are incurred at agreed-upon billing rates; or
based on fixed-prices, whereby revenues are recognized ratably over the term of
the contract. To date, the use of fixed-price contracts for consulting
engagements has not been significant. Revenues on long-term service contracts
are recognized ratably over the term of the contract. Revenues from license fees
are generated from sales to both end-users and resellers and are recognized when
a non-cancelable license agreement has been signed, the product has been
delivered, collection is probable and all significant obligations relating to
the license have been satisfied. There are no significant post-sales support
obligations related to the Founding Companies' revenues. Advance payments on
certain service contracts are recorded as deferred revenues and are recognized
ratably, together with the related costs and expenses, over the life of the
contract.
Cost of revenues includes purchases of services and material directly
related to the revenues, inventory adjustments, costs of acquisition of hardware
and software resold to clients, subcontracted labor or other outside services,
direct labor and benefits and other direct costs associated with revenues, as
well as an allocation of certain indirect costs.
23
<PAGE>
Selling, general and administrative costs include salaries, benefits,
commissions payable to the Company's sales personnel, marketing and advertising
expenses and administrative costs. The Company expects to incur additional
selling, general and administrative expenses after this Offering, reflecting the
costs of being a public company, increased marketing activities and costs
associated with the Company's acquisition program. The Company expects that such
additional selling, general and administrative expenses will relate primarily to
salaries and benefits payable to senior management, which are expected to
represent over 50% of such incremental costs. Additionally, the key incremental
expenses are expected to include travel, fees for professional services,
including audit and legal fees, and expenses related to the Company's Board of
Directors. Such incremental expenses are expected to be offset, however, by
reductions in operating expenses primarily as the result of a consolidation of
purchasing relationships among the Founding Companies and from savings realized
by combining insurance, treasury, legal and risk management functions.
The Founding Companies have been managed throughout the periods presented as
independent private companies and, as such, their results of operations reflect
different corporate and tax structures (S corporations and C corporations) which
have influenced, among other things, their historical levels of owners'
compensation. The owners and key employees of the Founding Companies have agreed
to certain reductions in their salaries, bonuses and benefits in connection with
the organization of the Company. The Compensation Differentials for 1996 and for
the nine months ended September 30, 1997 were $1.9 million and $3.1 million
respectively, and have been reflected as pro forma adjustments in the Unaudited
Pro Forma Combined Statements of Operations. The Unaudited Pro Forma Combined
Statements of Operations include a provision for income tax as if the Company
were taxed as a C corporation.
The Company anticipates that following the Mergers it will realize savings
from (i) greater volume discounts from suppliers; (ii) consolidation of
insurance programs and treasury functions; and (iii) other general and
administrative areas, such as training and advertising. This integration process
may also present opportunities to reduce costs through the elimination of
duplicative functions and through economies of scale, but may necessitate
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration and
facilities expansion. These various costs and possible cost savings may make
historical operating results not comparable to, or indicative of, future
performance. Accordingly, neither the anticipated savings nor the anticipated
costs have been included in the unaudited pro forma financial data presented
herein. There can be no assurance, however, that the Company will achieve any
cost savings.
In July 1996, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 97 relating to business combinations immediately prior to an
initial public offering. SAB 97 requires that these combinations be accounted
for using the purchase method of acquisition accounting. MST has been identified
as the "accounting acquiror" for financial statement presentation purposes. The
excess of the fair value of the consideration received in the Mergers over the
fair value of the net assets to be acquired totals approximately $40.2 million
and is recorded as goodwill on the Company's balance sheet. Goodwill will be
amortized as a non-cash charge to the income statement over a period ranging
from seven to 35 years. The pro forma impact of this amortization expense, none
of which is deductible for tax purposes, is approximately $1.9 million per year.
See the Notes to the Unaudited Pro Forma Combined Financial Statements. A total
of $5.0 million of the purchase price has been allocated to in-process research
and development and will be expensed upon the closing of the Mergers.
Approximately $2.5 million of the purchase price has been allocated to
internally developed software at a Founding Company and will be amortized over a
period of five years.
24
<PAGE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
The pro forma combined results of operations of the Founding Companies for
the periods presented do not represent combined results of operations presented
in accordance with generally accepted accounting principles, but are only a
summation of the revenues, operating expenses and general and administrative
expenses of the individual Founding Companies on a pro forma basis. The pro
forma combined results may not be comparable to, and may not be indicative of,
the Company's post-combination results of operations because (i) the Founding
Companies were not under common control or management during the periods
presented; (ii) the Company will incur incremental costs related to its new
corporate management and the costs of being a public company; and (iii) the
combined data do not reflect potential benefits and cost savings the Company
expects to realize when operating as a combined entity. The following discussion
should be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements and the related Notes thereto and the Founding Companies' Historical
Financial Statements and the related Notes thereto appearing elsewhere in this
Prospectus.
The following table sets forth the combined results of operations of the
Founding Companies on a pro forma basis and as a percentage of revenues for the
periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1997
-------------------- ---------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues......................................... $ 73,627 100.0% $ 105,723 100.0%
Cost of revenues................................. 54,081 73.5 80,151 75.8
--------- --------- ---------- ---------
Gross profit..................................... 19,546 26.5 25,572 24.2
Selling, general and administrative expenses..... 13,177 17.9 16,291 15.4
Goodwill amortization............................ 1,047 1.4 1,047 1.0
--------- --------- ---------- ---------
Income from operations........................... $ 5,322 7.2% $ 8,234 7.8%
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES. Revenues increased approximately $32.1 million, or 43.7%, from
$73.6 million for the nine months ended September 30, 1996 to $105.7 million for
the nine months ended September 30, 1997. This increase was primarily
attributable to growth in revenues from the provision of IT services and
solutions, predominantly from Federal and CHMC with revenue increases of $20.2
million and $6.8 million, respectively. Revenues from both of these Founding
Companies increased as a result of procurement revenues ($22.5 million) and
expanded maintenance programs ($3.9 million). Additional increases in revenues
from procurement services of approximately $3.9 million were generated at two
other Founding Companies. Two additional Founding Companies reported an increase
in revenues from the nine months ended September 30, 1996 to the same period in
1997, partially offset by a decline in revenues at MST and InVenture.
COST OF REVENUES. Cost of revenues increased approximately $26.1 million,
or 48.2%, from $54.1 million for the nine months ended September 30, 1996 to
$80.0 million for the nine months ended September 30, 1997, primarily as a
result of the net increase in revenues described above. As a percentage of
revenues, cost of revenues increased from 73.5% for the nine months ended
September 30, 1996 to 75.8% for the nine months ended September 30, 1997,
primarily as a result of lower gross profit margins at Federal resulting from
the deferral of certain revenue amounts to reflect the matching of warranty
costs to be incurred by Federal on one of its new hardware contracts with
associated revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.1 million, or 23.5%, from $13.2 million for
the nine months ended September 30, 1996 to $16.3 million
25
<PAGE>
for the nine months ended September 30, 1997, due primarily to an increase in
infrastructure needed to support increased volume. As a percentage of revenues,
selling, general and administrative expenses decreased from 17.9% for the nine
months ended September 30, 1996 to 15.4% for the nine months ended September 30,
1997 as the infrastructure costs were spread over a larger base of revenues.
INCOME FROM OPERATIONS. Income from operations increased $2.9 million, or
54.7%, from $5.3 million for the nine months ended September 30, 1996 to $8.2
million for the nine months ended September 30, 1997. As a percentage of
revenues, operating income increased from 7.2% for the nine months ended
September 30, 1996 to 7.8% for the nine months ended September 30, 1997. This
change was attributable to the factors discussed above.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that will conduct all of its operations
through its subsidiaries. Accordingly, the Company's principal sources of
liquidity are the cash flow of its subsidiaries, cash available from lines of
credit it may establish and the unallocated net proceeds of this Offering. After
the closing of the Mergers and this Offering, the Company will have
approximately $27.9 million in cash and cash equivalents, approximately $1.3
million in marketable securities and approximately $1.3 million of indebtedness
outstanding (on a pro forma basis), other than the line of credit discussed
below.
The Company has obtained a commitment from a major commercial bank, subject
to a diligence review, for a $30.0 million line of credit. It is anticipated
that the line of credit will require the Company to comply with various loan
covenants including: (i) maintenance of certain financial ratios; (ii)
restrictions on additional indebtedness; and (iii) restrictions on liens,
guarantees, advances and dividends. The facility is intended to be used for
working capital and general corporate purposes, including future acquisitions.
There can be no assurance that the Company will obtain such credit facility.
The Company made capital expenditures of approximately $800,000 in 1996 and
approximately $639,000 for the nine months ended September 30, 1997, primarily
for office equipment and computers and facility upgrades. The Company expects to
expend capital to install or upgrade its accounting and management information
systems, to install an internal network and communications system integrating
the Founding Companies and subsequently acquired businesses and to install a
client call center. Management presently anticipates that such expenditures will
total approximately $5.0 million over the next two years; however, no assurance
can be made with respect to the actual timing and amount of such expenditures.
The Company intends to pursue acquisition opportunities. The timing, size or
success of any acquisition effort and the associated potential capital
commitments are unpredictable. The Company expects to fund future acquisitions
primarily through a combination of a portion of the unallocated net proceeds of
this Offering, cash flow from operations and borrowings, including borrowings
under the proposed line of credit, as well as issuances of additional shares of
Common Stock. The Company plans to register an additional 5,000,000 shares of
its Common Stock under the Securities Act after the completion of this Offering
for use as consideration for future acquisitions.
The Company believes that cash flow from operations, borrowings under the
proposed line of credit and the unallocated net proceeds of this Offering will
be sufficient to fund its capital requirements for at least the next 12 months.
To the extent that the Company is successful in consummating acquisitions, it
may be necessary to finance such acquisitions through the issuance of additional
equity securities, incurrence of indebtedness or both.
26
<PAGE>
SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS
The Company has experienced and expects to continue to experience
variability in revenues and net income from quarter to quarter as a result of
seasonality that may accompany private or governmental sector budget cycles.
Sales of the Company's IT products and related services have historically been
concentrated in the third and fourth calendar quarters as a result of patterns
of capital spending by clients, principally the federal, state and local
governments.
The Company also believes that the IT industry is influenced by general
economic conditions and particularly by the level of technological change.
Increased levels of technological change can have a favorable impact on the
Company's revenues. In general, technological change drives the need for
hardware and software procurement and information systems services provided by
the Company. The Company also believes that the industry tends to experience
periods of decline and recession during economic downturns. The industry could
experience sustained periods of decline in revenues in the future, and any such
decline may have a material adverse effect on the Company.
The Company could in the future experience quarterly fluctuations in
operating results due to the factors discussed above and other factors,
including the short-term nature of certain client commitments; patterns of
capital spending by clients the loss of a major client; the timing and size of
new projects; the timing and magnitude of required capital expenditures; pricing
changes in response to various competitive factors; market factors affecting the
availability of qualified technical personnel; timing and client acceptance of
new service offerings; changes in the trends affecting the outsourcing of IT
services; and additional selling, general and administrative expenses to acquire
and support new business. The Company plans its operating expenditures based on
revenue forecasts, and a revenue shortfall below such forecasts in any quarter
would likely adversely affect the Company's operating results for that quarter.
See "Risk Factors--Risks of Substantial Variability in Quarterly Operating
Results."
MST--RESULTS OF OPERATIONS
MST is a high-level IT management consulting firm specializing in the use of
corporate strategy and IT to improve an organization's overall effectiveness,
productivity, quality, flexibility and responsiveness.
The following table sets forth certain selected financial data for MST on an
historical basis and as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------------------------- ---------
1994 1995 1996 1996
-------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenue...................................... $ 3,669 100.0% $ 6,193 100.0% $ 8,211 100.0% $ 6,452
Cost of revenue.............................. 1,463 39.9 2,415 39.0 3,783 46.1 2,895
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................. 2,206 60.1 3,778 61.0 4,428 53.9 3,557
General and administrative expenses.......... 1,113 30.3 1,606 25.9 2,188 26.6 1,684
--------- --------- --------- --------- --------- --------- ---------
Income from operations....................... $ 1,093 29.8% $ 2,172 35.1% $ 2,240 27.3% $ 1,873
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1997
--------------------
<S> <C> <C> <C>
Revenue...................................... 100.0% $ 5,509 100.0%
Cost of revenue.............................. 44.9 2,934 53.3
--------- --------- ---------
Gross profit................................. 55.1 2,575 46.7
General and administrative expenses.......... 26.1 1,453 26.4
--------- --------- ---------
Income from operations....................... 29.0% $ 1,122 20.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
MST--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUE. Revenue decreased approximately $943,000, or 14.6%, from $6.5
million for the nine months ended September 30, 1996 to $5.5 million for the
same period in 1997. This decrease resulted primarily from the completion of
short term consulting contracts in 1996 that were not renewed or replaced during
the nine months ended September 30, 1997. For the nine months ended September
30, 1996, revenue from CIGNA Property & Casualty (including revenue from The CSN
Company ("CSN"), which was acquired in 1996) ("CIGNA") and Reinsurance Solutions
International ("RSI") accounted for 61% and 24%, respectively, of total revenue.
For the nine months ended September 30, 1997, revenue
27
<PAGE>
from CIGNA and RSI accounted for 64% and 26%, respectively, of total revenue. No
other client accounted for 10% or more of MST's revenue in these periods.
COST OF REVENUE. Cost of revenue increased approximately $39,000, or 1.3%,
from $2.9 million for the nine months ended September 30, 1996 to $2.9 million
for the same period in 1997. The increase resulted from increases in
non-stockholder compensation and consulting fees, partially offset by a
reduction in compensation to MST's chief executive officer (who is also MST's
sole stockholder (see Note 2 to the Notes to MST's Historical Financial
Statements)). Cost of revenue as a percentage of revenue increased from 44.9% in
1996 to 53.3% in 1997, substantially due to the decrease in revenue from the
completion of short term consulting contracts while a portion of MST's fixed
employment and consulting expenses remained stable. Fixed costs primarily
consist of costs related to the employment of consulting professionals, which do
not vary significantly with the profitability of engagements.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by approximately $231,000, or 13.7%, from $1.7 million for the nine
months ended September 30, 1996 as compared to $1.5 million for the same period
in 1997. The decrease resulted from a decrease in MST's discretionary profit
sharing contribution and a reduction in travel related expenses. General and
administrative expenses as a percentage of revenue increased from 26.1% for the
nine months ended September 30, 1996 to 26.4% for the nine months ended
September 30, 1997.
MST--1996 COMPARED TO 1995
REVENUE. Revenue increased approximately $2.0 million, or 32.6%, from $6.2
million in 1995 to $8.2 million in 1996. This increase resulted from contracts
with several new clients as well as from expansion of the work performed at RSI.
In 1995, revenue from CIGNA accounted for 89% of total revenue. In 1996, revenue
from CIGNA and RSI accounted for 61% and 25%, respectively, of total revenue. No
other client accounted for 10% or more of MST's revenue in 1996 or 1995.
COST OF REVENUE. Cost of revenue increased approximately $1.4 million, or
56.6%, from $2.4 million in 1995 to $3.8 million in 1996. Cost of revenue as a
percentage of revenue increased from 39.0% in 1995 to 46.1% in 1996. This
increase was due to a combination of the direct costs associated with increased
revenue, salary increases to attract and retain technical personnel and the
investment associated with hiring additional employees to support the growth in
the level of activity at MST.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $582,000, or 36.2%, from $1.6 million in 1995 to $2.2
million in 1996. This increase was due to additional costs associated with the
growth in MST's business, staff and facilities. General and administrative
expenses as a percentage of revenue increased from 25.9% in 1995 to 26.6% in
1996.
MST--1995 COMPARED TO 1994
REVENUE. Revenue increased approximately $2.5 million, or 68.8%, from $3.7
million in 1994 to $6.2 million in 1995, due to new relationships with
significant clients. Included in the new clients for 1995 were an international
financial services group, an environmental controls group, a gas distribution
company and a number of other clients in the financial services, healthcare and
governmental markets. In 1994, revenue from CIGNA accounted for 93%, of total
revenue. In 1995, revenue from CIGNA accounted for 89% of total revenue. No
other client accounted for 10% or more of MST's revenue in these years.
COST OF REVENUE. Cost of revenue increased approximately $952,000, or
65.1%, from $1.5 million in 1994 to $2.4 million in 1995. This increase was due
to a combination of the direct costs associated with increased revenue, salary
increases to attract and retain technical personnel and the investment
associated with hiring additional employees to support the growth in the level
of activity at MST. Cost of revenue as a percentage of revenue decreased
slightly from 39.9% in 1994 to 39.0% in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $493,000, or 44.3%, from $1.1 million in 1994 to $1.6
million in 1995. Selling expenses increased with the
28
<PAGE>
additional revenue. General and administrative expenses as a percentage of
revenue decreased from 30.3% in 1994 to 25.9% in December 31, 1995. MST was able
to generate operating leverage by maintaining relatively consistent general and
administrative expenses with the increased activity.
CHMC--RESULTS OF OPERATIONS
CHMC provides desktop computer systems, service and support programs for a
variety of commercial and federal, state and local governmental entities in the
Mid-Atlantic region.
The following table sets forth certain selected financial data for CHMC on
an historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------------------------------------------- AUGUST 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, --------------------
1995 1996 1997 1996
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues.............................. $ 33,201 100.0% $ 30,808 100.0% $ 44,718 100.0% $ 21,259 100.0%
Cost of revenues...................... 28,044 84.5 26,223 85.1 38,403 85.9 18,438 86.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.......................... 5,157 15.5 4,585 14.9 6,315 14.1 2,821 13.3
Selling, general and administrative
expenses............................ 3,910 11.8 3,844 12.5 4,784 10.7 1,761 8.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations................ $ 1,247 3.8% $ 741 2.4% $ 1,531 3.4% $ 1,060 5.0%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1997
--------------------
<S> <C> <C>
Revenues.............................. $ 24,065 100.0%
Cost of revenues...................... 18,890 78.5
--------- ---------
Gross profit.......................... 5,175 21.5
Selling, general and administrative
expenses............................ 3,794 15.8
--------- ---------
Income from operations................ $ 1,381 5.8%
--------- ---------
--------- ---------
</TABLE>
CHMC--SIX MONTHS ENDED AUGUST 31, 1997 COMPARED TO SIX MONTHS ENDED AUGUST 31,
1996
REVENUES. Revenues increased approximately $2.8 million, or 13.2%, from
$21.3 million for the six months ended August 31, 1996 to $24.1 million for the
six months ended August 31, 1997, respectively. This increase was primarily
attributable to continued expansion of CHMC's services, including procurement,
on-site services, help-desk and project management and other support programs.
Project management work increased over 350% as CHMC was able to introduce and
successfully sell this new service offering to existing clients. CHMC's
help-desk services expanded 74% through the addition of new clients and growth
in the existing client base while procurement services increased as a result of
additional product and service sales to several state governments.
COST OF REVENUES. Cost of revenues increased approximately $452,000, or
2.5%, from $18.4 million for the six months ended August 31, 1996 to $18.9
million for the six months ended August 31, 1997. Cost of revenues as a
percentage of revenues decreased from 86.7% for the six months ended August 31,
1996 to 78.5% for the six months ended August 31, 1997, respectively. This
reduction in costs as a percentage of revenues resulted from expansion of CHMC's
service and project management businesses and product sales to higher margin
clients through targeted sales and marketing programs. CHMC took advantage of
increased competition among suppliers by increasing purchase discounts and also
using suppliers' drop-ship programs to end users. Through enhancements to its
help-desk call accounting system, CHMC was able to increase productivity without
corresponding increases in direct labor costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $2.0 million, or 115.2%, from
$1.8 million for the six months ended August 31, 1996 to $3.8 million for the
six months ended August 31, 1997. These expenses as a percentage of revenues
increased from 8.3% to 15.8% in these periods, primarily as a result of
increases in discretionary management bonuses due to improved earnings, as well
as from increased selling and training costs.
CHMC--1997 COMPARED TO 1996
REVENUES. Revenues increased approximately $13.9 million, or 45.2%, from
$30.8 million for the year ended February 29, 1996 to $44.7 million for the year
ended February 28, 1997. This resulted from increased sales of all services
offered by CHMC, including expansion in maintenance, help-desk and other support
programs, in addition to growth in procurement revenues. CHMC's overall growth
during this
29
<PAGE>
period was attributable to additional procurement contracts and continued
development of telesales and on-line configuration and ordering capabilities.
COST OF REVENUES. Cost of revenues increased approximately $12.2 million,
or 46.4%, from $26.2 million for the year ended February 29, 1996 to $38.4
million for the year ended February 28, 1997. Cost of revenues as a percentage
of revenues remained relatively stable at 85.1% in fiscal 1996 versus 85.9% in
fiscal 1997 . Several factors, all related to CHMC's ongoing efforts in 1997 to
further develop and expand its IT services, increased costs of revenues.
Specifically, CHMC hired additional engineers to support the further development
of its services and increased salaries in order to attract and retain personnel
who can provide the larger scope of services CHMC is offering its clients. The
efficiencies gained through this strategy partially offset the investment made
in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $940,000, or 24.5%, from $3.8
million for the year ended February 29, 1996 to $4.8 million for the year ended
February 28, 1997. This increase was primarily related to additional
discretionary bonuses due to the improved performance of CHMC, increased sales
commissions resulting from CHMC's growth in sales and an overall increase in
management, both in the number of employees and base compensation, in order to
support the increased organization. These expenses as a percentage of revenues
decreased from 12.5% for the year ended February 29, 1996 to 10.7% for the year
ended February 28, 1997.
CHMC--1996 COMPARED TO 1995
REVENUES. Revenues decreased approximately $2.4 million, or 7.2%, from
$33.2 million for the year ended February 28, 1995 to $30.8 million for the year
ended February 29, 1996. This decline was primarily due to a decrease in sales
of desktop support procurement services resulting from the loss of certain
contracts. As described above, CHMC has been transitioning its business toward a
more complete spectrum of desktop support services and chose to establish new
service offerings rather than seek additional procurement contracts.
COST OF REVENUES. Cost of revenues declined approximately $1.8 million, or
6.5%, from $28.0 million for the year ended February 28, 1995 to $26.2 million
for the year ended February 29, 1996, primarily as a result of the decrease in
revenues described above. Cost of revenues as a percentage of revenues was
relatively unchanged at 84.5% for the year ended February 28, 1995 compared to
85.1% for the year ended February 29, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were relatively unchanged at $3.9 million for the year
ended February 28, 1995 compared to $3.8 million for the year ended February 29,
1996. These expenses as a percentage of revenues increased from 11.8% for the
year ended February 28, 1995 to 12.5% for the year ended February 29, 1996.
FEDERAL--RESULTS OF OPERATIONS
Federal supplies computer products and services to governmental and
commercial entities. Federal provides its clients with integration,
implementation and support services, including network design and installation,
system upgrades and enhancements, hardware and software maintenance and on-site
technical support and relocation services.
The following table sets forth certain selected financial data for Federal
on an historical basis and as a percentage of revenues for the periods
indicated. The table below includes revenues and related costs generated from
sales of hardware and software as well as sale of maintenance services. Federal
additionally generates revenues through certain agency contracts, consulting
fees from affiliates and other revenues, including interest and dividends. These
other types of revenues are not considered part of Federal's core operations
and, therefore, have not been included in the table.
30
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues................................ $ 22,437 100.0% $ 46,186 100.0% $ 26,417 100.0% $ 24,354 100.0%
Cost of revenues........................ 18,415 82.1 38,732 83.9 19,168 73.3 18,133 74.5
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 4,022 17.9 7,454 16.1 7,249 27.7 6,221 25.5
Selling, general and administrative
expenses.............................. 7,539 33.6 7,619 16.5 5,794 22.2 5,094 20.9
--------- --------- --------- --------- --------- --------- --------- ---------
(Loss) income from operations........... $ (3,517) (15.7)% $ (165) (0.4)% $ 1,455 5.6% $ 1,127 4.6%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1997
--------------------
<S> <C> <C>
Revenues................................ $ 30,645 100.0%
Cost of revenues........................ 25,311 82.6
--------- ---------
Gross profit............................ 5,334 17.4
Selling, general and administrative
expenses.............................. 3,581 11.7
--------- ---------
(Loss) income from operations........... $ 1,753 5.7%
--------- ---------
--------- ---------
</TABLE>
FEDERAL--NINE MONTHS ENDED JULY 31, 1997 COMPARED TO NINE MONTHS ENDED JULY 31,
1996
REVENUES. Revenues increased approximately $6.3 million, or 25.8%, from
$24.4 million for the nine months ended July 31, 1996 to $30.6 million for the
nine months ended July 31, 1997. This increase was caused primarily by larger
government contract sales with the U.S. Social Security Administration,
Department of Justice and the U.S. Postal Service.
COST OF REVENUES. Cost of revenues increased approximately $7.2 million, or
39.6%, from $18.1 million for the nine months ended July 31, 1996 to $25.3
million for the nine months ended July 31, 1997. Cost of revenues as a
percentage of revenues increased from 74.5% for the nine months ended July 31,
1996 to 82.6% for the nine months ended July 31, 1997. The overall increase in
costs was caused primarily by the purchase of hardware required to fulfill the
large contracts noted above. The increase in cost of revenues as a percentage of
revenues was due to decreased profit margins resulting from the deferral of
certain revenue amounts at July 31, 1997 to reflect matching of warranty costs
to be incurred by the Company on one of the new hardware contracts with
associated revenues. The sales price on this particular contract included
warranty provisions bundled with the price of the hardware.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $1.5 million, or 29.7%, from
$5.1 million for the nine months ended July 31, 1996 to $2.5 million for the
nine months ended July 31, 1997. As a percentage of revenues, selling, general
and administrative expenses decreased from 20.9% for the nine months ended July
31, 1996 to 11.7% for the nine months ended July 31, 1997. The primary reason
for this decrease was the revision of the compensation packages for Federal's
principal shareholders, including changes to their base salaries and certain
commission arrangements. The change in arrangements was effective November 1,
1996.
FEDERAL--1996 COMPARED TO 1995
REVENUES. Revenues decreased approximately $19.5 million, or 42.9%, from
$45.5 million in 1995 to $26.0 million in 1996. This decrease was caused
primarily by significant mainframe purchases under unusually large contracts
which ended in 1995.
COST OF REVENUES. Cost of revenues decreased approximately $19.6 million,
or 50.5%, from $38.7 million in 1995 to $19.2 million in 1996. Cost of revenues
as a percentage of revenues decreased from 85.2% in 1995 to 73.8% in 1996. The
overall decrease in costs was caused primarily by the decrease in revenues as
described above. The decrease in cost of revenues as a percentage of revenues
was due to a decrease in the costs of mainframe computers in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $1.8 million, or 24.0%, from
$7.6 million in 1995 to $5.8 million in 1996, due mainly to the decrease in
revenues discussed above. As a percentage of revenues, selling, general and
administrative expenses increased from 16.8% in 1995 to 22.3% in 1996. This
percentage increase resulted from significant bid and proposal expenses incurred
by Federal during 1996 in an effort to win new business.
31
<PAGE>
FEDERAL--1995 COMPARED TO 1994
REVENUES. Revenues increased approximately $23.6 million, or 107.6%, from
$21.9 million in 1994 to $45.5 million in 1995. This increase was primarily due
to significant mainframe purchase contracts and scanner revenues obtained late
in fiscal 1995.
COST OF REVENUES. Cost of revenues increased approximately $20.3 million,
or 110.3%, from $18.4 million in 1994 to $38.7 million in 1995. Cost of revenues
as a percentage of revenues increased from 84.1% in 1994 to 85.2% in 1995. The
overall increase in costs was caused primarily by the increase in revenues as
described above. The increase in cost of revenues as a percentage of revenues
was due to lower negotiated profit margins earned on the significant mainframe
contract sale noted above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $80,000, or 1.1%, from $7.5
million in 1994 to $7.6 million in 1995, as a result of the increases in
revenues discussed above. As a percentage of revenues, selling, general and
administrative expenses decreased from 34.4% in 1994 to 16.8% in 1995, primarily
due to decreased commission expenses resulting partially from the acquisition of
the affiliated entities Federal historically used as subcontractors.
CORPORATE ACCESS--RESULTS OF OPERATIONS
Corporate Access offers a variety of desktop computer hardware, software and
peripheral products, along with related configuration and installation services,
to commercial clients and governmental entities in the Greater Boston
metropolitan area.
The following table sets forth certain selected financial data for Corporate
Access on an historical basis and as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1996 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 3,931 100.0% $ 4,747 100.0%
Cost of revenues............................................ 3,311 84.2% 4,118 86.7%
--------- --------- --------- ---------
Gross profit................................................ 620 15.8% 629 13.3%
Selling, general and administrative expenses................ 387 9.8% 466 9.8%
--------- --------- --------- ---------
Income (loss) from operations............................... $ 233 5.9% $ 163 3.4%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Corporate Access recognizes revenues from product sales when the related
product is shipped. There are no post-sales support obligations related to
Corporate Access's product sales. Cost of revenues is comprised of purchased
materials, inventory adjustments, purchase discounts and direct labor and
benefits. Selling, general and administrative expenses include salaries,
benefits, commissions payable to Corporate Access's sales personnel, marketing
and advertising expenses and administrative costs.
CORPORATE ACCESS--THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER
30, 1996
REVENUES. Revenues increased approximately $816,000, or 20.8%, from $3.9
million for the three months ended September 30, 1996 to $4.7 million for the
three months ended September 30, 1997, primarily due to an increase in volume
which can be attributed to greater market penetration through a larger sales
force.
COST OF REVENUES. Cost of revenues increased approximately $807,000, or
24.4%, from $3.3 million for the three months ended September 30, 1996 to $4.1
million for the three months ended September 30, 1997. As a percentage of
revenues, cost of revenues increased from 84.2% in the 1996 period to 86.7% in
the 1997 period. The overall increase in cost of revenues was attributable to an
increase in sales volume. The increase in cost of revenues as a percentage of
revenues from the 1996 period to the 1997 period was the result of a lower
margin sales mix in the 1997 period compared to the same period in 1996.
32
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $79,000, or 20.4%, from $387,000
for the three months ended September 30, 1996 to $466,000 for the three months
ended September 30, 1997. As a percentage of revenues, selling, general and
administrative expenses remained constant at 9.8%. The change was primarily due
to increased sales volume coupled with costs associated with hiring and training
additional salespersons.
ISSI--RESULTS OF OPERATIONS
ISSI develops, sells and supports proprietary software for information
access and delivery in the end-user production-data market.
The following table sets forth certain selected financial data for ISSI on
an historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPT. 30,
---------------------------------------------------------------- ---------
1994 1995 1996 1996
-------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues..................................... $ 5,729 100.0% $ 6,610 100.0% $ 9,028 100.0% $ 6,655
Cost of revenues............................. 1,297 22.6 2,010 30.4 1,482 16.4 1,120
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................. 4,432 77.4 4,600 69.6 7,546 83.6 5,535
Selling, general and administrative
expenses................................... 3,315 57.9 4,453 67.4 4,557 50.5 3,144
Research and development..................... 1,018 17.8 804 12.2 766 8.5 522
--------- --------- --------- --------- --------- --------- ---------
Income from operations....................... $ 99 1.7% $ (657) -9.9% $ 2,223 24.6% $ 1,869
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1997
--------------------
<S> <C> <C> <C>
Revenues..................................... 100.0% $ 8,360 100.0%
Cost of revenues............................. 16.8 1,224 14.6
--------- --------- ---------
Gross profit................................. 83.2 7,136 85.4
Selling, general and administrative
expenses................................... 47.2 3,979 47.6
Research and development..................... 7.8 933 11.2
--------- --------- ---------
Income from operations....................... 28.2% $ 2,224 26.6%
--------- --------- ---------
--------- --------- ---------
</TABLE>
ISSI--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues increased approximately $1.7 million, or 25.6%, from
$6.7 million for the nine months ended September 30, 1996 to $8.4 million for
the nine months ended September 30, 1997. This increase reflected the impact of
ISSI's continuing maintenance revenues as well as an approximately 43% increase
in revenues from the sale of licenses for ISSI's products and related "first
year" maintenance. The maintenance revenues increase annually as ISSI retains
approximately 85% of its maintenance clients and begins maintenance contracts
for those clients who purchased software during the year. The increases in
license revenues resulted primarily from increased sales at ISSI's European
subsidiary and through additional sales to a major value added reseller.
COST OF REVENUES. Cost of revenues increased approximately $104,000, or
9.3%, from $1.1 million for the nine months ended September 30, 1996 to $1.2
million for the nine months ended September 30, 1997. Cost of revenues as a
percentage of revenues decreased from 16.8% for the nine months ended September
30, 1996 to 14.6% for the same period in 1997. This decrease was primarily due
to increased average selling prices for software licenses sold to a major value
added reseller.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $835,000, or 26.6%, from $3.1
million for the nine months ended September 30, 1996 to $4.0 million for the
nine months ended September 30, 1997. This increase in total costs resulted from
increased levels of business, although a portion of the additional business
resulted from maintenance income, which has a relatively lower level of
associated selling expenses. In addition, ISSI has had higher costs associated
with travel to client sites with value-added resellers to obtain new work.
Selling, general and administrative expenses remained relatively consistent as a
percentage of revenues at 47.2% for the nine months ended September 30, 1996 to
47.6% for the nine months ended September 30, 1997.
RESEARCH AND DEVELOPMENT. Research and development costs increased
approximately $411,000, or 78.7%, from $522,000 for the nine months ended
September 30, 1996 to $933,000 for the nine months ended September 30, 1997.
This increase was primarily due to expenditures, including the addition of 11
33
<PAGE>
employees, related to the development of certain new products to be included in
ISSI's Safari InfoTools suite of data access and management products.
ISSI--1996 COMPARED TO 1995
REVENUES. Revenues increased approximately $2.4 million, or 36.6%, from
$6.6 million in 1995 to $9.0 million in 1996. This revenue growth was primarily
the result of expansion of ISSI's client base, including a new relationship with
a significant value added reseller. New client revenues accounted for
approximately $2.0 million of the increase in revenues from sales of ISSI's
software products. The remaining increase was attributable primarily to the
impact of a larger installed base on maintenance revenues.
COST OF REVENUES. Cost of revenues decreased $528,000, or 26.3%, from $2.0
million in 1995 to $1.5 million in 1996. Cost of revenues as a percentage of
revenues was 30.4% in 1995 and 16.4% in 1996. This decrease was caused primarily
by a non-recurring charge in 1995, when management determined that there was no
future value to be obtained from certain capitalized software costs. These costs
were written off in 1995, thereby increasing cost of sales. The decrease in cost
of revenues as a percentage of revenues was caused primarily by lower costs
associated with the portion of the increased revenues in 1996 that consisted of
maintenance revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $104,000, or 2.3%, from $4.5
million in 1995 to $4.6 million in 1996. This increase in total costs reflected
the increased level of revenues.
RESEARCH AND DEVELOPMENT. Research and development costs were relatively
unchanged at $804,000 in 1995 and $766,000 in 1996.
ISSI--1995 COMPARED TO 1994
REVENUES. Revenues increased approximately $881,000, or 15.4%, from $5.7
million in 1994 to $6.6 million in 1995. This revenue growth was primarily the
result of expansion of ISSI's client base through development of relationships
with new value added resellers.
COST OF REVENUES. Cost of revenues increased approximately $713,000, or
55.0%, from $1.3 million in 1994 to $2.0 million in 1995. Cost of revenues as a
percentage of revenues increased from 22.6% in 1994 to 30.4% in 1995. This
change was caused primarily by the unusual charge related to the write-off of
software development costs in 1995 described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $1.1 million, or 34.3%, from
$3.3 million in 1994 to $4.5 million in 1995. A portion of this increase was
consistent with selling costs associated with a higher level of revenues.
Additionally, ISSI added staff in anticipation of engineering, support and sales
requests from its new value added resellers and expensed all of its investment
in its new European subsidiary in its first year of existence. As a percentage
of revenues, selling, general and administrative expenses increased from 57.9%
in 1994 to 67.4% in 1995.
RESEARCH AND DEVELOPMENT. Research and development costs decreased
approximately $214,000, or 21%, from $1.0 million in 1994 to $804,000 in 1995.
This decrease was due to the the termination by ISSI of in-house development of
a graphical user interface tool in light of its purchase of base technology for
the same purpose, allowing for a quicker and more complete roll-out of the
product. The total number of engineers working on this technology decreased from
1994 to 1995.
34
<PAGE>
USCOMM--RESULTS OF OPERATIONS
USComm provides governmental and commercial clients with desktop computer
hardware, software, and peripheral products, technical support and comprehensive
training solutions.
The following table sets forth certain selected financial data for USComm on
an historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues.............................................. $ 7,215 100.0% $ 4,740 100.0% $ 6,024 100.0%
Cost of revenues...................................... 6,574 91.1 4,293 90.6 5,611 93.1
--------- --------- --------- --------- --------- ---------
Gross profit.......................................... 641 8.9 447 9.4 413 6.9
Selling, general and administrative expenses.......... 475 6.6 336 7.1 367 6.1
--------- --------- --------- --------- --------- ---------
Income from operations................................ $ 166 2.3% $ 111 2.3% $ 46 .8%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
USCOMM--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues increased approximately $1.3 million, or 27.1%, from
$4.7 million for the nine months ended September 30, 1996 to $6.0 million for
the nine months ended September 30, 1997, primarily due to significant new
contracts that enabled USComm to qualify as a general vendor for municipalities
in Maryland, thereby facilitating additional direct sales to local, state and
federal agencies and departments.
COST OF REVENUES. Cost of revenues increased approximately $1.3 million, or
30.7%, from $4.3 million for the nine months ended September 30, 1996 to $5.6
million for the nine months ended September 30, 1997. As a percentage of
revenues, cost of revenues increased from 90.6% to 93.1%. This overall increase
in cost of revenues was caused primarily by increased sales volume. Several
other factors related to USComm's ongoing efforts to further develop and expand
IT service offerings, such as increased hiring of additional technical
engineers, contributed to the increase in cost of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $31,000, or 9.2%, from $336,000
for the nine months ended September 30, 1996 to $367,000 for the nine months
ended September 30, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 7.1% to 6.1% in these periods. USComm was
able to generate operating leverage by maintaining relatively consistent general
and administrative expenses despite the increased activity.
INVENTURE--RESULTS OF OPERATIONS
InVenture creates and executes strategic marketing programs for resellers
and manufacturers of IT products and services as well as for commercial
customers in other industries.
The following table sets forth certain selected financial data for InVenture
on an historical basis and as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues....................................................... $ 5,416 100.0% $ 4,253 100.0% $ 3,210 100.0%
Cost of revenues............................................... 3,948 72.9 3,165 74.4 1,603 49.8
--------- --------- --------- --------- --------- ---------
Gross profit................................................... 1,468 27.1 1,088 25.6 1,607 50.1
Selling, general and administrative expenses................... 1,464 27.0 1,028 24.2 1,378 42.9
--------- --------- --------- --------- --------- ---------
Income from operations......................................... $ 4 0.1% $ 60 1.4% $ 229 7.1%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
35
<PAGE>
INVENTURE--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
REVENUES. Revenues decreased approximately $1.0 million, or 24.5%, from
$4.3 million for the nine months ended September 30, 1996 to $3.2 million for
the nine months ended September 30, 1997, primarily due to InVenture's intended
redirection from the marketing collateral service line to a business mix
containing a higher level of marketing and strategic planning services. This
strategy generated a lower revenue stream, but a higher gross margin for
InVenture.
COST OF REVENUES. Cost of revenues decreased approximately $1.6 million, or
49.4%, from $3.2 million for the first nine months ended September 30, 1996 to
$1.6 million for the nine months ended September 30, 1997. As a percentage of
revenues, cost of revenues decreased from 74.4% in the 1996 period to 49.8% in
the 1997 period. The decrease in cost of revenues was primarily attributable to
decreased sales volume in addition to a change in the mix of services as
described above. The decrease in cost of revenues as a percentage of revenues
resulted from a higher level of strategic planning services relative to lower
margin service lines in the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $350,000, or 34%, from $1.0
million for the nine months ended September 30, 1996 to $1.4 million for the
nine months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 24.2% in the 1996 period to
42.9% in the 1997 period. This increase was due to salary increases resulting
from the hiring of additional and/or different skill type employees to support
the expansion of services provided by InVenture to a wider range of clients. In
addition, the diversification of clients and services resulted in much higher
travel and telecommunications costs related to the sales effort.
MIS--RESULTS OF OPERATIONS
MIS provides clients with temporary contract staffing and permanent
placement of qualified professionals with IT experience.
The following table sets forth certain selected financial data for MIS on an
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues....................................................... $ 2,582 100.0% $ 1,895 100.0% $ 3,387 100.0%
Cost of revenues............................................... 1,426 55.2 1,213 64.0 1,841 54.4
--------- --------- --------- --------- --------- ---------
Gross profit................................................... 1,156 44.8 682 36.0 1,546 45.6
Selling, general and administrative expenses................... 1,150 44.6 592 31.2 1,347 39.8
--------- --------- --------- --------- --------- ---------
Income from operations......................................... $ 6 0.2% $ 90 4.8% $ 199 5.8%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
36
<PAGE>
MIS TECHNOLOGIES, INC.--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
SEPTEMBER 30, 1996
REVENUES. Revenues increased approximately $1.4 million, or 78.7%, from
$1.9 million for the nine months ended September 30, 1996 to $3.3 million for
the nine months ended September 30, 1997, primarily due to MIS expanding its
client base and volume for both temporary and permanent placements.
COST OF REVENUES. Cost of revenues increased approximately $628,000, or
51.8%, from $1.2 million for the nine months ended September 30, 1996 to $1.8
million for the nine months ended September 30, 1997. As a percentage of
revenues, cost of revenues decreased from 64.0% to 54.4%, which was attributable
to MIS utilizing a greater number of higher cost outsourced contract personnel
during the 1996 period compared to the 1997 period, during which time MIS was
able to staff projects with its own employees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $755,000, or 127.5%, from
$592,000 for the nine months ended September 30, 1996 to $1.3 million for the
nine months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 31.2% to 39.8% during these
periods. This increase in selling, general and administrative expenses as a
percentage of revenues was due to the expansion of MIS's infrastructure in order
to support the continued growth of the business.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," provides a new fair-value-based method of
accounting for employee stock options or similar equity instruments; however,
this statement allows companies to continue to utilize the intrinsic-value-based
measure of accounting prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"). Companies electing to remain with the accounting method provided
in APB No. 25 must make pro forma disclosures of net income and net earnings per
share as if the fair value method of accounting had been applied. In the future,
the Company will provide pro forma disclosure of net income and net income per
share, as applicable, in its notes to consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which will be effective for fiscal periods ending
after December 15, 1997. SFAS No. 128 simplifies the standards required under
current accounting rules for computing earnings per share and replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share ("basic EPS") and diluted
earnings per share ("diluted EPS"). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted EPS under current accounting
principles.
The Company will implement SFAS 128 during the fourth quarter of 1997.
37
<PAGE>
BUSINESS
INTRODUCTION
Condor Technology Solutions, Inc. provides a wide range of IT services and
solutions to middle market organizations. The Company offers its clients a
single source for a comprehensive range of services, including strategic
planning and management consulting; strategic marketing communications;
development, integration and installation of IT systems; contract staffing and
recruiting; training and continuing education; desktop systems maintenance and
support; and procurement. The Company works with its clients to identify areas
of their businesses where the effective deployment of technology can have the
maximum impact on executing business strategies and optimizing business
processes.
The Company's marketing efforts focus on middle market organizations, which
typically spend from $2 million to $30 million annually on their IT needs. In
addition, the Company targets the financial services, healthcare, technology and
governmental markets. These markets are typically characterized by (i) reliance
on legacy systems; (ii) platform migration to client/server architectures; (iii)
changing competitive dynamics, such as globalization and deregulation; and (iv)
heavy dependency on database and proprietary applications. The Company believes
that middle market organizations in these industry groups have been underserved
by large IT vendors which, due to economic and high cost structures, cannot
address the requirements of the middle market adequately. The Company intends to
market its services through each of the sales forces at the Founding Companies
as well as through the Company's corporate sales force. This approach will allow
the Company to market its services independently or in combination to provide a
solution to a client's specific IT needs.
The Company provides IT services through 24 offices located in 11 states
across the United States and in two foreign countries as of September 30, 1997.
The Company had approximately 532 employees, including approximately 345
technical professionals, as of that date. The Company cultivates long-term
relationships with its clients and believes these long-term relationships
present excellent opportunities for further marketing of its services.
MARKET OPPORTUNITY
Heightened competition, deregulation, globalization and rapid technological
advances are forcing organizations to make fundamental changes in their business
processes. These pressures have compelled organizations to improve the quality
of products and services, reduce costs and strengthen client relationships.
Increasingly, organizations are addressing these issues by developing and
utilizing IT services and solutions that facilitate the rapid and flexible
collection, analysis and dissemination of information. The ability of an
organization to maintain and refresh its existing systems and to integrate and
deploy new information technologies in a cost-effective manner has become
critical to competing successfully in today's rapidly changing business
environment.
Although many companies have recognized the importance of IT systems and
products to compete in this business climate, the process of designing,
developing, procuring and implementing IT systems has become increasingly
complex. Companies are continuing to migrate away from centralized mainframes
running proprietary software toward decentralized, scalable architectures based
on personal computers, client/server architectures, local and wide area
networks, shared databases and packaged application software. These advances
have greatly enhanced the ability of companies to benefit from the application
of IT. Consequently, the number of companies desiring to use IT in new ways and
the number of end users within these organizations are rising rapidly.
During this time of increasing reliance on IT, rapid technological change
and other challenges, such as the need for Year 2000 conversions, have strained
the capabilities of the internal departments within these organizations. At the
same time, external economic factors have forced organizations to focus on core
competencies and trim workforces in the IT management area. Accordingly, these
organizations often lack
38
<PAGE>
the quantity or variety of IT skills necessary to design and develop emerging IT
solutions. Consequently, businesses are increasingly looking to outsource IT
services. By outsourcing IT services, companies are able to (i) focus on their
core business; (ii) access specialized technical skills; (iii) implement IT
solutions more rapidly; (iv) benefit from flexible staffing; and (v) reduce the
cost of recruiting and training.
Due to the foregoing factors, demand for IT services has grown
significantly. According to Dataquest, the worldwide market for IT services was
approximately $262 billion in 1996 and will grow to $517 billion by the year
2001. The IT professional service portion of such worldwide market (consulting,
systems integration, application development and outsourcing services) was
approximately $158 billion in 1996 and is estimated to grow by 17% annually
through 2001. The domestic market for IT professional services is projected to
grow from approximately $73 billion in 1996 to approximately $148 billion in
2001. The middle market, defined as comprising organizations with under $1
billion in annual revenues, represents approximately one-third of the overall
market and is generally projected to grow at annual rates higher than that of
the overall market.
The IT service industry has evolved into a highly fragmented environment
with a small number of large, national service providers and a large number of
small- and medium-size service providers, usually only regional in scope. Large
IT service providers typically address the IT needs of large organizations with
substantial IT requirements for a wide range of services, whereas smaller IT
service firms provide specialized services of limited scope. Consequently,
middle market organizations typically rely on multiple, often specialized,
providers to help implement and manage their systems. These smaller IT service
providers often lack sufficient breadth and depth of services or industry
knowledge to satisfy these organizations' need for comprehensive solutions. The
Company believes the current reliance on multiple service providers can create
multiple relationships which are more logistically difficult and less cost-
effective to manage, a lack of responsibility for ultimate delivery of an
optimal IT solution and an adverse impact on the quality and compatibility of IT
solutions. In an attempt to reduce cost and management complexity, many
organizations are seeking to establish preferred vendor relationships with a
small number of IT service providers that are able to address a broad range of
IT service needs.
THE CONDOR VISION
The Company intends to capitalize upon consolidation opportunities in the
highly fragmented IT service industry in order to create a single-source
provider of a wide range of IT services and solutions to middle market
organizations in select vertical markets. In response to market demand, the
Company has assembled a diverse set of IT offerings, from planning and
consulting to development, integration and installation of IT systems to desktop
services. This broad range of offerings will enable clients to use a single
provider for their IT needs, which should result in tighter integration,
minimized risk and greater management control. In addition, the Company will
focus upon acquisition opportunities that complement and enhance its existing IT
offerings. The Company believes that its expertise in providing IT services,
industry experience, client relationships, geographic reach and size will enable
it to capitalize on the anticipated continued growth of the IT needs of middle
market organizations.
STRATEGY
The Company's objective is to be a leading provider of IT offerings to
middle market organizations with a focus on select vertical markets. Key
elements of the Company's strategy are presented below.
LEVERAGE CONSULTING SERVICES. The Company intends to leverage its
high-level planning and strategic consulting services to secure contracts to
perform the implementation, maintenance and refreshment phases of the clients'
desired IT solutions. The Company believes that its ability to partner with
clients to define their IT service needs and to deliver the full range of these
IT services provides an attractive single-source solution for its clients.
39
<PAGE>
EXPAND CLIENT RELATIONSHIPS. The Company believes it can increase its
revenues from existing clients by cross-selling its services. Each of the
Founding Companies specializes in certain areas of the IT service market.
Consolidation of these companies enables the Company to offer a single source
for a variety of IT services. The Company believes that the access and goodwill
derived from its long-term relationships with its clients will provide it with
significant advantages in marketing additional offerings to existing clients.
SECURE FULL SERVICE CONTRACTS. The Company believes the broader range of IT
services and geographic coverage available from the combination of the Founding
Companies will allow it to become a single-source provider of IT services. This
should provide the Company with a competitive advantage in meeting the IT
requirements of middle market organizations and will give the Company the
opportunity to secure full service contracts from a larger group of potential
clients.
RECRUIT, TRAIN AND RETAIN TECHNICAL PERSONNEL. The Company focuses on
recruiting, training and retaining highly skilled IT professionals in response
to the shortage of and significant competition for such professionals. MIS, one
of the Founding Companies, is dedicated solely to identifying, attracting and
staffing IT professionals, and another Founding Company, USComm, will
increasingly concentrate on training such professionals. While these activities
will continue to be conducted primarily on behalf of the Company's clients,
these capabilities also will enable the Company to enhance its ability to staff
Company engagements as it implements its growth strategy. The Company intends to
provide competitive incentives, compensation and benefits in order to retain its
IT professionals, including the use of options to purchase the Company's Common
Stock.
EXPAND SERVICE OFFERINGS AND GEOGRAPHIC REACH. The Company plans to expand
its service offerings and add new businesses in order to offer new and existing
clients access to a more complete range of services. The Company intends to
expand its service offerings by addressing emerging technologies, including
web-based systems, Internet, intranet and object-oriented development systems.
The Company also plans to expand its geographic reach based on its clients'
needs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
IMPLEMENT DECENTRALIZED MANAGEMENT PHILOSOPHY; ACHIEVE CENTRAL OPERATING
EFFICIENCIES. The Company intends to operate with a decentralized management
structure to provide superior client service and a motivating environment for
its various subsidiaries. The Company anticipates that finance, accounting,
management information systems, treasury, employee benefits and certain
purchasing arrangements will be managed or provided on a centralized basis. The
Founding Companies and subsequently acquired businesses will manage the
professional services and technical aspects of their respective businesses in a
manner consistent with their historical practices and as dictated by local
market conditions. The Company believes that this approach will enable the
Founding Companies and subsequently acquired businesses to maintain their high
level of client service and contact, while allowing them to draw upon the
collective resources of the Company as a whole.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. Given the highly fragmented
nature of the IT service industry, the Company believes significant acquisition
opportunities exist. The Company seeks to acquire IT service companies to
strengthen its core competencies, to offer complementary services and to
facilitate its expansion into new geographic areas. The Company believes that it
will be regarded by acquisition candidates as an attractive acquiror because of:
(i) the Company's cross-selling strategy, which will offer owners of acquisition
candidates significant opportunities to enhance the growth of their businesses;
(ii) its decentralized operating strategy; (iii) the Company's increased
visibility and access to financial resources as a public company; and (iv) the
potential for the owners of the business being acquired to participate in the
Company's planned internal growth and growth through acquisitions, while at the
same time realizing near-term liquidity.
In addition to acquisitions, the Company may seek to form strategic
relationships with business partners to share technical and industry knowledge
and pursue joint marketing opportunities. These
40
<PAGE>
relationships typically will allow the Company to gain access to training,
product support and the technology developed by these partners.
SERVICES
The Company offers its clients a single source for a broad range of IT
services. The Company delivers each of these services independently or in
combination to provide a solution to a client's specific IT needs.
<TABLE>
<S> <C> <C> <C> <C>
Consulting Services System Services Desktop Services
- IT NEEDS ANALYSIS - CLIENT/SERVER - HARDWARE AND
- TECHNOLOGY DEVELOPMENT AND SOFTWARE PROCUREMENT
INFRASTRUCTURE DESIGN INTEGRATION - SYSTEMS MAINTENANCE
- FUTURE TECHNOLOGY - LAN/WAN DESIGN AND AND SUPPORT
PLANNING AND REFRESHMENT IMPLEMENTATION - HARDWARE AND
- SYSTEMS ARCHITECTURE - PROJECT MANAGEMENT AND SOFTWARE MAINTENANCE
DEVELOPMENT RESOURCE PLANNING - HELP-DESK OPERATIONS
- DECISION SUPPORT - HARDWARE AND SOFTWARE - SYSTEMS TESTING AND
PLANNING AND ANALYSIS SELECTION ENGINEERING
- BUSINESS PROCESS - INFORMATION ACCESS
AUTOMATION SOFTWARE DESIGN AND
- YEAR 2000 PLANNING AND IMPLEMENTATION
CONSULTING - SOFTWARE APPLICATION
- STRATEGIC MARKETING DESIGN AND DEVELOPMENT
SERVICES - CONTRACT STAFFING AND
RECRUITING
- TRAINING AND CONTINUING
EDUCATION
- CONFIGURATION, TESTING
AND INSTALLATION
</TABLE>
CONSULTING SERVICES
STRATEGIC PLANNING AND MANAGEMENT CONSULTING. The Company's technical
professionals provide strategic planning and management consulting to senior
management, typically through a client's chief executive officer, chief
financial officer or chief information officer. These services involve the
development of long-term technology plans that help the client to achieve
specific strategic business objectives and include IT needs analysis, technology
infrastructure design, future technology planning and refreshment, systems
architecture development, decision support planning and analysis, business
process automation and Year 2000 planning and consulting. The Company's ability
to perform such strategic consulting services gives it the opportunity to
deliver "follow-on" services to implement its recommended technology strategies.
STRATEGIC MARKETING PROGRAM DEVELOPMENT AND IMPLEMENTATION. The Company
also creates and executes strategic marketing programs for resellers and
manufacturers of software and hardware products. These programs include a wide
range of marketing related services, including marketing strategies, corporate
identity programs, creative development, merchandising programs, publications,
web site development, direct mail, advertising and event planning.
41
<PAGE>
SYSTEM SERVICES
DEVELOPMENT, INTEGRATION AND INSTALLATION OF IT SYSTEMS. The Company offers
its clients a single source for a wide range of IT services required to
successfully design, develop and implement integrated IT solutions in diverse
computing environments. The Company's services include client/server development
and integration; LAN and WAN design and implementation; project management and
resource planning; hardware and software selection; information access software
design and installation; systems migration planning and implementation;
configuration, testing and installation; and software application design and
development. The Company integrates servers, mini-computers and mainframe
systems, workstations, terminals and communication gateways into single
integrated networks. The Company also develops, sells and supports proprietary
software for information access and delivery in the end-user, production-data
market, primarily under the Safari InfoTools brand. This software enables
clients to manage information across virtually all databases, computing
platforms and operating systems in a three-tiered, client/server environment.
CONTRACT STAFFING AND RECRUITING. The Company contracts to provide both
temporary and permanent personnel with highly specialized technical skills. In
order to obtain the necessary technical personnel for its contract staffing
business, the Company conducts extensive recruiting operations. The Company also
uses these recruiting services to fulfill its internal personnel requirements.
TRAINING AND CONTINUING EDUCATION. The Company offers IT training through
its training facility in Annapolis, Maryland. The facility, a Microsoft
Authorized Technical Education Center, focuses on Microsoft NT certification
courses. The Company's services also include skills assessment, interactive
learning solutions at the desktop and courseware. The Company intends to expand
its training capabilities, using the Annapolis facility and programs as a model.
The Company also will use these training facilities to fulfill its internal
training requirements.
DESKTOP SERVICES
SYSTEMS MAINTENANCE AND SUPPORT. The Company provides a complete array of
desktop systems maintenance and support services to its clients, including
hardware and software maintenance, help-desk operations and systems testing and
engineering. These services, which are provided both on-site and on a remote
basis, allow clients to make efficient use of their technology tools by
minimizing network disruptions and downtime through the Company's rapid response
to applications inquiries.
PROCUREMENT. The Company resells hardware and software as part of its
desktop services. The Company maintains a dedicated procurement infrastructure
to manage the acquisition process through purchasing arrangements with
distributors, aggregators and manufacturers. The Company maintains reseller
certifications from leading hardware and software manufacturers, including
Microsoft, IBM, Novell, Cisco, 3Com, Compaq, Sun, Oracle, Hewlett-Packard, Bay
Networks and Apple.
CLIENTS AND ALLIANCE PARTNERS
The Company's clients include a broad array of middle market commercial and
governmental users of IT services. The Company focuses on serving four vertical
markets: financial services, healthcare, technology and government. In addition,
the Company has established relationships with "Alliance Partners" that involve
joint marketing, software distribution and the provision of services on a
subcontractor basis.
42
<PAGE>
The following table shows selected clients, categorized by industry group,
and Alliance Partners for which the Company has provided services in the past 12
months. The clients listed below are intended to convey the breadth and depth of
the Company's client relationships, and represent a sampling of the primary
industries in which the Company has a strong client base. While these clients
generally represent the largest of the Company's clients, the Company has over
200 active clients.
<TABLE>
<CAPTION>
TECHNOLOGY FINANCIAL SERVICES ALLIANCE PARTNERS
- -------------------------------- -------------------------------- ------------------------
<S> <C> <C>
CIC Systems CIGNA Property & Baan
Digital Equipment Casualty Computer Associates
Hewlett-Packard Fidelity Investments EDS
Hyperion Software Reinsurance Solutions Perot Systems
IBM International OTHER
PictureTel State Street Bank Mack Truck
Texas Instruments GOVERNMENT Town & Country
XLSource Internal Revenue Service Wheelabrator Tech
HEALTHCARE U.S. Customs Department
Boston University Hospital U.S. Department of Defense
CIGNA Property & Casualty U.S. Department of Justice
McNeil Consumer Products
US Healthcare
</TABLE>
For the year ended December 31, 1996, the Company's top 10 clients accounted
for 46.4% of the Company's pro forma combined revenues. No single client
accounted for as much as 10% of the Company's pro forma combined revenues,
except for the U.S. Customs Department, which accounted for 10.8% of the
Company's pro forma combined revenues. On a pro forma combined basis, the
Company generated revenues of over $1 million from approximately 20 of its
clients in 1996.
SALES AND MARKETING
The Company's marketing efforts focus on middle market organizations, which
typically spend from $2 million to $30 million annually on their IT needs. In
addition, the Company targets the financial services, healthcare, technology and
governmental markets.
The Company intends to focus its sales and marketing efforts around four
principal goals: (i) continuing to expand the existing sales and marketing
efforts of the Founding Companies; (ii) cross-selling the complementary service
capabilities of the Founding Companies and any subsequently acquired companies
across the Company's client base; (iii) leveraging the experience and reputation
of the Company's senior management to secure middle market, IT service contracts
in the $10 million to $50 million range; and (iv) establishing Condor as a
nationally recognized, full-service provider of IT services.
As of September 30, 1997, the Company had approximately 85 sales and
marketing personnel. The Company intends to market its services through each of
the sales forces at the Founding Companies as well as through the Company's
corporate sales force. This approach will allow the Company to market its
services independently or in combination to provide a solution to a client's
specific IT needs. The senior executives of the Founding Companies have
historically been the primary sales and marketing leaders at such companies and
will continue to provide this leadership. The Company intends to add sales and
marketing personnel to assist senior executives in increasing the number of new
clients and the amount of business generated from existing clients.
The Company generates sales leads through referrals from clients and
management consultants, responses to requests for proposals, strategic alliances
with complementary companies, the Company's Internet web sites and associated
links, industry seminars, trade shows, direct telephone and mail campaigns and
advertisements in trade journals. In addition, the Company intends to leverage
the experience and reputation within the IT service industry of its senior
management team. The Company
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also intends to retain senior industry consultants to assist in identifying,
marketing and securing large IT service contracts with middle market
organizations.
The Company intends to expand its marketing efforts by coordinating the
Founding Companies' responses to requests for proposals from current clients. In
addition, the Company believes it has a significant opportunity to cross-sell
its IT offerings to its existing client base. Historically, MST, which provides
strategic planning and management consulting at the most senior levels of an
organization, outsourced or partnered with other IT service providers in order
to provide the resources to implement the technology programs it had developed.
The implementation of such technology programs has generated revenues for other
IT service providers that generally exceeded the revenues derived by MST in
providing its services. As a result of the formation of the Company, MST will be
able to offer its clients a wider range of IT services and solutions and capture
revenue opportunities created by its strategic planning and consulting practice.
The Company's senior management intends to work directly with the Founding
Companies to assist them in identifying and coordinating opportunities to
cross-sell additional services.
The Company intends to implement marketing and advertising campaigns to
establish the Company as a leading provider of IT offerings to middle market
organizations. The Company believes these efforts will help it obtain new
clients and attract and retain employees.
COMPETITION
The market for the Company's services is highly competitive. The Company's
competitors vary in size and in the scope of the products and services that they
offer. Primary competitors generally include consulting and systems
implementation firms, "Big Six" accounting firms, applications development
firms, service groups of computer equipment companies, general management
consulting firms, programming companies, temporary staffing firms and other IT
service providers. Traditionally, the largest service providers have principally
focused on providing full-service solutions to international Fortune 500
companies. There is an emerging group of smaller services companies (in terms of
market share and scope and size of contracts) that are exploring opportunities
in broader markets, including Cambridge Technology Partners, Perot Systems
Corporation, The Registry and Technology Solutions Corp.
There are relatively low barriers to entry into the Company's markets, and
the Company expects to face competition from established and emerging companies.
Increased competition may result in greater pricing pressure, which could
adversely affect the Company's gross margins. In addition, many of the Company's
competitors have greater financial, development, technical, marketing and sales
resources than the Company. As a result, the Company's competitors may be able
to adapt more quickly to new or emerging technologies and to changes in client
requirements, or to devote greater resources than the Company to the
development, promotion, sale and support of IT products and services. In
addition, there is a risk that clients may elect to increase their internal IT
resources to satisfy their IT solutions needs. The Company also intends to enter
new markets and offer new services, and expects to face intense competition from
existing and new competitors, particularly since barriers of entry in the IT
service industry are low. There can be no assurance that the Company will
continue to provide IT services and products demanded by the market or be able
to compete successfully with existing or new competitors. An inability to
compete in its market effectively would have a material adverse effect on the
Company's results of operations, financial condition and business.
The Company believes that the principal competitive factors in the IT
service industry include quality of service, availability of qualified technical
personnel, responsiveness to client requirements and needs, price, ability to
deliver on large multi-year contracts, breadth of product and service offerings,
timely completion of projects, adherence to industry technical standards,
capital resources and general market reputation. The Company also believes that
a variety of competitive factors beyond its control, including the capabilities,
resources and reputations of its competitors, may affect the Company's ability
to compete effectively.
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HUMAN RESOURCES
The Company's success depends in large part upon its ability to attract,
develop, motivate and retain highly-skilled technical employees. The Company
dedicates significant resources to employee recruitment and employs multiple
recruiting methods, such as maintaining a presence at local and regional
technical colleges, newspaper and technical periodical classified advertising,
participation in national and regional job fair networks and the establishment
of employee referral incentive programs. The Company maintains a staff of 10
full-time recruiters. The Company plans to supplement its internal recruiting
efforts by using the resources of its contract staffing business, including
access to a database of qualified technical professionals. Qualified technical
employees are in great demand and are likely to remain a limited resource for
the foreseeable future. Candidates are typically screened through detailed
interviews by the Company's recruiting personnel, technical interviews by
consultants and an appraisal by the Company's managers.
The Company has developed programs to help train, motivate and retain its
employees. For example, the Company intends to implement a performance-based
incentive compensation program. The Company also intends to develop training
programs to guide technical personnel continually through a progression of skill
and competency development programs. As another incentive measure, the Company
plans to issue options to its employees under the Plan. Most importantly, in
addition to formal programs, the Company plans to maintain an environment that
fosters creativity and recognizes technical excellence.
The Company is dependent upon its ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet the
staffing requirements of its clients and the Company's own personnel needs.
Competition for individuals with proven technical skills is intense. There can
be no assurance the Company will be able to recruit or retain the technical
personnel necessary to execute its business and growth strategy.
As of September 30, 1997, the Company employed approximately 532 employees,
of whom approximately 345 were technical personnel. None of the Company's
employees is represented by a collective bargaining agreement. Although most
consultants are Company employees, the Company does engage consultants as
independent contractors from time to time. The Company considers relations with
its employees to be good.
45
<PAGE>
FACILITIES
The Company's headquarters are located in McLean, Virginia. In addition to
its headquarters, the Company leases office space and warehouse space as
follows:
<TABLE>
<CAPTION>
LOCATION TYPE
- ----------------------------- --------------------------------------
<S> <C>
Allentown, PA Warehouses
Annapolis, MD Office/Training Center/Warehouse
Andover, MA Office/Warehouse
Boston, MA Office
Dallas, TX Office
Denver, CO Office
Falls Church, VA Office
Framingham, MA Office
Hanover, Germany Office
Joplin, MO Office
Langhorne, PA Office/Warehouse
Lincoln, NE Office
Oklahoma City, OK Office
Pittsburgh, PA Office
San Jose, CA Office
Scottsdale, AZ Office
Seal Beach, CA Office
St. Louis, MO Office
Tulsa, OK Office
Utrecht, The Netherlands Office
Vienna, VA Warehouse
</TABLE>
The leases expire at various times between 1997 and 2004. The aggregate
square footage for all of the Company's offices and warehouses is 113,677 square
feet.
Corporate Access leases property in Andover, Massachusetts that is owned by
Corpac II Realty Trust, of which Richard T. Marino, the President of Corporate
Access, is a trustee. The lease provides for monthly rentals of approximately
$7,600. The Company believes that the rent for such property does not exceed the
fair market rental thereof. See "Certain Transactions" and the Notes to the
Founding Companies' Historical Financial Statements for information regarding
lease obligations.
The Company has entered into a lease agreement, dated August 1, 1997, with
Tysons II Development Co. Limited Partnership for 8,829 square feet of leased
space at its corporate headquarters located at 1650 Tysons Boulevard, Suite 600,
McLean, Virginia. Under the agreement, which expires on July 31, 2007, subject
to a five-year renewal option, the Company is responsible for annual rental
payments totaling approximately $251,600. The Company currently subleases a
portion of the premises to The Fortress Group, Inc. ("Fortress Group"), a public
U.S. homebuilding company for which J. Marshall Coleman, Chairman of the Board
of the Company, serves as Chairman of the Board. Annual rental under the
sublease is approximately $101,600.
LEGAL PROCEEDINGS
In the course of Condor's consolidation efforts, Condor negotiated with
Emtec, Inc. ("Emtec"), an IT service company based in Pennsylvania, with a view
to Emtec becoming one of the Founding Companies. As part of this process,
Emtec's investment banker and Commonwealth executed two confidentiality
agreements pursuant to which each agreed, among other things, not to disclose
certain confidential information and Commonwealth agreed that Condor would not
acquire two companies to be introduced to it by Emtec's investment banker for a
period of two years without such investment banker's prior written consent.
Neither Emtec nor Condor was a signatory to either agreement. Emtec's investment
bank then introduced representatives of Commonwealth and Condor to two of the
Founding Companies, CHMC and Corporate Access, and Condor and the three
companies then proceeded over the course of more than two
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<PAGE>
months to negotiate the terms and conditions pursuant to which each of those
companies would be acquired by Condor in connection with its consolidation
efforts and this Offering. On or about July 24, 1997, Condor informed Emtec that
due to Emtec's failure to resolve problems that were critical to ensuring
Emtec's participation in the consolidation and initial public offering, Condor
could no longer continue with its plans to acquire Emtec. On October 28, 1997,
Emtec filed suit in the United States District Court for the Eastern District of
Pennsylvania against Condor, Commonwealth, J. Marshall Coleman and Kennard F.
Hill alleging breach of contract, tortious interference with Emtec's business
relationship with Corporate Access and CHMC and misappropriation of a trade
secret arising out of the participation of CHMC and Corporate Access in the
consolidation and initial public offering without Emtec's consent. In connection
with the three causes of action, Emtec seeks an injunction restraining Condor
and Commonwealth from engaging in any business transaction with CHMC or
Corporate Access through May 13, 1999, demands that the defendants disgorge the
financial benefits that they have and will obtain as a result of their breach of
contract and seeks compensatory and punitive damages. Condor and the other
defendants intend to defend vigorously against this action. Condor has agreed to
indemnify CHMC's directors, officers and stockholders against any liability such
persons may incur as a result of any claims brought by Emtec against any of them
that directly related to CHMC's participation as a Founding Company.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and other information
concerning those persons who currently are or who will be directors and
executive officers of the Company upon the closing of this Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------- --------- -----------------------------------------------------
<S> <C> <C>
Kennard F. Hill.................................. 57 Chairman of the Board (1) and Chief Executive Officer
C. Lawrence Meador............................... 51 Vice Chairman of the Board (1)
Daniel J. Roche.................................. 35 President (1) and Chief Operating Officer
Santanu Sarkar................................... 32 Chief Financial Officer
William J. Caragol, Jr........................... 30 Vice President of Finance
J. Marshall Coleman.............................. 55 Director
Peter T. Garahan................................. 51 Director (1)
Edward J. Mathias................................ 56 Director (1)
William M. Newport............................... 69 Director (1)
</TABLE>
- ------------------------
(1) Appointment will become effective upon the closing of this Offering.
Kennard F. Hill has been President, Chief Executive Officer and a director
of the Company since January 1997. He will resign as President and become
Chairman of the Board of the Company effective upon the closing of this
Offering. Mr. Hill was Group President at I-NET, Inc., a network computing and
systems integration services company, from September 1995 to December 1996. From
June 1993 to June 1995, Mr. Hill was President and Chief Executive Officer of
Insource Technology, Inc., an IT consulting firm. From June 1992 to June 1993,
Mr. Hill was a private consultant on client/server acquisition strategy in the
healthcare industry. From 1988 to July 1992, Mr. Hill was Chief Executive
Officer of DataLine Inc., a data processing and IT firm. From 1968 to 1988, Mr.
Hill was employed by Electronic Data Systems Corporation, a full-service IT
provider ("EDS"). He served as President of General Motors-EDS for North America
from 1985 to 1988. At EDS, Mr. Hill also served as chief of the Healthcare
Division, having previously served as its Director of Sales. Mr. Hill also was
an officer of EDS's Federal Corp. subsidiary and a director of its National
Heritage Insurance Corp. subsidiary, which provides healthcare underwriting for
lower-income policyholders. In December 1994, Mr. Hill filed a voluntary
petition in bankruptcy in order to discharge indebtedness arising out of his
divorce and several partnerships in which he was a limited partner. The
bankruptcy was discharged in January 1996. Mr. Hill attended the University of
Texas and served two tours of duty as a United States Army pilot in Vietnam.
C. Lawrence Meador will become Vice Chairman of the Board of Directors of
the Company and Chief Executive Officer of MST effective upon the closing of
this Offering. Mr. Meador is the founder and has been the President of MST, a
Founding Company, since 1992. Since January 1996, Mr. Meador has served, under
an MST contract, as the Chief Information Officer of CIGNA Property and
Casualty, an insurance company. All fees payable by CIGNA Property and Casualty
in connection with Mr. Meador's services as the Chief Information Officer of
CIGNA Property and Casualty are payable to MST. Mr. Meador has also been on the
academic staff of the Massachusetts Institute of Technology for over 20 years,
during which period he was a consultant to numerous international Fortune 1000
companies, governmental bodies and other organizations. Mr. Meador received a
bachelor of science degree from the University of Texas and masters degrees in
management and mechanical engineering from the Massachusetts Institute of
Technology.
Daniel J. Roche became Chief Operating Officer of the Company effective
October 27, 1997 and will become President of the Company effective upon the
closing of this Offering. Mr. Roche previously served
48
<PAGE>
as the Chief Operating Officer and Executive Vice President of BSG, an IT
service division of Medaphis Corp. that focuses on client/server and network
technologies. In 1991, Mr. Roche founded Rapid Systems Solutions, Inc., a
provider of client/server applications with competencies in database management
systems, networking, communications and graphical user interfaces, which BSG
acquired in May 1996. From 1985 to 1990, Mr. Roche was an Associate at
Booz-Allen & Hamilton. Mr. Roche received a masters degree in computer science
from The Johns Hopkins University and a bachelor of science degree in computer
science from Central Michigan University.
Santanu Sarkar has been Chief Financial Officer of the Company since July
1997. He joined Condor from Commonwealth, where he was a Vice President from
March 1997 to June 1997. From June 1992 to February 1997, Mr. Sarkar was a
member of the Mergers & Acquisitions Group at Wasserstein Perella & Co., an
investment banking firm, where he most recently served as a Vice President. He
also previously served as a Financial Analyst in the investment banking firm of
Dillon, Read & Co. Mr. Sarkar graduated from the University of Pennsylvania,
where he received a bachelor of arts degree from the College of Arts and
Sciences and a bachelor of science degree from The Wharton School. Mr. Sarkar
also earned a masters degree in economics from Yale University.
William J. Caragol, Jr. has been Vice President of Finance of the Company
and Chief Financial Officer of MST since October 1997. Prior to joining Condor,
he was a Senior Manager in the High Technology Service Group of Deloitte &
Touche LLP, which he joined in 1989. As a member of the High Technology Service
Group, Mr. Caragol provided comprehensive accounting services to publicly-held
U.S. corporations in the technology sector. Mr. Caragol is a Certified Public
Accountant, and is a member of the American Institute of Certified Public
Accountants. He received a bachelor of science degree in accounting and business
administration from Washington & Lee University.
J. Marshall Coleman has been Chairman of the Board of Directors of the
Company since August 1996. He will resign as Chairman of the Board of the
Company upon the closing of this Offering but remain as a director of the
Company. Mr. Coleman is also currently Chairman of the Board of Fortress Group,
a public U.S. homebuilding company. Mr. Coleman also serves as Managing Director
of Commonwealth, a Virginia-based merchant banking firm. From August 1992
through April 1996, Mr. Coleman was an attorney with Katten Muchin & Zavis, a
national law firm, and was the Managing Partner of its Washington office from
1994 until April 1996. From 1985 until 1992, Mr. Coleman was an attorney at the
Washington, D.C. law firm of Arent, Fox, Kintner, Plotkin and Kahn. Mr. Coleman
was Attorney General of Virginia from 1978 to 1982. In 1975, Mr. Coleman was
elected to the Virginia State Senate. In 1972, Mr. Coleman was elected to the
Virginia House of Delegates and also served as a United States Magistrate from
1970 to 1972. Mr. Coleman received bachelor of arts and juris doctor degrees
from the University of Virginia. He is a veteran of the United States Marine
Corps, having served as an officer in Vietnam.
Peter T. Garahan will become a director of the Company upon the closing of
this Offering. Mr. Garahan has been a principal of The Ryegate Group, a
strategic and financing consulting firm, since January 1997. From March 1995 to
December 1996, Mr. Garahan was Executive Vice President - Sales and Marketing of
Mitchell International, an IT company servicing the automotive industry and a
subsidiary of the Thomson Corporation, a major publishing and information
company company. From May 1992 through December 1996, Mr. Garahan was President
of Mitchell Medical, formerly Medical Decision Systems, a software company
specializing in automotive medical insurance claims analysis. Mr. Garahan
received a bachelor of arts degree from the State University of New York at
Stony Brook and a masters degree in business administration from Cornell
University. Mr. Garahan serves on the board of directors of each of AmTeva
Technologies, a voice services software company, and National Medical Advisory
Service, a litigation consulting firm. Mr. Garahan is a veteran of the United
States Navy.
Edward J. Mathias will become a director of the Company upon the closing of
this Offering. Mr. Mathias has been a Managing Director of The Carlyle Group, a
Washington, D.C.-based merchant bank, since January 1994. Prior to joining
Carlyle, Mr. Mathias held various positions at T. Rowe Price
49
<PAGE>
Associates, Inc., an investment management firm, from June 1971 to December
1993, serving most recently as a Managing Director. He received a masters degree
in business administration from Harvard Business School and a bachelor of arts
degree from the University of Pennsylvania. Mr. Mathias also serves on the board
of directors of U.S. Office Products, an office products distributor, Fortress
Group, Sirrom Capital and PathoGenesis.
William M. Newport will become a director of the Company upon the closing of
this Offering. Mr. Newport has been a Director and Chairman of the Audit
Committee of the Corporation for National Research Initiatives, an independent
non-profit research and development organization, since . Mr.
Newport has also been a non-executive Director of Ovum Holdings plc, a
privately-held London based consulting firm specializing in communications and
IT, since and a Director of Authentix Network, Inc., a
privately-held company engaged in providing cellular roaming fraud prevention
solutions to the cellular industry, since . Mr. Newport was
Vice-President, Strategic Planning at Bell Atlantic Corporation from
to December 1992. Mr. Newport received a bachelor of science
degree in electrical engineering from Purdue University and a [SM] in management
from the Sloan School of Business at the Massachusetts Institute of Technology,
which he attended as a Sloan Fellow.
All officers serve at the discretion of the Board of Directors.
BOARD CLASSIFICATION
Effective upon the closing of this Offering, the Board of Directors will be
divided into three classes of two directors, each, with directors serving
staggered three-year terms, expiring at the annual meeting of stockholders in
1998, 1999 and 2000, respectively. See "Description of Capital Stock." At each
annual meeting of stockholders, one class of directors will be elected for a
full term of three years to succeed that class of directors whose terms are
expiring. Directors whose terms expire in 1998 are Messrs. Garahan and Meador;
the directors whose terms expire in 1999 are Messrs. Mathias and Newport; and
the directors whose terms expire in 2000 are Messrs. Coleman and Hill.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee, effective upon the closing of this Offering. The Audit Committee will
review the results and scope of the audit and other services provided by the
Company's independent accountants and will consist of Mr. Coleman and Mr.
Mathias. The Compensation Committee will approve salaries and certain incentive
compensation for management and key employees of the Company, will administer
the 1997 Long-Term Incentive Plan and will consist of Mr. Coleman and Mr.
Mathias.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries will receive an
annual retainer fee of $5,000. In addition, under the Company's 1997 Long-Term
Incentive Plan, each person serving or who has agreed to serve as a non-employee
director at the commencement of this Offering will be granted automatically an
option to acquire 10,000 shares of Common Stock, and thereafter each person who
becomes a non-employee director will be granted automatically an initial option
upon such person's initial election as a director. In addition, each such non-
employee director will be granted, subject to a certain exception, an annual
option to acquire 5,000 shares at each annual meeting of the Company's
stockholders thereafter at which such director is re-elected or remains a
director. See "--1997 Long-Term Incentive Plan." Directors also will be
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof, in their capacity as directors.
50
<PAGE>
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company was incorporated in August 1996 and has conducted no operations
and did not pay any of its executive officers compensation during 1996. The
Company has entered into the following employment agreements with Messrs.
Meador, Hill, Roche, Sarkar and Caragol.
Mr. Hill has entered into an employment agreement with the Company,
effective as of January 2, 1997, providing for an annual base salary of $216,000
until the closing of this Offering and $300,000 after the closing of this
Offering. Mr. Hill also will participate in the bonus program to be established
by the Company in the same manner as the other executives as described below.
Mr. Hill also acquired 135,503 shares of the Common Stock of the Company and
will be granted options to purchase 100,000 shares of the Company's Common
Stock, pursuant to his employment agreement. Mr. Hill's employment agreement has
a three-year term with automatic renewals for successive one-year periods (each
a "Renewal Period") unless, within 30 days prior to the termination of any such
period, either party shall have given written notice to the other party that the
term shall not be so extended.
If the Company terminates Mr. Hill's employment other than for cause prior
to January 2, 1998, he will be entitled to receive all of the benefits payable
under his agreement for the balance of the initial term. If the Company
terminates Mr. Hill's employment other than for cause after January 2, 1998
(Renewal Periods included), he will receive severance pay equal to 100% of his
base salary for the period of time that would have been remaining in the initial
term or any Renewal Period of his Employment Agreement, as the case may be.
Each of Messrs. Meador, Roche, Sarkar and Caragol will enter or has entered
into an employment agreement with the Company providing for an annual base
salary of $431,815, $220,000, $150,000 and $110,000, respectively, and a bonus
to be determined annually in accordance with an annual bonus program of the
Company for senior executives, which bonus shall be contingent upon the
achievement of certain corporate and/or individual performance goals established
by the Compensation Committee. Mr. Meador's agreement provides that he shall be
paid a special bonus equal to 1% of the total purchase price or total investment
for any acquisition or joint venture by the Company that Mr. Meador identifies
and in which he assists in the closing thereof. Mr. Meador's employment
agreement will be effective as of the closing of this Offering for a term of
three years. Mr. Caragol's employment agreement was effective as of November 1,
1997 for a term of three years. Mr. Roche's employment agreement was effective
as of October 27, 1997 for a term of three years. Mr. Sarkar's employment
agreement was effective as of July 1, 1997 for a term of three years. Effective
as of the expiration of each such initial term and as of each anniversary date
thereof, the term shall be extended automatically for an additional 12-month
period on the same terms and conditions existing at the time of renewal unless,
not later than two months prior to each such respective date, either party shall
have given notice to the other party that the term shall not be so extended.
Each of these agreements will provide that, in the event of a termination of
employment by the Company without cause (other than upon the death or disability
of the employee) or by the employee for good reason (including (i) a material
breach by the Company of the compensation and benefits provisions set forth in
the agreement; (ii) a material breach by the Company of any other term of the
agreement; (iii) except in the case of Mr. Hill, a notice of termination by such
employee following a Change of Control of the Company, as defined in the
agreement; (iv) except in the case of Mr. Hill, a material diminution in the
employee's duties or responsibilities, as defined under the agreement; or (v) in
the case of Mr. Meador, if he is no longer a director of the Company or MST),
the employee shall be entitled to severance payments equal to the employee's
base salary as in effect immediately prior to such termination over the longer
of the then-remaining term or 12 months (the "Severance Period"). In addition,
under the foregoing circumstances, all options to purchase Common Stock issued
to the employee shall become immediately vested and exercisable and, subject to
the 1997 Long-Term Incentive Plan, shall remain exercisable during the Severance
Period.
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<PAGE>
Pursuant to his employment agreement, Mr. Roche acquired 108,402 shares of
the Company's Common Stock. In addition, options to purchase 75,000 shares of
the Company's Common Stock will be granted to Mr. Roche. See "--1997 Long-Term
Incentive Plan."
Each of the aforementioned employees will also be entitled to coverage under
the group medical care, disability and life insurance benefit plans or
arrangements in which such employee is participating at the time of termination,
for the continuation of the Severance Period, provided such employee does not
have comparable substitute coverage from another employer. Each employment
agreement contains a covenant-not-to-compete with the Company without the prior
approval of the Board of Directors of the Company. The covenant-not-to-compete
is in effect during the period of employment, as well as during the Severance
Period, if applicable. In the case of Mr. Meador, the covenant-not-to-compete is
in effect initially for a period of four years from the closing of this Offering
and remains in effect thereafter during his employment period. In the event Mr.
Meador is terminated by the Company without cause or he resigns for good reason,
the Company must continue to pay him his base salary in order to keep the
covenant-not-to-compete in effect beyond the Severance Period.
1997 LONG-TERM INCENTIVE PLAN
In July 1997, the Board of Directors and the Company's stockholders approved
the Company's 1997 Long-Term Incentive Plan, which was amended in November 1997
(as amended, the "Plan"). The purpose of the Plan is to provide a means by which
the Company can attract and retain executive officers, key employees, directors,
consultants and other service providers and to compensate such persons in a way
that provides additional incentives and enables such persons to increase their
ownership interests in the Company. Individual awards under the Plan may take
the form of one or more of: (i) either incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs");
(iii) restricted or deferred stock; (iv) dividend equivalents; (v) bonus shares
and awards in lieu of Company obligations to pay cash compensation; and (vi)
other awards the value of which is based in whole or in part upon the value of
the Common Stock.
The Plan will generally be administered by a committee (the "Committee"),
which will initially be the Compensation Committee of the Board, except that the
Board will itself perform the Committee's functions under the Plan for purposes
of grants of awards to non-employee directors, and may perform any other
function of the Committee as well. The Committee generally is empowered to
select the individuals who will receive awards and the terms and conditions of
those awards, including exercise prices for options and other exercisable
awards, vesting and forfeiture conditions (if any), performance conditions, the
extent to which awards may be transferable and periods during which awards will
remain outstanding. Awards may be settled in cash, shares, other awards or other
property, as determined by the Committee.
The maximum number of shares of Common Stock that may be subject to
outstanding awards under the Plan at any time may not exceed 12% of the
aggregate number of shares of Common Stock outstanding, minus the number of
shares previously issued pursuant to awards granted under the Plan. The number
of shares deliverable upon exercise of ISOs is limited to 1,000,000. The Plan
also provides that no participant may be granted in any calendar year (i)
options or SARs exercisable for more than 400,000 shares; or (ii) other awards
that may be settled by delivery of more than 200,000 shares, and limits payments
under cash-settled awards in any calendar year to an amount equal to the fair
market value of that number of shares as of the date of grant or the date of
settlement of the award, whichever is greater.
In addition to authorizing grants of awards to any eligible person in the
discretion of the Committee, the Plan authorizes automatic grants of NQSOs to
non-employee directors. Under these provisions, each person serving or who has
agreed to serve as a non-employee director at the commencement of this Offering
will be granted an initial option to purchase 10,000 shares, and thereafter each
person who becomes a non-employee director will be granted an initial option to
purchase 10,000 shares upon such person's initial election as a director. In
addition, these provisions authorize the automatic annual grant to
52
<PAGE>
each non-employee director of an option to purchase 5,000 shares at each annual
meeting of stockholders following this Offering; provided, however, that a
director will not be granted an annual option if he or she was granted an
initial option during the preceding three months. The number of shares to be
subject to initial or annual options to be granted after the first annual
meeting of stockholders following this Offering may be altered by the Board of
Directors. These options will have an exercise price equal to the fair market
value of Common Stock on the date of grant (in the case of options granted in
connection with this Offering, the exercise price will be the initial public
offering price per share in this Offering), and the options will expire at the
earlier of 10 years after the date of grant or one year after the date the
participant ceases to serve as a director of the Company for any reason, and
generally will become exercisable one year after the date of grant, except that
an option may be forfeited upon a participant's termination of service as a
director for reasons other than death or disability if the date of termination
is less than 11 months after the date of grant.
In connection with this Offering, in addition to the options to be
automatically granted to non-employee directors, options in the form of NQSOs to
purchase a total of 262,500 shares of Common Stock of the Company will be
granted to executive officers of the Company as follows: 100,000 shares to Mr.
Hill, 75,000 shares to Mr. Roche, 50,000 shares to Mr. Sarkar and 37,500 shares
to Mr. Caragol. In addition, options to purchase 649,663 shares will be granted
to directors of the Company and other employees of the Company and to employees
of the Founding Companies in connection with this Offering. Each of the
foregoing options will have an exercise price equal to the initial public
offering price per share in this Offering, and will vest as to 33% each on the
date that is 12 months, 24 months and 36 months after the date of closing of
this Offering. Unvested options generally will be forfeited upon a termination
of employment that is voluntary by the participant. Upon a change of control of
the Company (as defined), vesting will be accelerated. The options generally
will expire on the earlier of 10 years after the date of grant or three months
after termination of employment (immediately in the event of a termination for
cause), unless otherwise determined by the Committee.
In connection with the Mergers, the Company will assume options to acquire
shares of common stock of certain of the Founding Companies which, following the
Mergers, will constitute options to purchase an aggregate of 64,970 shares of
Common Stock of the Company at an exercise price equal to the initial public
offering price per share. The other terms of such options will be the same as
the terms of the options described in the preceding paragraph.
The Company generally will be entitled to a tax deduction equal to the
amount of compensation realized by a participant through awards under the Plan,
except (i) no deduction is permitted in connection with ISOs if the participant
holds the shares acquired upon exercise for the required holding periods; and
(ii) deductions for some awards could be limited under the $1.0 million
deductibility cap of Section 162(m) of the Internal Revenue Code. This
limitation, however, should not apply to awards granted under the Plan during a
grace period of approximately three years following this Offering, and should
not apply to certain options, SARs and performance-based awards granted
thereafter if the Company complies with certain requirements under Section
162(m).
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted. The
number of shares reserved or deliverable under the Plan, the annual
per-participant limits, the number of shares subject to options automatically
granted to non-employee directors and the number of shares subject to
outstanding awards are subject to adjustment in the event of stock splits, stock
dividends and other extraordinary corporate events.
53
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Condor was formed in August 1996. Condor was initially capitalized by
Commonwealth, a Virginia-based merchant banking firm, of which J. Marshall
Coleman, a director of the Company, is a Managing Director. In connection with
the organization of the Company, Commonwealth acquired 1,310,271 shares of
Common Stock in exchange for consulting, financial advisory and capital raising
services provided by Commonwealth to Condor and Commonwealth's commitment to
provide the funds necessary to effect the Mergers and this Offering. These
shares were distributed to the members of Commonwealth, J. Marshall Coleman,
James J. Martell, Jr. and Charles F. Smith, in November 1997. Commonwealth will
be reimbursed for the funds advanced by it to the Company out of the proceeds of
this Offering, together with interest on such advances at the prime rate. Such
advances aggregated approximately $1.0 million as of September 30, 1997, and the
Company expects such advances will aggregate approximately $2.2 million as of
the closing of this Offering.
Simultaneously with the closing of this Offering, Condor will acquire by
merger all of the issued and outstanding stock of the eight Founding Companies,
at which time each Founding Company will become a wholly owned subsidiary of the
Company. The aggregate consideration to be paid by Condor in the Mergers
consists of (i) approximately $48.2 million in cash; (ii) 2,153,355 shares
(based on an assumed initial public offering price of $14.00 per share) of
Common Stock, for an aggregate value of approximately $30.1 million; and (iii)
approximately $1.3 million of indebtedness of the Founding Companies to be
assumed by the Company. The Company also will assume options to purchase shares
of common stock of certain of the Founding Companies which, following the
Mergers, will constitute options to purchase an aggregate of 64,970 shares of
Common Stock of the Company. See "Management--1997 Long-Term Incentive Plan."
The consideration to be paid for the Founding Companies was determined
through arm's-length negotiations between Condor and the representatives of each
Founding Company. The factors considered by the Company in determining the
consideration to be paid included, among others, the historical operating
results, the net worth, the amount and type of indebtedness and the future
prospects of the Founding Companies. Each Founding Company was represented by
independent counsel in the negotiation of the terms and conditions of the
Mergers. Immediately prior to the Mergers, one of the Founding Companies will
repurchase certain shares held by a minority stockholder for $2.0 million and
distribute $1.0 million to its stockholders and another Founding Company will
distribute $4.0 million to certain stockholders.
The aggregate consideration to be paid by Condor for each of the Founding
Companies is as follows:
<TABLE>
<CAPTION>
COMMON STOCK(1)
--------------------------- DEBT
FOUNDING COMPANY NUMBER DOLLAR VALUE CASH ASSUMED TOTAL
- --------------------------------------- ------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
MST (2)................................ 560,714 $ 7,850,000 $ 9,750,000 $ 550,000 $ 18,150,000
CHMC (3)............................... 135,714 1,900,000 17,861,000 200,000 19,961,000
Federal (4)............................ 535,714 7,500,000 7,500,000 - 15,000,000
Corporate Access (5)................... 196,214 2,747,000 5,494,000 - 8,241,000
ISSI (6)............................... 500,000 7,000,000 5,000,000 28,000 12,028,000
USComm (7)............................. 42,857 600,000 600,000 130,000 1,330,000
InVenture (8).......................... 53,571 750,000 750,000 - 1,500,000
MIS (9)................................ 128,571 1,800,000 1,200,000 371,000 3,371,000
------------ ------------- ------------- ------------ -------------
Total.................................. 2,153,355 $ 30,147,000 $ 48,155,000 $ 1,279,000 $ 79,581,000
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
</TABLE>
- ------------------------
(1) Based on an assumed initial public offering price of $14.00 per share. In
order to maintain the dollar value of the stock consideration as of the
closing of this Offering, the total shares issuable in the
54
<PAGE>
Mergers will increase or decrease to the extent the initial public offering
price differs from $14.00 per share.
(2) Pursuant to an earn-out, contingent consideration of up to $8,400,000 may be
paid, $2,520,000 of which would be paid in cash and the remainder of which
would be paid in Common Stock, depending on MST's pre-tax income in 1998,
1999 and 2000.
(3) Includes an estimated $761,000 of additional cash consideration pursuant to
an agreed book value at closing as set forth in the Merger Agreement.
(4) Pursuant to an earn-out, contingent consideration of up to $9,000,000 may be
paid, $3,150,000 of which would be paid in cash and the remainder of which
would be paid in Common Stock, depending on Federal's pre-tax income in 1998
and 1999.
(5) Includes an estimated $441,000 of additional consideration apportioned
two-thirds cash and one-third stock pursuant to the purchase price
adjustment set forth in the Merger Agreement.
(6) Pursuant to an earn-out, contingent consideration of up to $14,000,000 may
be paid, $4,200,000 of which would be paid in cash and the remainder of
which would be paid in Common Stock, depending on ISSI's pre-tax income in
1998 and 1999.
(7) Pursuant to an earn-out, contingent consideration of up to $7,000,000 may be
paid, $2,100,000 of which would be paid in cash and the remainder of which
would be paid in Common Stock, depending on USComm's pre-tax income in 1997,
1998 and 1999.
(8) Pursuant to an earn-out, contingent consideration of up to $14,000,000 may
be paid, $4,666,667 of which would be paid in cash and the remainder of
which would be paid in Common Stock, depending on InVenture's pre-tax income
in 1997, 1998 and 1999.
(9) Pursuant to an earn-out, contingent consideration of up to $5,500,000, may
be paid, $2,200,000 of which would be paid in cash and the remainder of
which would be paid in Common Stock, depending on MIS's pre-tax income in
1998 and 1999.
The closing of the Mergers is subject to customary conditions. These
conditions include, among others, the simultaneous closing of this Offering and
the transactions contemplated by the Merger Agreements; the accuracy on the
closing date of the Mergers of the representations and warranties made by the
Founding Companies, their principal stockholders and Condor; the performance of
each of the parties' respective covenants included in the Merger Agreements; the
nonexistence of a material adverse change in the results of operations,
financial condition or business of any of the Founding Companies; and the
execution of employment agreements between the principal executive officers of
each of the Founding Companies and the Company or such Founding Company. There
can be no assurance that the conditions to the Mergers will be satisfied or
waived or that the Merger Agreements will not be terminated prior to
consummation. If any of the Merger Agreements is terminated for any reason, it
is likely that the Company will not close this Offering on the terms described
herein.
Each of the stockholders of the Founding Companies has agreed not to compete
with the Company for four years, commencing on the date of the closing of this
Offering.
In connection with the Merger of MST into the Company, and as consideration
for his interest in MST, Mr. Meador, who will be an executive officer, director
and holder of more than 5% of the outstanding shares of Common Stock of the
Company upon the closing of this Offering, will receive 560,714 shares of Common
Stock and approximately $9.8 million in cash.
55
<PAGE>
OTHER TRANSACTIONS
The Company currently subleases a portion of its corporate headquarters to
the Fortress Group, a public U.S. homebuilding company of which J. Marshall
Coleman, Chairman of the Board of the Company, serves as Chairman of the Board.
Annual rental under the sublease is approximately $101,600.
One of the Founding Companies, CHMC, has a financing arrangement that has
been personally guaranteed by certain of its stockholders. At September 30,
1997, the aggregate amount of CHMC's current financing that was subject to
personal guarantees was approximately $2.2 million. The Company intends to use
its best efforts to have the personal guarantees on such financing arrangements
released within 120 days after the closing of this Offering.
During 1995 and 1996, MST paid approximately $86,000 and $245,000, in
consulting fees to two companies that have directors in common with MST under
arms'-length terms. During the nine months ended September 30, 1996 and 1997,
MST paid approximately $154,000 and $61,000, respectively, to these companies.
Howard Schapiro, President and Chief Executive Officer of InVenture, is a
majority stockholder of The Sound Marketing Group, Inc. ("SMG"), a company
engaged in the business of retail product marketing devices. As of September 30,
1997, SMG was indebted to InVenture in the principal amount of $222,000.
Subsequent to September 30, InVenture entered into an agreement with a vendor
whereby the receivable from SMG was assigned to the vendor in payment of a
liability in the amount of $321,000. This transaction resulted in a gain of
$99,000 in the quarter ending December 31, 1997.
Mr. Schapiro also owns IGI Services, Inc ("IGI"), a company engaged in the
business of operating an electronic service bureau that supplies high-resolution
negatives and positives from computer files for the publishing and advertising
industries. During 1996, InVenture purchased $32,000 of prepress services from
and advanced $56,000 to IGI, net of repayments of $39,000. IGI shares office
space with InVenture and InVenture provides administrative services to IGI. The
total charges to IGI for office space and administrative services for the year
ended December 31, 1996 were $42,000. In addition, for the year ended December
31, 1996, InVenture paid IGI a print brokerage fee amounting to 7.0% of all of
InVenture's print purchases, or $47,000. InVenture believes that the fees paid
to IGI were equivalent to those that would be paid in an arm's-length
transaction. Effective May 31, 1997, InVenture acquired all of the operating
assets of IGI. The purchase price of the acquisition included a cash payment of
$22,000, forgiveness of an account receivable from IGI in the amount of $60,000
and the assumption of liabilities totaling $22,000.
Corporate Access leases property in Andover, Massachusetts that is owned by
Corpac II Realty Trust, of which Richard T. Marino, the President of Corporate
Access, is a trustee. The lease provides for monthly rentals of approximately
$7,600. The Company believes that the rent for such property does not exceed the
fair market rental thereof.
Federal earned consulting fees from certain of its affiliates of
approximately $394,000 for the year ended October 31, 1995 under agreements
entitling Federal to receive a portion of such affiliates' contract profits.
Federal incurred consulting fees from such affiliates of approximately $496,000
for the year ended October 31, 1995 for their work in helping to obtain and
service contracts. During 1995, Federal acquired 100% of the outstanding stock
of these affiliated companies.
Federal previously owned a 22% limited partnership in which Federal's former
majority shareholder was a general partner. The partnership owned the building
that Federal occupies. Federal was leasing the office space in this building
from the partnership on a month-to-month basis, and a portion of Federal's
office space was being subleased to entities owned by such shareholder. On
January 10, 1995, the partnership sold the building to a third party and was
dissolved, resulting in a loss to Federal of $128,000 for the year ended October
31, 1995.
56
<PAGE>
On October 1, 1996, J. Patrick Horner and Gary Wright entered into separate
agreements with Commonwealth, the founder of Condor, pursuant to which Messrs.
Horner and Wright were appointed as directors of Condor. Under such agreements,
Mr. Horner received a monthly retainer of $15,000 in exchange for his
consulting, financial advisory and related services to Condor, and Mr. Wright
received a monthly retainer of $10,000 in exchange for his consulting, financial
advisory and related services to Condor. In addition, in November 1996, Messrs.
Horner and Wright acquired 54,201 and 13,550 shares of Common Stock,
respectively, subject to a repurchase option, as further consideration for
consulting, financial advisory and related services provided by each of them to
Condor, and Condor agreed to grant each options to purchase 40,651 shares of
Common Stock (each, an "Option") upon the successful completion of this
Offering. On August 21, 1997, Mr. Horner and Commonwealth agreed to modify Mr.
Horner's arrangement as follows: (i) Mr. Horner resigned from the Board of
Directors effective as of July 31, 1997; (ii) the parties agreed that the
$15,000 monthly payments will continue until the closing of this Offering and
that, after the closing, the Company will enter into a consulting agreement with
Mr. Horner at a rate of $15,000 per month for a one-year term; and (iv) Mr.
Horner relinquished his Option in exchange for a cash payment of $50,000 at the
closing of this Offering. Also on August 21, 1997, Commonwealth and Mr. Wright
agreed to modify his arrangement as follows: (i) Mr. Wright resigned from the
Board of Directors effective as of July 31, 1997; (ii) the $10,000 monthly
payments will continue until the closing of this Offering; (iii) Mr. Wright
relinquished his Option; and (iv) Mr. Wright acquired an additional 20,325
shares of Common Stock as consideration for the foregoing and additional
consulting, financial advisory and related services provided by him.
COMPANY POLICY
The Company expects that, in the future, any transactions between officers,
directors or holders of more than 5% of the Common Stock will be minimal and
will be approved by a majority of the disinterested members of the Board of
Directors.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company, after giving effect to the Mergers
and this Offering, by (i) each person known to beneficially own more than 5% of
the outstanding shares of Common Stock; (ii) each of the Company's directors and
persons who have consented to be named as directors ("named directors"); (iii)
each named executive officer; and (iv) all executive officers, directors and
named directors as a group. All persons listed have an address in care of the
Company's principal executive offices and have sole voting and investment power
with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES TO BE
BENEFICIALLY
OWNED AFTER OFFERING
-----------------------
<S> <C> <C>
NAME NUMBER PERCENT
- ----------------------------------------------------------------------------------------- ---------- -----------
Kennard F. Hill (1)(2)................................................................... 190,032 1.9%
C. Lawrence Meador (3)................................................................... 560,714 5.6
Daniel J. Roche (1)(4)................................................................... 152,025 1.5
Santanu Sarkar (1)(5).................................................................... 66,511 *
William J. Caragol, Jr. (1)(6)........................................................... 9,502 *
J. Marshall Coleman (1)(7)(8)............................................................ 408,253 4.0
Peter T. Garahan (8)..................................................................... -- *
Edward J. Mathias (1)(8)................................................................. 28,505 *
William M. Newport (8)................................................................... -- *
All executive officers, directors and
named directors as a group (9 persons)................................................. 1,415,542 14.0%
</TABLE>
- ------------------------
* less than 1.0%
(1) All of these shares are shares of Restricted Common Stock having 0.2 of a
vote per share. See "Description of Capital Stock."
(2) All of these shares are owned of record by the Hill-Craft Irrevocable Family
Trust, of which Mr. Hill and his spouse, Shirley Craft, are trustees and
share voting power and investment power with respect to such shares. Does
not include 100,000 shares issuable in connection with options that are not
exercisable within 60 days of the date hereof.
(3) Based on an assumed initial public offering price of $14.00 per share. Does
not include shares issuable in connection with options that are not
exercisable within 60 days of the date hereof.
(4) Does not include 75,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(5) Does not include 50,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(6) Does not include 37,500 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(7) An aggregate of 58,221 of these shares are owned of record by Mr. Coleman's
spouse.
(8) Does not include 10,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 49,000,000 shares of
Common Stock, par value $.01 per share, of which 5,000,000 are shares of
Restricted Common Stock, par value $.01 per share, and 1,000,000 shares of
undesignated preferred stock, par value $.01 per share ("Preferred Stock").
After giving effect to the Mergers and this Offering, the Company will have
10,100,000 outstanding shares of Common Stock (including 1,459,365 shares of
Restricted Common Stock) and no shares of Preferred Stock. See "Shares Eligible
for Future Sale."
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and By-Laws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following is
qualified in its entirety by reference thereto.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Except
as otherwise required by law, holders of shares of Restricted Common Stock shall
be entitled to 0.2 of a vote for each share held on matters on which holders of
Common Stock are entitled to vote. The holders of Restricted Common Stock shall
have no right to vote separately as a class except as specifically required by
law. Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of Common Stock and Restricted Common Stock are entitled to share
ratably such dividends as may be declared in the discretion of the Board of
Directors out of funds legally available therefor. See "Dividend Policy." The
holders of Common Stock and the holders of Restricted Common Stock are entitled
to share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock and the holders of
Restricted Common Stock have no preemptive rights to purchase shares of stock of
the Company. Shares of Common Stock and Restricted Common Stock are not subject
to any redemption provisions and are not convertible into any other securities
of the Company, except as provided in the following paragraph. All outstanding
shares of Common Stock and Restricted Common Stock are, and the shares of Common
Stock to be issued pursuant to this Offering will be upon payment therefor,
fully-paid and non-assessable.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of a share of
Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners or a transfer to a related party of
such holder (as defined in Sections 267, 707, 318 and/or 4946 of the Internal
Revenue Code of 1986)); (ii) in the event following the closing of this
Offering, any person acquires beneficial ownership of 15% or more of the
outstanding shares of Common Stock of the Company; or (iii) in the event
following the closing of this Offering, any person or group of persons acting in
concert offers to acquire 15% or more of the outstanding shares of Common Stock
of the Company. After December 1, 1998, the Company may elect to convert any
outstanding shares of Restricted Common Stock into shares of Common Stock in the
event 80% or more of the outstanding shares of Restricted Stock have been
previously converted into shares of Common Stock.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "CNDR," subject to official notice of issuance. The Restricted
Common Stock will not be quoted on the Nasdaq National Market.
59
<PAGE>
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Certificate of
Incorporation and limitations prescribed by law, the Board of Directors is
expressly authorized to adopt resolutions to issue the shares, to fix the number
of shares and to change the number of shares constituting any series and to
provide for or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, including dividend rights (and whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any series of the Preferred Stock, in each case without
any further action or vote by the stockholders. The Company has no current plans
to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
Upon consummation of this Offering, the Company will be subject to the
provisions of Section 203 ("Section 203") of the DGCL. Section 203 provides,
with certain exceptions, that a Delaware corporation may not engage in any of a
broad range of business combinations with a person or an affiliate or associate
of such person, who is an "interested stockholder" for a period of three years
from the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction is commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (a) by persons who are directors and officers and (b) by employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (x) the owner of 15% or
more of the outstanding voting stock of the corporation or (y) an affiliate or
associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
The provisions of Section 203 could delay or frustrate a change in control
of the Company, deny stockholders the receipt of a premium on their Common Stock
and have an adverse effect on the Common Stock. The provisions also could
discourage, impede or prevent a merger or tender offer, even if such event would
be favorable to the interests of stockholders. The Company's stockholders, by
adopting an amendment to the Certificate of Incorporation, may elect not to be
governed by Section 203, which election would be effective 12 months after such
adoption.
60
<PAGE>
LIMITATION ON DIRECTORS' LIABILITIES
LIMITATION ON LIABILITY. Pursuant to the Certificate of Incorporation and
as permitted by Section 102(b)(7) of the DGCL, directors of the Company are not
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty, except for liability in connection with a breach of duty of
loyalty, for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, for dividend payments or stock
repurchases that are illegal under Delaware law or for any transaction in which
a director has derived an improper personal benefit.
INDEMNIFICATION. To the maximum extent permitted by law, the Certificate of
Incorporation provides for mandatory indemnification of directors and officers
of the Company against any expense, liability and loss to which they become
subject, or which they may incur as a result of having been a director or
officer of the Company. In addition, the Company must advance or reimburse
directors and officers for expenses incurred by them in connection with certain
claims.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Certificate of Incorporation and By-Laws contain provisions that could
have an anti-takeover effect. The provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors. These
provisions also are intended to help ensure that the Board of Directors, if
confronted by an unsolicited proposal from a third party which has acquired a
block of stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives to the proposal and to act in what it believes to
be the best interest of the stockholders.
The following is a summary of such provisions included in the Certificate of
Incorporation and By-Laws of the Company. See also "--Preferred Stock." The
Board of Directors has no current plans to formulate or effect additional
measures that could have an anti-takeover effect.
CLASSIFIED BOARD OF DIRECTORS. The Certificate of Incorporation provides
for a Board of Directors divided into three classes of directors serving
staggered three-year terms. The classification of directors has the effect of
making it more difficult for stockholders to change the composition of the Board
of Directors in a relatively short period of time. At least two annual meetings
of stockholders, instead of one, generally will be required to effect a change
in a majority of the Board of Directors. Such a delay may help ensure that the
Board of Directors and the stockholders, if confronted with an unsolicited
proposal by a stockholder attempting to force a stock repurchase at a premium
above market, a proxy contest or an extraordinary corporate transaction, will
have sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interests of the
stockholders. Directors, if any, elected by holders of Preferred Stock voting as
a class, will not be classified as aforesaid. Moreover, under Delaware law, in
the case of a corporation having a classified board, stockholders may remove a
director only for cause. This provision will preclude a stockholder from
removing incumbent directors without cause.
ADVANCE NOTICE REQUIREMENTS FOR DIRECTOR NOMINEES. The By-Laws establish an
advance notice procedure with regard to the nomination of candidates for
election as directors at any meeting of stockholders called for the election of
directors. The procedure provides that a notice relating to the nomination of
directors must be timely given in writing to the Secretary of the Company prior
to the meeting. To be timely, notice relating to the nomination of directors for
election at an annual meeting must be delivered not later than the close of
business on the later of the 90th day prior to such annual meeting or the 10th
day following the day on which public announcement of the date of such annual
meeting is first made. Notice relating to the nomination of directors for
election at a special meeting must be given not later than the close of business
on the 10th day following the date notice of such meeting is mailed to
stockholders or public disclosure of the date of such meeting is made.
61
<PAGE>
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must be accompanied by each proposed
nominee's written consent and contain the name, address and principal occupation
of each proposed nominee. Such notice must also contain the total number of
shares of capital stock of the Company that will be voted for each of the
proposed nominees, the number of shares of each class of capital stock of the
Company beneficially owned by such person and other information that may be
required under the proxy rules of the Commission. Such notice must also contain
the name and address of the notifying stockholder and the number of shares of
capital stock of the Company owned by the notifying stockholder.
Although the Company's By-Laws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's By-Laws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular meeting if the proper procedures are not followed; or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Mergers and completion of this Offering, the
Company will have outstanding 10,100,000 shares of Common Stock. The 5,900,000
shares sold in this Offering (plus any additional shares sold upon exercise of
the Underwriters' over-allotment option) will be freely tradable without
restriction unless acquired by affiliates of the Company. None of the remaining
4,200,000 outstanding shares of Common Stock have been registered under the
Securities Act, which means that they may be resold publicly only upon
registration under the Securities Act or in compliance with an exemption from
the registration requirements of the Securities Act, including the exemption
provided by Rule 144 thereunder.
In general, under Rule 144, if one year has elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
from any affiliate of the Company, the acquiror or subsequent holder thereof may
sell, within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of the Common Stock, or the average weekly trading
volume of the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of the proposed sale is sent
to the Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
any affiliate of the Company, a person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements.
Subject to the following paragraph, the Company's executive officers and
directors and existing stockholders have agreed not to offer, sell, contract to
sell, make any short sale or otherwise dispose of any shares of Common Stock,
options to acquire shares of Common Stock or securities convertible into or
exchangeable for, or any rights to purchase or acquire, shares of Common Stock
during the one-year period following the date of this Prospectus, without the
prior written consent of Volpe Brown Whelan & Company, LLC. The Company also has
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exchangeable for, or any
rights to purchase or acquire, any shares of Common Stock during the one-year
period following the date of this Prospectus without the prior written consent
of Volpe Brown Whelan & Company, LLC, except for the granting of options
pursuant to the Plan or the issuance of shares of Common Stock upon the exercise
of outstanding options, in connection with acquisitions or in connection with
any conversion of the Restricted Common Stock. Volpe Brown Whelan & Company,
LLC, in its discretion, may waive the foregoing restrictions in whole or in
part, with or without a public announcement of such action.
In connection with the Mergers, the Company has agreed to provide piggyback
registration rights with respect to the Common Stock issued to the stockholders
of the Founding Companies and existing other Company stockholders. Subject to
certain conditions, limitations and exceptions, the piggyback registration
rights provide the holders of Common Stock with the right to participate in
registrations by the Company of its equity securities. The Company is generally
required to pay the costs associated with such an offering other than
underwriting discounts and commissions attributable to the shares sold on behalf
of the selling stockholders.
Within 90 days after the closing of this Offering, the Company intends to
register 5,000,000 shares of its Common Stock under the Securities Act for use
by the Company in connection with future acquisitions. Upon such registration,
these shares will generally be freely tradable after their issuance unless
acquired by parties to the transaction or affiliates thereof, other than the
issuer, in which case they may be sold pursuant to Rule 145 under the Securities
Act. Rule 145 permits, in part, such persons to resell immediately securities
acquired in transactions covered under the Rule, provided such securities are
resold
63
<PAGE>
in accordance with the public information requirements, volume limitations and
manner of sale requirements of Rule 144. If a period of one year has elapsed
since the date such securities were acquired in such transaction and if the
issuer meets the public information requirements of Rule 144, Rule 145 permits a
person who is not an affiliate of the issuer to freely resell such securities.
In some instances, the Company may contractually restrict the sale of shares
issued in connection with future acquisitions. The piggyback registration rights
described above do not apply to the registration statement relating to these
5,000,000 shares.
In addition to the shares described above, 12% of the aggregate shares of
Common Stock outstanding from time to time have been reserved for issuance upon
exercise of options that may be granted under the Plan. The Company intends to
file one or more registration statements on Form S-8 under the Securities Act
with respect to such shares of Common Stock, including shares of Common Stock
underlying options to be assumed by the Company in connection with the Mergers.
Shares of Common Stock covered by such registration statements will be freely
tradable by holders who are not affiliates of the Company and, subject to the
volume and other limitations of Rule 144, by holders who are affiliates of the
Company.
Prior to this Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price for
the Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale, of substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the ability of the
Company to raise equity capital in the future.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the underwriters named below (the
"Underwriters"), and each of such Underwriters, for whom Volpe Brown Whelan &
Company, LLC and Furman Selz LLC (collectively, the "Representatives") are
acting as representatives, have agreed severally to purchase from the Company,
the respective number of shares of Common Stock set forth opposite its name
below. The Underwriters are committed to purchase and pay for all shares if any
shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Volpe Brown Whelan & Company, LLC .........................................................
Furman Selz LLC
----------
Total...................................................................................... 5,900,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share, of which $ per
share may be reallocated to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option for 45 days after the
date of this Prospectus to purchase, at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus, up to 885,000 additional shares of Common Stock at the same price
per share as the Company receives for the 5,900,000 shares of Common Stock
offered hereby, solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by each of
them, as shown in the foregoing table, bears to the 5,900,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
the over-allotments in connection with the sale of the 5,900,000 shares of
Common Stock offered hereby.
The Company's executive officers and directors and existing stockholders
have agreed not to offer, pledge, sell, contract to sell, make any short sale or
otherwise dispose of any shares of Common Stock, options to acquire shares of
Common Stock or securities convertible into or exchangeable for shares of Common
Stock, or any rights to purchase or acquire shares of Common Stock, during the
one-year period following the date of this Prospectus, without the prior written
consent of Volpe Brown Whelan & Company, LLC. The Company also has agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities convertible into or exchangeable for shares of Common Stock,
or any rights to purchase or acquire shares of Common Stock, during the one-year
period following the date of this Prospectus without the prior written consent
of Volpe Brown Whelan & Company, LLC, except for the granting of options
pursuant to the Plan or the issuance of shares of Common Stock upon the exercise
of outstanding options, in connection with acquisitions or in connection with
any conversion of the Restricted Common Stock. Volpe Brown Whelan & Company,
LLC, in its discretion, may waive the foregoing restrictions in whole or in
part, with or without a public announcement of such action. In recent offerings
in which it has served as lead manager of underwriters, Volpe Brown Whelan &
Company, LLC has consented to early releases from lock-up agreements only in a
limited number of circumstances, after considering all circumstances that it
deemed to be relevant. Volpe Brown Whelan & Company, LLC will
65
<PAGE>
have, however, complete discretion in determining whether to consent to early
releases from the lock-up agreements delivered in connection with this Offering,
and no assurance can be given that it will not consent to the early release of
all or a portion of the shares of Common Stock and options covered by such
lock-up agreements.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which the Underwriters have
discretionary authority.
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock will be determined by negotiations between the Company and the
Representatives. Among the factors to be considered in such negotiations are
expected to be the results of operations of the Founding Companies in recent
periods, the prospects for the Company and the industry in which the Company
competes, an assessment of the Company's management, its financial condition,
the prospects for future earnings of the Company, the present state of the
Company's development, the general condition of the economy and the securities
markets at the time of this Offering and the market prices of and demand for
publicly traded stock of comparable companies in recent periods.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with this Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of this Offering to cover
all or a portion of such short position. The Underwriters also may cover all or
a portion of such short position, up to 885,000 shares, by exercising the
Underwriters' over-allotment option referred to above. In addition, Volpe Brown
Whelan & Company, LLC, on behalf of the Underwriters, may impose "penalty bids"
under the contractual arrangements with the Underwriters whereby it may reclaim
from an Underwriter (or dealer participating in this Offering), for the account
of the other Underwriters, the selling concession with respect to Common Stock
that is distributed in this Offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Common Stock at
a level above that which otherwise might prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with this Offering, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
The foregoing contains a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Morgan, Lewis & Bockius LLP,
New York, New York. Certain legal matters related to this Offering will be
passed upon for the Underwriters by Sachnoff & Weaver, Ltd., Chicago, Illinois.
66
<PAGE>
EXPERTS
The Condor financial statements as of December 31, 1996 and September 30,
1997 and for the period from inception to December 31, 1996 and the nine months
ended September 30, 1997; the CHMC financial statements as of February 28, 1997
and September 30, 1997 and for each of the three years in the period ended
February 28, 1997 and the nine months ended September 30, 1997; the ISSI
financial statements as of December 31, 1996 and September 30, 1997 and for each
of the three years in the period ended December 31, 1996 and for the nine months
ended September 30, 1997; the Corporate Access financial statements as of June
30, 1997 and for the year then ended; the USComm and MIS financial statements as
of December 31, 1996 and September 30, 1997 and for the year ended December 31,
1996 and the nine months ended September 30, 1997; and the InVenture financial
statements as of December 31, 1996 and for the year then ended included
elsewhere in this Prospectus have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of MST as of December 31, 1995, December 31, 1996
and September 30, 1997, for each of the three years in the period ended December
31, 1996 and for the nine months ended September 30, 1997 included elsewhere in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the chief
executive officer/sole stockholder's compensation being at his sole discretion),
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated balance sheets of Federal as of October 31, 1995 and 1996
and July 31, 1997 and the consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended October
31, 1996 and for the nine months ended July 31, 1997 included elsewhere in this
Prospectus have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form S-1 with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information pertaining to the Company and the
shares of Common Stock offered hereby, reference is made to such Registration
Statement, including the exhibits, financial statements and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or any other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials can be obtained from the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically.
The address of such Internet web site is http://www.sec.gov.
As a result of this Offering, the Company will be subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). So long as the Company is subject to the periodic reporting requirements
of the Exchange Act, it will continue to furnish the reports and other
information required thereby to the Securities and Exchange Commission. The
Company will furnish to its stockholders annual reports containing financial
statements audited by its independent auditors and will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
67
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements.................................... F-3
Unaudited Pro Forma Combined Balance Sheet........................................................... F-4
Unaudited Pro Forma Combined Statements of Operations................................................ F-5
Notes to Unaudited Pro Forma Combined Financial Statements........................................... F-8
CONDOR TECHNOLOGY SOLUTIONS, INC.
Report of Independent Accountants.................................................................... F-12
Balance Sheets....................................................................................... F-13
Notes to Financial Statements........................................................................ F-14
FOUNDING COMPANIES
MANAGEMENT SUPPORT TECHNOLOGY CORP.
Independent Auditors' Report......................................................................... F-19
Balance Sheets....................................................................................... F-20
Statements of Income and Retained Earnings........................................................... F-21
Statements of Cash Flows............................................................................. F-22
Notes to Financial Statements........................................................................ F-23
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
Report of Independent Accountants.................................................................... F-28
Balance Sheets....................................................................................... F-29
Statements of Operations............................................................................. F-30
Statements of Changes in Stockholders' Equity........................................................ F-31
Statements of Cash Flows............................................................................. F-32
Notes to Financial Statements........................................................................ F-33
FEDERAL COMPUTER CORPORATION
Report of Independent Accountants.................................................................... F-41
Consolidated Balance Sheets.......................................................................... F-42
Consolidated Statements of Operations................................................................ F-43
Consolidated Statements of Changes in Shareholders' Equity........................................... F-44
Consolidated Statements of Cash Flows................................................................ F-45
Notes to Consolidated Financial Statements........................................................... F-46
CORPORATE ACCESS, INC.
Report of Independent Accountants.................................................................... F-59
Balance Sheet........................................................................................ F-60
Statement of Operations.............................................................................. F-61
Statement of Changes in Stockholders' Equity......................................................... F-62
Statement of Cash Flows.............................................................................. F-63
Notes to Financial Statements........................................................................ F-64
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
Report of Independent Accountants.................................................................... F-68
Consolidated Balance Sheets.......................................................................... F-69
Consolidated Statements of Operations................................................................ F-70
Consolidated Statements of Changes in Stockholders' Equity........................................... F-71
Consolidated Statements of Cash Flows................................................................ F-72
Notes to Consolidated Financial Statements........................................................... F-73
U.S. COMMUNICATIONS, INC.
Report of Independent Accountants.................................................................... F-80
Balance Sheets....................................................................................... F-81
Statements of Operations............................................................................. F-82
Statements of Changes in Stockholder's Equity........................................................ F-83
Statements of Cash Flows............................................................................. F-84
Notes to Financial Statements........................................................................ F-85
INVENTURE GROUP, INC.
Report of Independent Accountants.................................................................... F-90
Balance Sheets....................................................................................... F-91
Statements of Operations............................................................................. F-92
Statements of Changes in Stockholder's Equity........................................................ F-93
Statements of Cash Flows............................................................................. F-94
Notes to Financial Statements........................................................................ F-95
MIS TECHNOLOGIES, INC.
Report of Independent Accountants.................................................................... F-100
Balance Sheets....................................................................................... F-101
Statements of Operations............................................................................. F-102
Statements of Changes in Stockholder's Equity........................................................ F-103
Statements of Cash Flows............................................................................. F-104
Notes to Financial Statements........................................................................ F-105
</TABLE>
F-2
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Condor Technology Solutions, Inc. of the outstanding
capital stock of Management Support Technology Corp., Computer Hardware
Maintenance Company, Inc., Federal Computer Corporation, Corporate Access, Inc.,
Interactive Software Systems Incorporated, U.S. Communications, Inc., InVenture
Group, Inc. and MIS Technologies, Inc. (including Kinnaird Technical Resources,
Inc.). These acquisitions will occur simultaneously with the closing of Condor's
initial public offering and will be accounted for using the purchase method of
accounting. MST, one of the Founding Companies, has been identified as the
"accounting acquiror" in accordance with the provisions of SAB 97, which states
that the combining company that receives the largest portion of voting rights in
the combined corporation is presumed to be the "accounting acquiror" for
financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the Mergers
and the Offering as if they had occurred on September 30, 1997. The unaudited
pro forma combined statements of operations give effect to these transactions as
if they had occurred on January 1, 1996.
Condor has preliminarily analyzed the savings that it expects to be realized
from reductions in salaries and certain benefits to the stockholders and
management of the Founding Companies. To the extent the stockholders and
management of the Founding Companies have agreed prospectively to reductions in
salary, bonuses and benefits, these reductions have been reflected in the pro
forma combined statements of operations. With respect to other potential cost
savings, Condor has not and cannot quantify these savings until completion of
the combination of the Founding Companies. It is anticipated that these savings
will be partially offset by the costs of being a publicly held company and the
incremental increase in costs related to the Company's new management. However,
these costs, like the savings that they offset, cannot be quantified accurately.
Neither the anticipated savings nor the anticipated costs have been included in
the pro forma combined financial statements of Condor.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
Condor's financial position or results of operations would actually have been if
such transactions in fact had occurred on those dates and are not necessarily
representative of Condor's financial position or results of operations for any
future period. Since the Founding Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. See "Risk Factors" included
elsewhere in this Prospectus.
F-3
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CORPORATE
ASSETS CONDOR MST CHMC FEDERAL ACCESS ISSI USCOMM
----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 13 $ 71 $ 1,560 $ 4,671 $ 612 $ 4,230 $ 22
Marketable securities.................... 1,178
Accounts receivable, trade............... 1,110 6,929 6,247 2,496 3,296 1,243
Inventory................................ 626 71 60
Prepaid expenses and other current
assets................................. 1,239 44 47 464 23 473 2
----------- --------- ----------- --------- ----------- --------- -----------
Total current assets................... 1,252 1,225 9,162 12,560 3,202 7,999 1,327
Property and equipment, net................ 618 339 55 121 450 157
Other assets............................... 15 88 154 111 4
Goodwill...................................
----------- --------- ----------- --------- ----------- --------- -----------
Total assets........................... $ 1,252 $ 1,858 $ 9,589 $ 12,769 $ 3,323 $ 8,560 $ 1,488
----------- --------- ----------- --------- ----------- --------- -----------
----------- --------- ----------- --------- ----------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................... $ $ 550 $ 169 $ $ $ 8 $ 85
Accounts payable and accruals............ 359 2,634 4,552 2,200 1,808 1,175
payable to stockholders..................
Deferred revenue......................... 2,530 2,412 17
Other current liabilities................ 1,031 472 412 34
----------- --------- ----------- --------- ----------- --------- -----------
Total current liabilities.............. 1,031 909 5,805 4,964 2,200 4,228 1,311
Long-term debt............................. 31 20 45
Deferred revenue........................... 1,741
Deferred income taxes...................... 6 37
----------- --------- ----------- --------- ----------- --------- -----------
Total liabilities...................... 1,031 909 5,836 6,711 2,200 4,285 1,356
Stockholders' equity:
Common stock............................. 19 2 1 4 26 1
Additional paid-in capital............... 1,033 171 1,089 180 2,602
Stock subscription receivable............
Treasury stock, at cost.................. (401)
Retained earnings........................ (831) 947 3,983 4,968 939 1,647 131
----------- --------- ----------- --------- ----------- --------- -----------
Total stockholders' equity............. 221 949 3,753 6,058 1,123 4,275 132
----------- --------- ----------- --------- ----------- --------- -----------
Total liabilities and stockholders'
equity............................... $ 1,252 $ 1,858 $ 9,589 $ 12,769 $ 3,323 $ 8,560 $ 1,488
----------- --------- ----------- --------- ----------- --------- -----------
----------- --------- ----------- --------- ----------- --------- -----------
<CAPTION>
PRO FORMA
MERGER PRO FORMA OFFERING
ASSETS INVENTURE MIS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 13 $ 151 $ (7,000) $ 4,343 $ 23,513 $ 27,856
Marketable securities.................... 75 - 1,253 1,253
Accounts receivable, trade............... 740 579 22,640 22,640
Inventory................................ 757 757
Prepaid expenses and other current
assets................................. 106 10 2,408 (1,239) 1,169
----------- --------- ----------- ----------- ----------- -------------
Total current assets................... 859 815 (7,000) 31,401 22,274 53,675
Property and equipment, net................ 153 21 2,500 4,414 4,414
Other assets............................... 22 394 394
Goodwill................................... 40,240 40,240 40,240
----------- --------- ----------- ----------- ----------- -------------
Total assets........................... $ 1,034 $ 836 $ 35,740 $ 76,449 $ 22,274 $ 98,723
----------- --------- ----------- ----------- ----------- -------------
----------- --------- ----------- ----------- ----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................... $ $ 371 $ 1,183 $ - $ 1,183
Accounts payable and accruals............ 663 226 13,617 13,617
payable to stockholders.................. $ 48,405 48,405 (48,405) -
Deferred revenue......................... 4,959 4,959
Other current liabilities................ 199 2,148 (1,031) 1,117
----------- --------- ----------- ----------- ----------- -------------
Total current liabilities.............. 862 597 48,405 70,312 (49,436) 20,876
Long-term debt............................. 96 - 96
Deferred revenue........................... 1,741 1,741
Deferred income taxes...................... 4 47 47
----------- --------- ----------- ----------- ----------- -------------
Total liabilities...................... 866 597 48,405 72,196 (49,436) 22,760
Stockholders' equity:
Common stock............................. 11 2 (24) 42 59 101
Additional paid-in capital............... (1,811) 3,264 71,651 74,915
Stock subscription receivable............ - - -
Treasury stock, at cost.................. 401 - -
Retained earnings........................ 157 237 (11,231) 947 947
----------- --------- ----------- ----------- ----------- -------------
Total stockholders' equity............. 168 239 (12,665) 4,253 71,710 75,963
----------- --------- ----------- ----------- ----------- -------------
Total liabilities and stockholders'
equity............................... $ 1,034 $ 836 $ 35,740 $ 76,449 $ 22,274 $ 98,723
----------- --------- ----------- ----------- ----------- -------------
----------- --------- ----------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-4
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CORPORATE
MST CHMC FEDERAL ACCESS ISSI
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................................ $ 8,211 $ 42,262 $ 12,661 $ 15,734 $ 9,028
Cost of revenues................................................ 3,783 36,395 9,287 13,464 1,482
--------- --------- --------- ----------- ---------
Gross profit.................................................... 4,428 5,867 3,374 2,270 7,546
Selling, general and administrative............................. 2,188 4,484 3,431 2,028 5,323
Goodwill amortization........................................... - - - - -
--------- --------- --------- ----------- ---------
Income from operations.......................................... 2,240 1,383 (57) 242 2,223
Other income (expense):
Interest income............................................... 3 -- 467 21 101
Interest expense.............................................. (29) (185) (16) - (199)
Other, net.................................................... - 114 844 10 8
--------- --------- --------- ----------- ---------
Income (loss) before income taxes............................... 2,214 1,312 1,238 273 2,133
Provision for income taxes...................................... - 528 -- 116 737
--------- --------- --------- ----------- ---------
Net income...................................................... $ 2,214 $ 784 $ 1,238 $ 157 $ 1,396
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Net income per share............................................
Shares used in computing pro forma net income per share (See
Note 5).......................................................
<CAPTION>
PRO FORMA PRO FORMA
USCOMM INVENTURE MIS ADJUSTMENTS COMBINED
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................................................ $ 7,215 $ 5,416 $ 2,675 $ - $ 103,202
Cost of revenues................................................ 6,574 3,948 1,451 - 76,384
----------- ----------- --------- ----------- -----------
Gross profit.................................................... 641 1,468 1,224 - 26,818
Selling, general and administrative............................. 475 1,464 1,066 (1,396) 19,063
Goodwill amortization........................................... - - - 1,396 1,396
----------- ----------- --------- ----------- -----------
Income from operations.......................................... 166 4 158 6,359
Other income (expense):
Interest income............................................... - 3 -- - 595
Interest expense.............................................. (21) - (18) - (468)
Other, net.................................................... - 16 - - 992
----------- ----------- --------- ----------- -----------
Income (loss) before income taxes............................... 145 23 140 7,478
Provision for income taxes...................................... 51 7 - 2,215 3,654
----------- ----------- --------- ----------- -----------
Net income...................................................... $ 94 $ 16 $ 140 $ (2,215) $ 3,824
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Net income per share............................................ $ 0.47
-----------
-----------
Shares used in computing pro forma net income per share (See
Note 5)....................................................... 8,171,043
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-5
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CORPORATE
CONDOR MST CHMC FEDERAL ACCESS ISSI
----------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................................. $ $ 5,509 $ 34,671 $ 30,442 $ 14,062 $ 8,360
Cost of revenues......................................... 2,934 28,082 26,783 12,073 1,224
----------- --------- --------- --------- ----------- ---------
Gross profit............................................. -- 2,575 6,589 3,659 1,989 7,136
Selling, general & administrative........................ 831 1,453 5,157 2,145 1,475 4,912
Goodwill amortization....................................
----------- --------- --------- --------- ----------- ---------
Income from operations................................... (831) 1,122 1,432 1,514 514 2,224
Other income (expense):
Interest income........................................ -- -- -- 213 11 107
Interest expense....................................... -- (11) (46) (21) -- --
Other, net............................................. -- 2 277 -- -- 15
----------- --------- --------- --------- ----------- ---------
Income before income taxes............................... (831) 1,113 1,663 1,706 525 2,346
Provision for income taxes............................... -- -- 658 1,016 34 795
----------- --------- --------- --------- ----------- ---------
Net income............................................... $ (831) $ 1,113 $ 1,005 $ 690 $ 491 $ 1,551
----------- --------- --------- --------- ----------- ---------
----------- --------- --------- --------- ----------- ---------
Net income per share.....................................
Shares used in computing pro forma net income per share
(See Note 5)...........................................
<CAPTION>
PRO FORMA PRO FORMA
USCOMM INVENTURE MIS ADJUSTMENTS COMBINED
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................................................. $ 6,024 $ 3,210 $ 3,445 $ $ 105,723
Cost of revenues......................................... 5,611 1,603 1,841 80,151
----------- ----------- --------- ----------- -----------
Gross profit............................................. 413 1,607 1,604 25,572
Selling, general & administrative........................ 367 1,378 1,289 (2,716) 16,291
Goodwill amortization.................................... 1,047 1,047
----------- ----------- --------- ----------- -----------
Income from operations................................... 46 229 315 1,669 8,234
Other income (expense):
Interest income........................................ -- -- -- -- 331
Interest expense....................................... (13) 0 (26) -- (117)
Other, net............................................. 0 123 -- 417
----------- ----------- --------- ----------- -----------
Income before income taxes............................... 33 352 289 1,669 8,865
Provision for income taxes............................... 15 141 69 1,284 4,012
----------- ----------- --------- ----------- -----------
Net income............................................... $ 18 $ 211 $ 220 $ 385 $ 4,853
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Net income per share..................................... $ 0.59
-----------
-----------
Shares used in computing pro forma net income per share
(See Note 5)........................................... 8,171,043
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
- ------------------------
F-6
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CORPORATE
MST CHMC FEDERAL ACCESS ISSI
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................................ $ 6,452 $ 27,885 $ 10,210 $ 11,462 $ 6,655
Cost of revenues................................................ 2,895 24,411 7,250 9,731 1,120
--------- --------- --------- ----------- ---------
Gross profit.................................................... 3,557 3,474 2,960 1,731 5,535
Selling, general and administrative............................. 1,684 2,760 2,645 1,569 3,666
Goodwill amortization........................................... -- -- -- -- --
--------- --------- --------- ----------- ---------
Income (loss) from operations................................... 1,873 714 315 162 1,869
Other income (expense):
Interest income............................................... 1 334 18 71
Interest expense.............................................. (27) (132) (16) -- (188)
Other, net.................................................... -- 142 597 (32) 7
--------- --------- --------- ----------- ---------
Income before income taxes...................................... 1,847 724 1,230 148 1,759
Provision for income taxes...................................... -- 276 -- 120 609
--------- --------- --------- ----------- ---------
Net income (loss)............................................... $ 1,847 $ 448 $ 1,230 $ 28 $ 1,150
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Net income per share............................................
Shares used in computing pro forma net income per share (See
Note 5).......................................................
<CAPTION>
PRO FORMA PRO FORMA
USCOMM INVENTURE MIS ADJUSTMENTS COMBINED
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................................................ $ 4,740 $ 4,253 $ 1,970 $ -- $ 73,627
Cost of revenues................................................ 4,293 3,165 1,216 -- 54,081
----------- ----------- --------- ----------- -----------
Gross profit.................................................... 447 1,088 754 -- 19,546
Selling, general and administrative............................. 336 1,028 536 (1,047) 13,177
Goodwill amortization........................................... -- -- -- 1,047 1,047
----------- ----------- --------- ----------- -----------
Income (loss) from operations................................... 111 60 218 5,322
Other income (expense):
Interest income............................................... -- -- -- -- 424
Interest expense.............................................. (17) -- (9) -- (389)
Other, net.................................................... -- 14 -- -- 728
----------- ----------- --------- ----------- -----------
Income before income taxes...................................... 94 74 209 6,085
Provision for income taxes...................................... 39 30 -- 1,816 2,890
----------- ----------- --------- ----------- -----------
Net income (loss)............................................... $ 55 $ 44 $ 209 $ (1,816) $ 3,195
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Net income per share............................................ $ 0.39
-----------
-----------
Shares used in computing pro forma net income per share (See
Note 5)....................................................... 8,171,043
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
- ------------------------
F-7
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL
Condor was established to create a leading single-source IT service company
that provides strategic IT business solutions to middle market organizations.
Condor has conducted no operations to date and will acquire the Founding
Companies concurrently with and as a condition to the closing of the Offering.
The historical financial statements reflect the financial position and
results of operations of Condor and the Founding Companies and were derived from
the respective Founding Companies' financial statements where indicated. The
periods included in these pro forma financial statements for the individual
Founding Companies are as of the respective periods, regardless of the fiscal
year end of such companies. The audited historical financial statements of
Condor and the Founding Companies included elsewhere in this Prospectus have
been included in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES
Concurrently with and as a condition to the closing of the Offering, Condor
will acquire all of the outstanding capital stock of the Founding Companies. The
acquisitions will be accounted for using the purchase method of accounting with
MST identified as the accounting acquiror. The carrying value of intangible
assets is periodically reviewed by the Company based on the expected future
undiscounted operating cash flows of the related business unit.
The following table sets forth the consideration to be paid in cash and in
shares of Common Stock to the stockholders of each of the Founding Companies.
For purposes of computing the estimated purchase price for accounting purposes,
the value of shares is determined using an estimated fair value of $11.20 per
share, which represents a discount of 20 percent from the assumed initial public
offering price of $14.00 per share due to restrictions on the sale and
transferability of the shares issued. The estimated purchase prices for the
acquisitions are based upon preliminary estimates and are subject to certain
purchase price adjustments at and following the closing. The Company does not
anticipate that the final allocation of purchase price will differ significantly
from that presented.
<TABLE>
<CAPTION>
ALLOCATION
VALUE TOTAL ADJUSTED OF PURCHASE
CASH OF SHARES CONSIDERATION NET ASSETS PRICE GOODWILL LIFE
--------- ----------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
MST.............................. $ 9,750 $ 6,280 $ 16,030 $ 949 N/A N/A
CHMC............................. 17,861 1,520 19,381 3,753 $ 15,628 35
Federal.......................... 7,500 6,000 13,500 2,058 11,442 35
Corporate Access................. 5,494 2,198 7,692 1,123 6,569 30
ISSI............................. 5,000 5,600 10,600 1,275 5,000a 1,825 7
2,500b 5
US Comm.......................... 600 480 1,080 132 948 30
InVenture........................ 750 600 1,350 168 1,182 35
MIS/KTR.......................... 1,200 1,440 2,640 (6) 2,646 35
--------- ----------- ------------- ----------- ----------- ---------
$ 48,155 $ 24,118 $ 72,273 $ 9,452 $ 7,500 $ 40,240
--------- ----------- ------------- ----------- ----------- ---------
--------- ----------- ------------- ----------- ----------- ---------
</TABLE>
a Represents amount allocated to in-process Research and Development.
b Represents amount allocated to existing technology.
F-8
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
MERGER ADJUSTMENTS
-------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
-------- -------- ----- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. (7,000) (7,000)
Prepaid and other current assets...........
-------- -------- ----- -------- ------- -----------
Total current assets..................... (7,000) (7,000)
Property and equipment, net.................. 2,500 2,500
Other assets................................. 5,000 (5,000) --
Goodwill, net................................ 40,240 40,240
-------- -------- ----- -------- ------- -----------
Total assets............................. (7,000) 47,740 (5,000) 35,740
-------- -------- ----- -------- ------- -----------
-------- -------- ----- -------- ------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to shareholders of founding co..... 48,155 250 48,405
Other current liabilities..................
-------- -------- ----- -------- ------- -----------
Total liabilities........................ 48,155 250 -- -- 48,405
Stockholders' equity
Common Stock............................... (6) (18) (24)
Treasury stock............................. 401 401
Additional paid-in capital................. (48,155) (2,602) 48,946 (1,811)
Retained earnings.......................... (4,392) (250) (1,589) (5,000) (11,231)
-------- -------- ----- -------- ------- -----------
Total stockholders' equity............... (48,155) (7,000) (250) 47,740 (5,000) (12,665)
Total liabilities and stockholders'
equity................................. -- (7,000) -- 47,740 (5,000) 35,740
-------- -------- ----- -------- ------- -----------
-------- -------- ----- -------- ------- -----------
<CAPTION>
OFFERING
ADJUSTMENTS POST
------------------ MERGER
(F) (G) ADJUSTMENTS
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. 71,918 (48,405) 23,513
Prepaid and other current assets........... (1,239) (1,239)
-------- -------- -----------
Total current assets..................... 70,679 (48,405) 22,274
Property and equipment, net..................
Other assets.................................
Goodwill, net................................
-------- -------- -----------
Total assets............................. 70,679 (48,405) 22,274
-------- -------- -----------
-------- -------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to shareholders of founding co..... (48,405) (48,405)
Other current liabilities.................. (1,031) (1,031)
-------- -------- -----------
Total liabilities........................ (1,031) (48,405) (49,436)
Stockholders' equity
Common Stock............................... 59 59
Treasury stock.............................
Additional paid-in capital................. 71,651 71,651
Retained earnings..........................
-------- -------- -----------
Total stockholders' equity............... 71,710 -- 71,710
Total liabilities and stockholders'
equity................................. 70,679 (48,405) 22,274
-------- -------- -----------
-------- -------- -----------
</TABLE>
(A) Records the liability for the cash portion of the consideration to be
paid to the stockholders of the Founding Companies in connection with the
Mergers.
(B) Reflects the repurchase of shares from a minority stockholder for
$2,000,000 and distributions to stockholders of $1,000,000 at ISSI. Adjustment
also reflects distributions of $4,000,000 to stockholders at Federal,
simultaneously with the consummation of the Mergers.
(C) Establishment of liability for S corporation distribution to be paid to
the stockholder at one of the Founding Companies.
(D) Reflects the acquisitions of the Founding Companies, consisting of
$48,155,000 in cash and 2,153,355 shares of common stock valued at $11.20 per
share (or $24,118,000) for a total estimated purchase price of $72,273,000
resulting in excess purchase price over the fair value of the net assets
acquired of $40,240,000. Adjustment also reflects the allocation of $5,000,000
of the purchase price to acquired research and development activities
(in-process research and development) and $2,500,000 of acquired internally
developed software, at a Founding Company. The values of the acquired research
and development and internally developed software were determined by independent
valuation. The remaining excess purchase price has been allocated to goodwill.
(E) Records the write-off of the acquired in-process research and
development from a Founding Company.
(F) Records the cash proceeds from the issuance of shares of Condor Common
Stock net of estimated Offering costs and the repayment of advances from a
shareholder (based on an assumed initial public offering price of $14.00 per
share). Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
F-9
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
(G) Records the cash portion of the consideration and the S corporation
distribution to be paid to the stockholder of one of the Founding Companies in
connection with the Mergers ($48,405,000) from proceeds of the Offering.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
The following tables summarize unaudited adjustments to the pro forma
combined statements of operations:
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling, general and administrative........................ $ (1,896) $ - $ 500 $ - $ (1,396)
Goodwill amortization...................................... - 1,396 - - 1,396
--------- --------- --------- --------- -----------
Income from operations..................................... 1,896 (1,396) (500) - -
Other income (expense):
Interest expense........................................... - - - -
--------- --------- --------- --------- -----------
Income (loss) before income taxes.......................... 1,896 (1,396) (500) - -
Provision for income taxes................................. - - - 2,215 2,215
--------- --------- --------- --------- -----------
Net income (loss).......................................... $ 1,896 $ (1,396) $ (500) $ (2,215) $ (2,215)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
For the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Selling, general and administrative............... $ (2,399) $ - $ 375 $ - $ (692) $ (2,716)
Goodwill amortization............................. - 1,047 - - - 1,047
--------- --------- --------- --------- --------- -----------
Income (loss) from operations..................... 2,399 (1,047) (375) - 692 1,669
Other income (expense):
Interest expense.................................. - - - - - -
--------- --------- --------- --------- --------- -----------
Income (loss) before income taxes................. 2,399 (1,047) (375) - 692 1,669
Provision for income taxes........................ - - - 1,284 - 1,284
--------- --------- --------- --------- --------- -----------
Net income (loss)................................. $ 2,399 $ (1,047) $ (375) $ (1,284) $ 692 $ 385
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
</TABLE>
F-10
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS (CONTINUED)
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling, general and administrative........................ $ (1,422) $ - $ 375 $ - $ (1,047)
Goodwill amortization...................................... - 1,047 - - 1,047
--------- --------- --------- --------- -----------
Income (loss) from operations.............................. 1,422 (1,047) (375) - -
Other income (expense):
Interest expense........................................... - - - - -
--------- --------- --------- --------- -----------
Income (loss) before income taxes.......................... 1,422 (1,047) (375) - -
Provision for income taxes................................. - - - 1,816 1,816
--------- --------- --------- --------- -----------
Net income (loss).......................................... $ 1,422 $ (1,047) $ (375) $ (1,816) $ (1,816)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
(A) Reflects the reductions in salaries, bonuses and benefits to the
stockholders and managers of the Founding Companies to which they have agreed
prospectively.
(B) Reflects the amortization of goodwill to be recorded as a result of
these Mergers over a period of seven- to 35-years. These amortization periods
were determined based on an analysis of the characteristics of the individual
Founding Companies.
(C) Reflects the amortization of internally developed software acquired as a
result of these Mergers over a five year estimated life.
(D) Reflects (i) the incremental provision for federal and state income
taxes assuming all entities were subject to federal and state income taxes; (ii)
federal and state income taxes relating to the other statements of operations'
adjustments; (iii) income taxes on S corporation income; and (iv) that goodwill
is not tax deductible.
(E) Reflects the reduction in compensation expense related to the
non-recurring, non-cash compensation charge of $692,000 recorded by Condor in
the third quarter of 1997 related to Common Stock issued to management of and
consultants to the Company. The issuances of Common Stock were made in
contemplation of the Mergers and the Offering, and no future issuances of this
nature are anticipated.
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
Includes (i) 2,046,645 shares issued to founders, consultants and management of
Condor; (ii) 2,153,355 shares issued to owners of the Founding Companies; and
(iii) 3,971,043 of the 5,900,000 shares sold in the Offering necessary to pay
the cash portion of the Merger consideration and to pay expenses of the
Offering.
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Condor Technology Solutions, Inc.
The reverse stock split described in Note 2 has not been consummated as of
November 24, 1997. When it has been consummated, we will be in a position to
furnish the following report on these financial statements.
"In our opinion, the accompanying balance sheets present fairly, in all
material respects, the financial position of Condor Technology Solutions,
Inc. at September 30, 1997 and December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements 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 of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above."
Price Waterhouse LLP
Philadelphia, PA
November 24, 1997
F-12
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- -------------
<S> <C> <C>
ASSETS
Cash................................................................................ $ - $ 13
Deferred offering costs............................................................. 265 1,239
----- ------
Total assets...................................................................... $ 265 $ 1,252
----- ------
----- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Amounts due to stockholder.......................................................... $ 178 $ 1,031
Stockholders' equity:
Preferred stock, $.01 par, 1,000,000 authorized, none outstanding.................
Common stock, $.01 par, 49,000,000 authorized, 1,538,310 and 1,900,321 outstanding
at December 31, 1996 and September 30, 1997, respectively....................... 15 19
Additional paid in capital.......................................................... 72 1,033
Accumulated deficit................................................................. -- ( 831)
----- ------
Total stockholders' equity........................................................ 87 221
----- ------
Total liabilities and stockholders' equity........................................ $ 265 $ 1,252
----- ------
----- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
Condor Technology Solutions, Inc., a Delaware Corporation ("Condor" or the
"Company"), was founded in August 1996 to create a leading single-source IT
service company that provides strategic IT business solutions to middle market
organizations. In order to become a single-source provider of a wide range of IT
services and solutions, Condor has entered into agreements to acquire (the
"Mergers") all of the common stock of eight established IT service providers
(the "Founding Companies") and concurrently complete an initial public offering
(this "Offering") of its common stock (the "Common Stock").
The Company has not conducted any operations, other than payment of salary
to one officer and some facility costs, and all activities to date have related
to this Offering and the Mergers. The Company's cash balances were provided from
the sale of stock to investors and advances from The Commonwealth Group
("Commonwealth"), a shareholder. Accordingly, statements of operations, cash
flows and changes in stockholders' equity for the period from inception to
December 31, 1996 and the period from January 1 to September 30, 1997 would not
provide meaningful information and have been omitted.
As of December 31, 1996 and September 30, 1997, costs of approximately
$265,000 and $1,239,000, respectively, have been incurred in connection with
this Offering. These costs will be recorded as a reduction of the proceeds of
this Offering. The Company is dependent upon this Offering to execute the
pending Mergers. There is no assurance that the pending Mergers or this Offering
will be completed or that the Company will be able to generate future operating
revenues.
2. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK
The Company intends to effect a one-for-5.26227 reverse stock split
effective on the day preceding the date of the final Prospectus for this
Offering. In addition, on October 1, 1997 the Company increased the number of
authorized shares of common stock to 49 million (including 5 million shares of
restricted common stock (the "restricted common stock") and authorized 1 million
shares of $.01 par value preferred stock. The effects of the common stock split
and the increase in the shares of authorized common stock have been
retroactively reflected in the balance sheet and the accompanying notes.
In connection with the organization of the Company, Condor issued 8,095,000
shares of common stock, before giving effect to the reverse stock split
described above, to Commonwealth and other founders in exchange for consulting,
financial advisory and related services provided to Condor and, with respect to
Commonwealth, its commitment to provide funds necessary to effect the Mergers
and this Offering. These non-monetary assets are considered to have an aggregate
value of $87,000. Amounts due to shareholder will be reimbursed out of the
proceeds of this Offering, together with interest on such advances at the prime
rate.
Between January and September 1997, 215,376 shares were issued in exchange
for services associated with the Offering that are considered to have an
aggregate value of $210,534. In the nine months ended September 30, 1997, 42,757
shares were sold to investors for $150,000.
In August and September 1997, the Company issued a total of 76,112 shares of
Common Stock to management. As a result, the Company recorded for financial
statement purposes a non-recurring non-cash compensation charge of approximately
$692,000 for the nine months ended September 30, 1997, representing the
estimated fair value of the shares on the date of issuance.
F-14
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
RESTRICTED COMMON STOCK
The common stock and the restricted common stock are identical except that
the holders of restricted common stock are only entitled to one-fifth of one
vote for each share on all matters. Immediately prior to the effectiveness of
the Company's registration statement, the founders and management of Condor will
exchange their shares of common stock for a equal number of shares of restricted
common stock.
3. DEFERRED COSTS
In connection with this Offering, the Company has incurred costs which are
directly attributable to this Offering. These costs, which include legal fees,
investment banking fees and other costs, have been deferred as of December 31,
1996 and September 30, 1997 and will be charged against the proceeds of this
Offering.
4. INCENTIVE COMPENSATION
In October 1997, the Board of Directors and the Company's stockholders
approved the Company's 1997 Long-Term Incentive Plan (the "Plan"). The purpose
of the Plan is to provide a means by which the Company can attract and retain
executive officers, key employees, directors, consultants and other service
providers and to compensate such persons in a way that provides additional
incentives and enables such persons to increase their ownership interests in the
Company. Individual awards under the Plan may take the form of one or more of:
(i) either incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or deferred
stock; (iv) dividend equivalents; (v) bonus shares and awards in lieu of Company
obligations to pay cash compensation, and (vi) other awards not otherwise
provided for, the value of which is based in whole or in part upon the value of
the common stock of the Company.
The maximum number of shares of common stock that may be subject to
outstanding awards under the Plan will not exceed 12% of the aggregate number of
shares of common stock outstanding, minus the number of shares previously issued
pursuant to awards granted under the Plan. The number of shares deliverable upon
the exercise of ISOs is limited to 1,000,000. The Plan also provides that no
participant may be granted in any calendar year options or SARs for more than
400,000 shares or other awards settleable by delivery of more than 200,000
shares, and limits cash awards in any calendar year to an amount equal to the
fair market value of the number of shares at the date of grant or the date of
settlement, whichever is greater.
In addition to authorizing grants of awards to eligible persons, the Plan
authorizes automatic grants of NQSOs to non-employee directors. Under these
provisions, each person serving or who has agreed to serve as a non-employee
director at the commencement of the Offering will be granted an initial option
to purchase 10,000 shares, and thereafter each person who becomes a non-employee
director will be granted an initial option to purchase 10,000 shares upon such
person's initial election as a director. In addition, these provisions authorize
the automatic annual grant to each non-employee director of an option to
purchase 5,000 shares at each annual meeting of stockholders following this
Offering, provided, however, that a director will not be granted an annual
option if he or she was granted an initial option during the preceding three
months. These options will have an exercise price equal to the fair market value
of common stock on the date of grant and the options will expire at the earlier
of 10 years after the date of grant or one year after the date the participant
ceases to serve as a director of the Company. In addition,
F-15
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCENTIVE COMPENSATION (CONTINUED)
these options generally will become exercisable one year after the date of
grant, except that an option may be forfeited upon a participant's termination
of service as a director for reasons other than death or disability if the date
of termination is less than 11 months after the date of grant.
In connection with this Offering, in addition to the options to be
automatically granted to non-employee directors, options in the form of NQSOs to
purchase shares of common stock of the Company will be granted to the executive
officers of the Company, the employees of the Company and the Founding
Companies. Each of the foregoing options will have an exercise price equal to
the initial public offering price per share in this Offering, and will vest as
to 33% each on the date that is 12 months, 24 months and 36 months after the
date of closing of this Offering. These options will not be exercisable until
they are vested, and unvested options generally will be forfeited upon a
termination of employment that is voluntary by the participant. Upon a change of
control of the Company, vesting will be accelerated. The options generally will
expire on the earlier of 10 years after the date of grant or three months after
termination of employment.
5. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," provides a new fair value based method of
accounting for employee stock options or similar equity instruments, however
this statement allows companies to continue to utilize the intrinsic value based
measure of accounting prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25). Companies electing to remain with the accounting provided in APB
Opinion No. 25 must make pro forma disclosures of net income and net earnings
per share as if the fair value method of accounting had been applied. The
Company will account for stock based compensation pursuant to the requirements
of APB 25 and will provide pro forma disclosure of net income and net income per
share, pursuant to the requirements of SFAS No. 123 as applicable, in the notes
to future consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which will be effective for fiscal periods ending
after December 15, 1997. SFAS No. 128 simplifies the standards required under
current accounting rules for computing earnings per share and replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share ("basic EPS") and diluted
earnings per share ("diluted EPS"). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted earnings per share under
current accounting principles.
The Company will implement SFAS 128 during the fourth quarter of 1997.
6. SUBSEQUENT EVENTS
The Company has signed definitive agreements to acquire all of the common
stock and ownership interests of the Founding Companies to be consummated
simultaneously with the closing of the Offering. The companies to be acquired
are Management Support Technology Corp.; Computer Hardware Maintenance Company,
Inc.; Federal Computer Corporation; Corporate Access Inc.; Interactive Software
Systems Incorporated; U.S. Communications, Inc.; InVenture Group, Inc. and MIS
Technologies, Inc.
F-16
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SUBSEQUENT EVENTS (CONTINUED)
The aggregate consideration that will be paid by Condor to acquire the
Founding Companies is approximately $48.2 million in cash and 2.2 million shares
of common stock. The number of shares of common stock is based on an assumed
offering price of $14.00 per share and is subject to change for the actual
offering price.
The following table reflects the consideration to be paid in cash and shares
of Common Stock, the allocation of the consideration to net assets and resulting
goodwill.
<TABLE>
<CAPTION>
ALLOCATION
VALUE TOTAL ADJUSTED OF PURCHASE
CASH OF SHARES CONSIDERATION NET ASSETS PRICE GOODWILL LIFE
--------- ----------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
MST.............................. $ 9,750 $ 6,280 $ 16,030 $ 949 N/A N/A
CHMC............................. 17,861 1,520 19,381 3,753 $ 15,628 35
Federal.......................... 7,500 6,000 13,500 2,058 11,442 35
Corporate Access................. 5,494 2,198 7,692 1,123 6,569 30
ISSI............................. 5,000 5,600 10,600 1,275 5,000a 1,825 7
2,500b 5
US Comm.......................... 600 480 1,080 132 948 30
InVenture........................ 750 600 1,350 168 1,182 35
MIS/KTR.......................... 1,200 1,440 2,640 (6) 2,646 35
--------- ----------- ------------- ----------- ----------- ---------
$ 48,155 $ 24,118 $ 72,273 $ 9,452 $ 7,500 $ 40,240
--------- ----------- ------------- ----------- ----------- ---------
--------- ----------- ------------- ----------- ----------- ---------
</TABLE>
- ------------------------
a Represents amount allocated to in-process Research and Development.
b Represents amount allocated to existing technology.
The total consideration does not reflect contingent consideration which may
be issued pursuant to earn out arrangements included in the definitive
agreements for the Founding Companies. These arrangements provide for the
Company to pay additional consideration of up to $19 million in cash and issue
up to $39 million in shares of Common Stock, based on earnings before interest
and taxes for 1998-2000. Contingent consideration, if earned, will be recorded
in a manner consistent with the consideration paid at closing for each Founding
Company. The shares associated with the contingent consideration will impact
earnings per share in the period in which the contingencies are resolved and the
stock is distributable.
The purchase price has been allocated to the Company's historical assets and
liabilities based on their respective carrying values, with the exception of
in-process research and development costs and existing technology at ISSI. The
fair market value of the in-process research and development costs and existing
technology was determined via an independent valuation by a third party. The
allocation of the purchase price is considered preliminary until such time as
the closing of the transaction and consummation of the Mergers. The Company does
not anticipate that the final allocation of purchase price will differ
significantly from that presented.
From October 1 to November 24, 1997 the Company issued a total of 146,325
shares of Common Stock to management of the Company. As a result, the Company
will record for financial statement purposes a non-recurring non-cash
compensation charge of approximately $1,639,000 (unaudited) in the quarter
ending December 31, 1997, representing the difference between the amount paid
for the shares and the estimated fair value of the shares on the date of grant.
F-17
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SUBSEQUENT EVENTS (CONTINUED)
On October 2, 1997, the Company filed a registration statement on Form S-1
for the sale of its Common Stock. An investment in shares of Common Stock
offered by this Prospectus involves a high degree of risk, including, among
others, absence of a combined operating history, risks relating to the Company's
acquisition strategy, risks relating to acquisition financing, reliance on key
personnel and a substantial portion of the proceeds from this Offering payable
to affiliates of the Founding Companies.
In the course of Condor's consolidation efforts, Condor negotiated with
Emtec, Inc. ("Emtec"), an IT service company based in Pennsylvania, with a view
to Emtec becoming one of the Founding Companies. As part of this process,
Emtec's investment banker and Commonwealth executed two confidentiality
agreements pursuant to which each agreed, among other things, not to disclose
certain confidential information and Commonwealth agreed that Condor would not
acquire two companies to be introduced to it by Emtec's investment banker for a
period of two years without such investment banker's prior written consent.
Neither Emtec nor Condor was a signatory to either agreement. Emtec's investment
bank then introduced representatives of Commonwealth and Condor to two of the
Founding Companies, CHMC and Corporate Access, and Condor and the three
companies then proceeded over the course of more than two months to negotiate
the terms and conditions pursuant to which each of those companies would be
acquired by Condor in connection with its consolidation efforts and this
Offering. On or about July 24, 1997, Condor informed Emtec that due to Emtec's
failure to resolve problems that were critical to ensuring Emtec's participation
in the consolidation and initial public offering, Condor could no longer
continue with its plans to acquire Emtec. On October 28, 1997, Emtec filed suit
in the United States District Court for the Eastern District of Pennsylvania
against Condor, Commonwealth, J. Marshall Coleman and Kennard F. Hill alleging
breach of contract, tortious interference with Emtec's business relationship
with Corporate Access and CHMC and misappropriation of a trade secret arising
out of the participation of CHMC and Corporate Access in the consolidation and
initial public offering without Emtec's consent. In connection with the three
causes of action, Emtec seeks an injunction restraining Condor and Commonwealth
from engaging in any business transaction with CHMC or Corporate Access through
May 13, 1999, demands that the defendants disgorge the financial benefits that
they have and will obtain as a result of their breach of contract and seeks
compensatory and punitive damages. Condor and the other defendants intend to
defend vigorously against this action. Condor has agreed to indemnify CHMC's
directors, officers and stockholders against any liability such persons may
incur as a result of any claims brought by Emtec against any of them that
directly related to CHMC's participation as a Founding Company.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Management Support Technology Corp.
Framingham, Massachusetts
We have audited the accompanying balance sheets of Management Support
Technology Corp. (the "Company") as of December 31, 1995 and 1996 and September
30, 1997, and the related statements of income and retained earnings, and cash
flows for each of the three years in the period ended December 31, 1996 and for
the nine months ended September 30, 1997. These financial statements 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, such financial statements present fairly, in all material
respects, the financial position of Management Support Technology Corp. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the nine months ended September 30, 1997 in conformity
with generally accepted accounting principles.
As discussed in Note 2 of the notes to financial statements, the Company's
chief executive officer is also the sole stockholder and his compensation is at
his sole discretion.
Deloitte & Touche LLP
Boston, Massachusetts
October 29, 1997
F-19
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents......................................................... $ 7 $ 102 $ 71
Accounts receivable (net of allowance for doubtful accounts of $7 in 1995,
1996 and 1997)............................................................. 1,184 1,451 1,110
Prepaid expenses and other current assets.................................... 126 169 44
--------- --------- ------
Total current assets................................................... 1,317 1,722 1,225
--------- --------- ------
Property and equipment:
Equipment.................................................................... 589 822 914
Vehicles..................................................................... 36 36 -
Furniture and fixtures....................................................... 164 177 179
Leasehold improvements....................................................... 20 34 41
--------- --------- ------
Total.................................................................. 809 1,069 1,134
Less accumulated depreciation................................................ (194) (381) (516)
--------- --------- ------
Property and equipment--net............................................ 615 688 618
--------- --------- ------
Investment..................................................................... 600 - -
--------- --------- ------
Deposits and other............................................................. 15 16 15
--------- --------- ------
Total assets........................................................... $ 2,547 $ 2,426 $ 1,858
--------- --------- ------
--------- --------- ------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Note payable to a bank....................................................... $ 500 $ 250 $ 550
Accrued compensation......................................................... - 280 -
Accounts payable and accrued expenses........................................ 208 95 359
Deferred revenue............................................................. 959 250 -
--------- --------- ------
Total current liabilities.............................................. 1,667 875 909
--------- --------- ------
Commitments (Note 4)
Stockholder's equity:
Common stock, $.01, $.002 and $.00025 par value in 1995, 1996 and 1997,
respectively; 20,000,000 shares authorized; 8,105,360 shares issued and
outstanding................................................................ 2 2 2
Retained earnings............................................................ 878 1,549 947
--------- --------- ------
Total stockholder's equity............................................. 880 1,551 949
--------- --------- ------
Total liabilities and stockholder's equity............................. $ 2,547 $ 2,426 $ 1,858
--------- --------- ------
--------- --------- ------
</TABLE>
See notes to financial statements.
F-20
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1994 1995 1996 1997
--------- --------- --------- 1996 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................................................... $ 3,669 $ 6,193 $ 8,211 $ 6,452 $ 5,509
Cost of revenue............................................. 1,463 2,415 3,783 2,895 2,934
--------- --------- --------- ----------- ---------
Gross profit................................................ 2,206 3,778 4,428 3,557 2,575
General and administrative expenses......................... 1,113 1,606 2,188 1,684 1,453
--------- --------- --------- ----------- ---------
Income from operations...................................... 1,093 2,172 2,240 1,873 1,122
Interest expense............................................ (2) (12) (29) (27) (11)
Interest income and other income (expense).................. - (3) 3 1 2
--------- --------- --------- ----------- ---------
Net income.................................................. 1,091 2,157 2,214 1,847 1,113
Retained earnings, beginning of period...................... 518 789 878 878 1,549
Distributions, net of contributions......................... (820) (2,068) (1,543) (1,459) (1,715)
--------- --------- --------- ----------- ---------
Retained earnings, end of period............................ $ 789 $ 878 $ 1,549 $ 1,266 $ 947
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See notes to financial statements.
F-21
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 1,091 $ 2,157 $ 2,214 $ 1,847 $ 1,113
--------- --------- --------- ----------- -----------
Adjustments to reconcile net income to cash provided
by operating activities:
Investment.......................................... (330) (270) - -
Compensation........................................ - - - - 150
Depreciation and amortization....................... 51 123 188 143 159
Provision for doubtful accounts..................... 7 - -
Changes in assets and liabilities:
Accounts receivable............................... (666) 102 (268) 109 342
Prepaid expenses and other current assets......... (41) (60) (43) 93 125
Deposits and other................................ - (5) - - -
Deferred revenue.................................. 776 103 (709) (760) (250)
Accounts payable and accrued expenses............. 43 112 166 536 (16)
--------- --------- --------- ----------- -----------
Total adjustments............................... (160) 105 (666) 121 510
--------- --------- --------- ----------- -----------
Cash provided by operating activities........... 931 2,262 1,548 1,968 1,623
--------- --------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (322) (393) (260) (223) (89)
Return of investment.................................. - - 600 600 -
--------- --------- --------- ----------- -----------
Cash provided by (used for) investing
activities.................................... (322) (393) 340 377 (89)
--------- --------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable.......................................... 200 200 (250) (500) 300
Distributions, net of contributions................... (820) (2,068) (1,543) (1,459) (1,865)
--------- --------- --------- ----------- -----------
Cash used for financing activities.............. (620) (1,868) (1,793) (1,959) (1,565)
--------- --------- --------- ----------- -----------
Increase (decrease) in cash and equivalents............. (11) 1 95 386 (31)
Cash and equivalents, beginning of period............... 17 6 7 7 102
--------- --------- --------- ----------- -----------
Cash and equivalents, end of period..................... $ 6 $ 7 $ 102 $ 393 $ 71
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
SUPPLEMENTAL INFORMATION--INTEREST PAID................. $ 2 $ 11 $ 31 $ 27 $ 10
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
Noncash Transactions--In 1994 and 1995, the Company received an equity position
in an investment in exchange for services with an assigned value at the date of
exchange of $330 and $270, respectively (see Note 6). In 1997, the chief
executive officer/sole stockholder received $150 as a distribution, which has
been recorded as compensation.
See notes to financial statements.
F-22
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS, PRINCIPAL PRODUCT AND MARKETS--Management Support
Technology Corp. (the "Company") is a consulting and systems integration firm
specializing in the use of corporate strategy and information technology to
improve organizational effectiveness, productivity, quality, flexibility and
speed. The Company consults with executive management in major United States and
European companies and governmental agencies to identify opportunities for using
technology to improve organizational performance. This includes business process
reengineering, organizational transformation planning, strategic information
technology initiatives in mission critical business processes, IT product
development, IT technology research and development of executive information
system and decision support applications. The Company provides development and
operational support for these information technology applications to its clients
throughout the entire life cycle of the applications. Its offices are located in
the Boston suburb of Framingham, Massachusetts, and near Los Angeles in Seal
Beach, California.
STOCK SPLITS AND RECAPITALIZATIONS--On June 1, 1996, the Board of Directors
and stockholder declared a five-for-one split of the Company's common stock,
approved an increase in the authorized common stock from 500,000 to 2,500,000
shares, and changed the par value of its common stock from $.01 per share to
$.002 per share. In June 1997, the Board of Directors and stockholder declared
an eight-for-one split of the Company's common stock, approved an increase in
the authorized common stock from 2,500,000 to 20,000,000 shares and changed the
par value of its common stock from $.002 per share to $.00025 per share. All
share data have been adjusted to reflect the splits of the Company's common
stock.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION (UNAUDITED)--The interim financial statements
for the nine months ended September 30, 1996 are unaudited and certain
information and disclosures normally included in annual financial statements
have been omitted. In the opinion of management, the accompanying interim
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows in accordance with generally
accepted accounting principles with respect to the interim financial statements
and have been prepared on the same basis as the audited financial statements.
The results of operations for the interim period is not necessarily indicative
of the results for the entire fiscal year.
USE OF ESTIMATES--The preparation of the Company's financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND EQUIVALENTS--The Company considers all highly liquid investments
purchased with remaining maturities of three months or less to be cash
equivalents.
EXPENSES OF STOCK OFFERING--As of September 30, 1997, the Company has
incurred $44,000 of expenses directly attributable to an offering of securities
(the "Offering") in connection with the Acquisition (see Note 9). These expenses
have been deferred as of September 30, 1997 and are included in prepaid expenses
and other current assets in the accompanying balance sheet. The expenses will be
charged against the gross proceeds of the Offering, which is expected to be
completed in early 1998.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets.
F-23
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leasehold improvements are recorded at cost and amortized using the
straight-line method over the lesser of the lease term or the estimated useful
life. Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever
circumstances indicate that the carrying value of an asset may not be
recoverable. The adoption of SFAS No. 121 did not have any effect on the
Company's financial position or results of operations for the year ended
December 31, 1996.
INVESTMENT--The investment was carried at cost (see Note 6).
REVENUE RECOGNITION, SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT
RISK--Substantially all revenue is generated from consulting contracts and is
recognized over specified performance periods using the percentage-of-completion
method. The Company records certain costs incurred under consulting contracts
which are billable to customers as revenue. The Company performs ongoing credit
evaluations of its customers, maintains allowances for potential credit losses
and generally requires no collateral from its customers. Substantially all of
the Company's revenue was earned from the Joint Venture and six independently
operated divisions of a large multinational holding company in 1994, 1995, 1996
and 1997 (Notes 6 and 7); an unrelated party in 1995; and an unrelated party in
1996 and 1997.
INCOME TAXES--The Company has elected to be taxed under Subchapter S of the
Internal Revenue Code. As a result, income of the Company is treated as
distributed to the stockholder and is reported on the personal income tax
returns of the stockholder. Accordingly, the Company makes no provision for
income taxes, and has not provided for deferred income taxes.
2. OFFICER SALARY
Mr. C. Lawrence Meador, the Company's chief executive officer and sole
stockholder, elected not to receive a salary for the nine months ended September
30, 1997 and to receive only distributions. The amount of any compensation or
any distribution is at Mr. Meador's sole discretion. In accordance with the
intent of Staff Accounting Bulletin No. 55, the Company has measured the value
of Mr. Meador's services as chief executive officer for the period and has
recorded compensation, with a corresponding reduction in stockholder
distributions, of $150,000, which has been recognized in the accompanying income
statement as a component of cost of revenue.
In measuring the value of Mr. Meador's services for the period, the Company
concluded that the value for such services for the full year is $200,000, as
this amount represents Mr. Meador's annual base salary for each calendar year
since 1992. The $150,000 represents a pro rata amount for the nine-month period.
In reaching this conclusion, the Company considered other information, including
(i) a one-time bonus of $280,000 paid to Mr. Meador for 1996, which brought the
officer/stockholder's total 1996 compensation to $480,000; (ii) a proposed
employment agreement between Mr. Meador and Condor (Note 9) which provides for a
minimum annual salary to be paid to Mr. Meador of $431,000 (unaudited) in his
dual role as the chief executive of the Company and as Vice Chairman of Condor's
board of directors subsequent to the Acquisition (Note 9) and (iii) total
distributions of $1,865,000 (prior to reclassification of salary) paid to Mr.
Meador during the nine-month period ended September 30, 1997 as compared to
distributions for the years ended December 31, 1992, 1993, 1994, 1995 and 1996
and for the nine months ended September 30, 1996 of $82,000 (unaudited),
$224,000 (unaudited), $820,000, $2,068,000, $1,543,000 and $1,459,000
(unaudited), respectively. Cost of revenue includes $200,000, $200,000,
$480,000, $360,000
F-24
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
2. OFFICER SALARY (CONTINUED)
(unaudited) and $150,000 of compensation to Mr. Meador for the years ended
December 31, 1994, 1995 and 1996 and for the nine months ended September 30,
1996 and 1997, respectively. Such compensation is at Mr. Meador's sole
discretion and, accordingly, the accompanying financial statements may not
necessarily be indicative of the conditions that would have existed if the
Company were not owned solely by Mr. Meador. Subsequent to September 30, 1997,
Mr. Meador received additional distributions aggregating $44,000 (unaudited).
3. NOTES PAYABLE TO BANK
At December 31, 1995, 1996 and September 30, 1997, the Company had a
line-of-credit agreement with Fleet Bank of Boston, N.A. (the "Bank") which
provided for borrowings of up to $500,000, $750,000 and $750,000, respectively.
Borrowings bear interest at the Bank's prime lending rate plus .75% (9% at
December 31, 1996 and 9.25% at September 30, 1997). The line-of-credit agreement
was renewed on October 2, 1997 (expiring October 2, 1998) under similar terms
and conditions and requires compensating balances equal to 5% ($37,500) of the
maximum amount of the loan be maintained at the Bank.
On October 2, 1997, the Company secured a second line-of-credit with the
Bank which provides for borrowings of up to $200,000. Borrowings bear interest
at the Bank's prime lending rate plus .75%. If the Bank has not made prior
demand, borrowings under this agreement shall convert on October 2, 1998 to a
term loan with equal monthly fixed principal payments plus interest due over
three years.
The two line-of-credit agreements are guaranteed by Mr. Meador (Note 2) and
include non-financial covenants and conditions which, among other things,
require the Company to maintain a zero balance for at least a thirty-day period
during the year. All amounts outstanding under the agreements (unless the
above-mentioned conversion occurs) are due on demand and are secured by all
assets of the Company.
4. COMMITMENTS
The Company leases certain equipment and office space under operating lease
arrangements expiring through 2000. Future minimum rental payments under
noncancelable operating leases at September 30, 1997 follow:
<TABLE>
<CAPTION>
Period ended December 31
<S> <C>
1997.............................................................. $ 35,000
1998.............................................................. 141,000
1999.............................................................. 74,000
2000.............................................................. 34,000
---------
$ 284,000
---------
---------
</TABLE>
Rent expense in 1994, 1995 and 1996 was $84,000, $115,000 and $136,000,
respectively. Rent expense for the nine months ended September 30, 1996 and 1997
was $107,000 and $119,000, respectively.
5. PROFIT-SHARING PLAN
The Company has a profit-sharing plan for its eligible employees. Employees
are eligible for participation upon attaining the age of 21 and completion of
one year of service. Contributions to the plan are made at the discretion of the
Board of Directors. Discretionary contributions aggregated $73,000,
F-25
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
5. PROFIT-SHARING PLAN (CONTINUED)
$93,000 and $131,000 in 1994, 1995 and 1996, respectively. Discretionary
contributions for the nine months ended September 30, 1996 and 1997 aggregated
$96,000 and $3,000, respectively.
The Company established a 401(k) plan in 1994 covering substantially all
full-time employees. Under the provisions of the plan, employees may contribute
a portion of their compensation within certain limitations. The Company matches
a percentage of employee contributions on a discretionary basis as determined by
the Board of Directors. For the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, the Board of Directors
elected to match 50% of employee contributions on the first 6% of the
participant's elective deferral, subject to certain limitations. The Company
contributed $18,000, $37,000 and $42,000 to the plan in 1994, 1995 and 1996,
respectively. The Company contributed approximately $33,000 and $36,000 for the
nine months ended September 30, 1996 and 1997, respectively.
6. INVESTMENT
In 1994, the Company entered into an agreement to purchase, prior to
December 7, 1995, for $600,000, a 10% equity interest in a recently formed
entity (the "Joint Venture") that is a significant client of the Company (Note
1). The Company's chief executive officer and stockholder served as a director
of the Joint Venture until May 30, 1996. Under the terms of the agreement, the
purchase price was withheld by the client from amounts payable to the Company
for services rendered under consulting agreements. At December 31, 1995, the
entire $600,000 had been withheld and was classified as an investment.
On May 30, 1996, the Joint Venture was acquired by a large multinational
holding company (Notes 1 and 7) and returned the Company's $600,000 investment
prior to consummation of the acquisition of the 10% interest and the Company
agreed to provide consulting services through October 31, 1996 to the Joint
Venture in exchange for $108,000, plus expenses. Revenue was recognized as
services were provided.
7. OTHER RELATED-PARTY TRANSACTIONS
Included in prepaid expenses and other current assets at December 31, 1995
is an advance of $15,000 to a director.
During 1995 and 1996, the Company paid approximately $86,000 and $245,000,
respectively, in consulting fees to two companies that have directors in common
with the Company under arms length terms. During the nine months ended September
30, 1996 and 1997, the Company paid approximately $154,000 and $61,000,
respectively, to these two companies.
During 1995, Mr. Meador (Note 2) became an officer, on an interim assignment
under contract, of a division of a large multinational holding company (Notes 1
and 6).
8. STOCK OPTION PLAN
In June 1997, the Board of Directors and shareholder adopted the 1997 Stock
Option Plan (the "Plan"), pursuant to which options to purchase up to 5,000,000
shares of common stock may be granted. Options granted under the Plan may be
designated as qualified and nonqualified stock options and are exercisable over
a term of not more than ten years (five years in the case of an incentive option
granted to a ten-percent stockholder). The exercise price of qualified stock
options will not be less than 100% (110%, in the case of an incentive option
granted to a ten-percent stockholder) of the fair market value at the time
F-26
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
8. STOCK OPTION PLAN (CONTINUED)
of grant. Options granted under the Plan vest over a period as determined by the
Board of Directors at the time of grant. No options have been granted under the
Plan. Effective November 28, 1997, the Board of Directors voted to terminate the
Plan.
9. SUBSEQUENT EVENT (UNAUDITED)
In October 1997, the Company entered into an agreement with Condor
Technology Solutions, Inc. ("Condor") for the acquisition of all of the
Company's outstanding common stock (the "Acquisition"). The consideration to be
paid by Condor for the Acquisition is approximately $17.6 million (unaudited),
$9.8 million (unaudited) of which would be paid in cash and $7.9 million
(unaudited) of which would be paid in Condor common stock. In addition, Mr.
Meador (Note 2) is eligible for an earn-out, resulting in contingent
consideration of up to $8.4 million (unaudited), up to $2.5 million (unaudited)
of which would be paid in cash and the remainder of which would be paid in
additional Condor common stock. Mr. Meador will also receive options to acquire
a number of shares of Condor common stock equal to 1.33% (unaudited) of Condor's
outstanding common stock at the Acquisition's close date which he may distribute
at his sole discretion. The consummation of the Acquisition is conditioned upon
Condor acquiring certain other companies and the availability of acceptable
financing.
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Computer Hardware Maintenance Company, Inc.
In our opinion, the accompanying balance sheets at February 29, 1996,
February 28, 1997 and August 31, 1997, the related statements of operations, of
changes in stockholders' equity and of cash flows for the years ended February
29, 1996 and February 28, 1997 and for the six month period ended August 31,
1997, and the related consolidated statement of operations, of changes in
stockholders' equity and of cash flows for the year ended February 28, 1995,
present fairly, in all material respects, the financial position of Computer
Hardware Maintenance Company, Inc. at February 29, 1996, February 28, 1997 and
August 31, 1997 and the results of its operations and its cash flows for the
years ended February 28, 1995, February 29, 1996 and February 28, 1997 and for
the six month period ended August 31, 1997, in conformity with generally
accepted accounting principles. These financial statements 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, PA
October 31, 1997
F-28
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEB. 29, FEB. 28, AUG. 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 923 $ 928 $ 1,940
Accounts receivable, net of allowance of $30 in 1996 and 1997..................... 3,025 5,267 4,898
Inventory......................................................................... 2,885 1,378 946
Deferred income taxes............................................................. 13 11 11
Prepaid expenses and other current assets......................................... 10 171 93
--------- --------- -----------
Total current assets.......................................................... 6,856 7,755 7,888
Fixed assets, net................................................................... 265 307 342
Investment in partnership........................................................... 10 17 -
Other non-current assets............................................................ 40 47 44
--------- --------- -----------
Total assets.................................................................. $ 7,171 $ 8,126 $ 8,274
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................................... $ 1,531 $ - $ 134
Current portion of capital lease obligations...................................... 13 16 10
Current portion of long-term debt................................................. 48 34 30
Accounts payable.................................................................. 1,938 2,342 1,323
Accrued liabilities............................................................... 454 850 1,418
Deferred revenue.................................................................. 1,085 1,730 1,555
Other current liabilities......................................................... 262 262 92
--------- --------- -----------
Total current liabilities..................................................... 5,331 5,234 4,562
Long-term debt...................................................................... 19 28 -
Other long-term liabilities......................................................... 14 12 -
--------- --------- -----------
Total liabilities............................................................. 5,364 5,274 4,562
--------- --------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized; 5,980,000 shares issued
in 1996 and 1997; 4,200,000, 4,100,000 and 4,100,000 shares outstanding at
February 1996, February 1997 and May 1997, respectively......................... - - -
Additional paid-in capital........................................................ 126 126 306
Deferred stock compensation....................................................... - 174 -
Retained earnings................................................................. 2,036 2,930 3,807
--------- --------- -----------
2,162 3,230 4,113
Less: Treasury stock (1,780,000, shares at February 1996 and 1,880,000 shares at
February 1997 and May 1997, all at cost)........................................ (355) (378) (401)
--------- --------- -----------
Total stockholders' equity.................................................... 1,807 2,852 3,712
--------- --------- -----------
Total liabilities and stockholders' equity.................................... $ 7,171 $ 8,126 $ 8,274
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28,
1997,
AND FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND 1997
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------- AUGUST 31,
FEB. 28, FEB. 29, FEB. 28, --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Services................................................. $ 7,545 $ 7,997 $ 9,279 $ 4,290 $ 6,401
Hardware and software procurement........................ 25,656 22,811 35,439 16,969 17,664
--------- --------- --------- --------- ---------
Total revenues....................................... 33,201 30,808 44,718 21,259 24,065
--------- --------- --------- --------- ---------
Cost of revenues:
Services................................................. 4,623 5,187 6,061 3,097 3,648
Hardware and software procurement........................ 23,421 21,036 32,342 15,341 15,242
--------- --------- --------- --------- ---------
Total cost of revenues............................... 28,044 26,223 38,403 18,438 18,890
--------- --------- --------- --------- ---------
Gross profit............................................... 5,157 4,585 6,315 2,821 5,175
Selling, general and administrative expenses............... 3,910 3,844 4,784 1,761 3,794
--------- --------- --------- --------- ---------
Income from operations..................................... 1,247 741 1,531 1,060 1,381
--------- --------- --------- --------- ---------
Other income (expense):
Net interest expense..................................... (284) (175) (191) (94) (14)
Other income............................................. 79 107 152 14 95
--------- --------- --------- --------- ---------
Total other income (expense)......................... (205) (68) (39) (80) 81
--------- --------- --------- --------- ---------
Income before income taxes................................. 1,042 673 1,492 980 1,462
Provision for taxes........................................ 396 285 598 440 585
--------- --------- --------- --------- ---------
Net income................................................. $ 646 $ 388 $ 894 $ 540 $ 877
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED FEBRUARY 28,
1997
AND FEBRUARY 29, 1996 AND THE SIX MONTH PERIOD ENDED AUGUST 31, 1997
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED
FEBRUARY 28, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL TREASURY STOCK DEFERRED TOTAL
---------- PAID-IN ----------------------- STOCK RETAINED STOCKHOLDERS'
SHARES CAPITAL SHARES AMOUNT COMPENSATION EARNINGS EQUITY
---------- ------------- ---------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1994........ 4,450,000 $ 126 1,530,000 $ (292) $ - $ 1,002 $ 836
Stock repurchase.................. (100,000) - 100,000 (22) - - (22)
Net Income........................ - - - - - 646 646
---------- ----- ---------- ----- ----- ----------- ------
Balance, February 28, 1995........ 4,350,000 126 1,630,000 (314) - 1,648 1,460
Stock repurchase.................. (150,000) - 150,000 (41) - - (41)
Net Income........................ - - - - - 388 388
---------- ----- ---------- ----- ----- ----------- ------
Balance, February 29, 1996........ 4,200,000 126 1,780,000 (355) - 2,036 1,807
Stock repurchase.................. (100,000) - 100,000 (23) - - (23)
Stock options vested.............. - - - - 174 - 174
Net income........................ - - - - - 894 894
---------- ----- ---------- ----- ----- ----------- ------
Balance, February 28, 1997........ 4,100,000 126 1,880,000 (378) 174 2,930 2,852
Stock options exercised........... 90,000 180 - - (174) - 6
Stock repurchase.................. (100,000) - 100,000 (23) - - (23)
Net income........................ - - - - - 877 877
---------- ----- ---------- ----- ----- ----------- ------
Balance, August 31, 1997.......... 4,090,000 $ 306 1,980,000 $ (401) $ - $ 3,807 $ 3,712
---------- ----- ---------- ----- ----- ----------- ------
---------- ----- ---------- ----- ----- ----------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28,
1997,
AND FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND 1997
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED FEBRUARY 28, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
------------------------------------- ENDED AUGUST 31,
FEB. 28, FEB. 29, FEB. 28, ----------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 646 $ 388 $ 894 $ 540 $ 877
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 148 117 95 43 48
Loss on sale of fixed assets.............................. - - 2 - -
Gain on sale of partnership investment.................... - - - - (56)
Deferred compensation..................................... - - 174 - 6
Income from partnership................................... (4) (6) (7) - -
Increase (decrease) in cash from changes in operating
assets and liabilities:
Accounts receivable..................................... (629) 720 (2,242) (2,204) 369
Inventory............................................... 1,205 (883) 1,507 774 432
Prepaids and other current assets....................... 67 13 (168) 4 81
Deferred taxes.......................................... 35 10 8 13 -
Accounts payable and accruals........................... (1,488) 331 800 1,363 (621)
Deferred revenue........................................ 135 (741) 645 45 (175)
----------- ----- ----------- ----------- ---------
Net cash provided by (used in) operating activities... 115 (51) 1,708 578 961
----------- ----- ----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets................................... (95) (112) (139) (75) (83)
----------- ----- ----------- ----------- ---------
Net cash used in investing activities................. (95) (112) (139) (75) (83)
----------- ----- ----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases..... (5) (10) (37) (57) (50)
Net borrowings (payments) under line of credit.............. 67 624 (1,504) (962) 134
Treasury stock repurchases.................................. (22) (41) (23) (12) (23)
Proceeds from sale of investment in partnership............. - - - - 73
----------- ----- ----------- ----------- ---------
Net cash provided by (used in) financing activities... 40 573 (1,564) (1,031) 134
----------- ----- ----------- ----------- ---------
Net increase (decrease) in cash and cash equivalents.......... 60 410 5 (528) 1,012
Cash and cash equivalents at beginning of period.............. 453 513 923 923 928
----------- ----- ----------- ----------- ---------
Cash and cash equivalents at end of period.................... $ 513 $ 923 $ 928 $ 395 $ 1,940
----------- ----- ----------- ----------- ---------
----------- ----- ----------- ----------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 303 $ 217 $ 209 $ 93 $ 14
----------- ----- ----------- ----------- ---------
----------- ----- ----------- ----------- ---------
Cash paid for income taxes.................................. $ 250 $ 289 $ 859 $ 450 $ 760
----------- ----- ----------- ----------- ---------
----------- ----- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Computer Hardware Maintenance Company, Inc. ("CHMC"), a Pennsylvania
corporation founded in 1972, provides desktop computer systems, service and
support programs for a variety of commercial and federal, state and local
governmental entities in the Mid-Atlantic region. CHMC has sales and support
offices throughout its market region, and offers nationwide coverage through a
network of operating affiliations and alliances. CHMC's service offerings
include network management and support, desktop system procurement and
refreshment, migration consulting and support, help-desk, remedial and
preventive maintenance and asset management services. The Company is
headquartered in Langhorne, Pennsylvania and has significant operations in
Allentown, Pennsylvania.
The Company and its stockholders have entered into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The statements of operations, of changes in stockholders' equity and of cash
flows for the six months ended August 31, 1996 are unaudited, and certain
information and footnote disclosure related thereto, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CHMC and its
wholly-owned subsidiary, Computer Hardware Product Centers, Inc. ("CHPC"), in
1995. Effective February 28, 1995, CHMC and CHPC merged to form one legal
entity, under the name of Computer Hardware Maintenance Company, Inc. All
significant intercompany balances and transactions have been eliminated in 1995.
CASH AND CASH EQUIVALENTS
CHMC considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
CHMC maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. CHMC has not experienced any losses in such accounts.
CHMC believes it is not exposed to any significant credit risk on cash and cash
equivalents. In addition, the Company grants credit terms in the normal course
of business to its customers. As part of its ongoing procedures, the Company
monitors the credit worthiness of its customers. The Company does not believe
that it is subject to any unusual credit risk beyond the normal credit risk
attendant in its business.
F-33
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company's sales and services are provided primarily to large and
mid-size companies. One commercial client represented greater than 10% of total
revenues for the years ended February 28, 1995, February 29, 1996 and February
28, 1997. Total revenues for this client were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Hardware and software............................................ $ 7,500 $ 3,677 $ 7,571
Services......................................................... 1,453 1,402 1,876
--------- --------- ---------
$ 8,953 $ 5,079 $ 9,447
--------- --------- ---------
--------- --------- ---------
</TABLE>
At February 28, 1995 and February 29, 1996, accounts receivable from one
commercial client were 12% of accounts receivable. At February 28, 1997,
accounts receivable from a different commercial client were greater than 10% of
accounts receivable.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenues are recognized upon delivery of the equipment and/or related
services. Revenues on long-term service contracts are recognized ratably over
the term of the contract. The Company receives advance payment on certain
maintenance contracts. Such advance payments are deferred and are reflected in
income together with the related costs and expenses as the services are
performed. Accounts receivable are accounted for net of allowances for estimated
uncollectible amounts.
INVENTORY
Inventories are stated at the lower of cost or market using the average cost
method and at February 29, 1996 and February 28, 1997 were comprised of the
following (in thousands):
<TABLE>
<CAPTION>
FEB. 29, FEB. 28, AUG. 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
New computer products (held for resale)........................ $ 2,145 $ 578 $ 506
Maintenance supplies........................................... 275 348 33
Maintenance parts.............................................. 465 452 407
--------- --------- -----
$ 2,885 $ 1,378 $ 946
--------- --------- -----
--------- --------- -----
</TABLE>
FIXED ASSETS
Fixed assets are recorded at cost. Improvements which substantially increase
the useful lives of assets are capitalized. Maintenance and repairs are expensed
as incurred. Upon retirement or disposal, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is
recorded. Depreciation is computed on the straight-line method based on the
estimated useful lives of assets as indicated in Note 5.
F-34
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are provided in accordance with the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
deferred tax assets and liabilities are recognized at the applicable income tax
rates based upon future tax consequences of temporary differences between the
tax basis and financial reporting basis of assets and liabilities.
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 reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. GOVERNMENT CONTRACTS
The Company has contracts with two state governments to provide products and
services to any of their agencies. These contracts are not subject to
renegotiation nor do they guarantee minimum sales levels; rather they name the
Company as an approved vendor for the governmental agencies. All income under
the contracts is recognized in the same manner as income from other parties.
Sales to governmental agencies totaled $2,570,000 for the six month period ended
August 31, 1997, and $3,980,000, $3,791,000 and $9,063,000 for the years ended
February 28, 1995, February 29, 1996 and February 28, 1997, respectively.
Accounts receivable from such agencies at February 29, 1996 and February 28,
1997 were $349,000 and $1,215,000, respectively.
4. INVESTMENT IN PARTNERSHIP
The Company is a partner in Computer Hardware Investors, which owns real
estate in Southampton, Pennsylvania. The property is used by CHI Institute, a
technical school, operated by Computer Hardware Service Company, Inc. (a related
party, see Note 13). Under the Partnership Agreement, profits and losses
resulting from the partnership are allocated 30% to each of two general
partners, 34% to Computer Hardware Service Company, Inc. and 6% to CHMC. Income
from the partnership for the years ended February 28, 1995, February 29, 1996
and February 28, 1997 was $4,000, $6,000 and $7,000, respectively. The
investment is accounted for under the equity method with earnings included in
the other income line in the income statement. The Company sold this investment
in June 1997 for a gain of $56,000, which is reflected in other income in the
statement of operations for the six months ended August 31, 1997.
F-35
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FIXED ASSETS
Fixed assets at the dates indicated below consisted of the following (in
thousands):
<TABLE>
<CAPTION>
AVERAGE FEB. 29, FEB. 28, AUG. 31,
USEFUL LIFE 1996 1997 1997
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computer equipment............................ 3--5 years $ 105 $ 174 $ 184
Software...................................... 3 years 20 20 30
Furniture and equipment....................... 5--7 years 370 400 404
Motor vehicles................................ 5 years 132 124 124
Leasehold and building improvements........... 1--10 years 209 218 244
----- ----- -----
Total fixed assets at cost.............. 836 936 986
Less accumulated depreciation and
amortization................................ (571) (629) (644)
----- ----- -----
Total fixed assets, net................. $ 265 $ 307 $ 342
----- -----
----- -----
</TABLE>
Property held under capital leases were included in the respective fixed
asset accounts on the balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
FEB. 29, FEB. 28, AUG. 31,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Furniture and equipment....................................... $ 91 $ 77 $ 77
Less accumulated depreciation................................. (57) (69) (77)
--- --- ---
$ 34 $ 8 $ -
--- --- ---
--- --- ---
</TABLE>
Depreciation and amortization of capital leases totaled $48,000 for the six
month period ended August 31, 1997, and $100,000, $117,000, and $95,000 for the
years ended February 28, 1995, February 29, 1996 and February 28, 1997,
respectively.
6. LONG-TERM DEBT
Long-term debt at February 29, 1996 and February 28, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Notes payable on automobiles at varying interest rates ranging from 7.25%
to 11.90%; due at various times through February 2000; payable in
monthly installments of principal and interest......................... $ 52 $ 47
Capital leases due through September 2001................................ 27 22
Notes payable to stockholder; interest free; due October 1997............ 15 15
--- ---
94 84
Less current maturities of long-term debt................................ 61 50
--- ---
$ 33 $ 34
--- ---
--- ---
</TABLE>
F-36
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Minimum principal payments on long-term debt and capital leases for the
years subsequent to February 28, 1997 is as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------------
<S> <C>
(IN THOUSANDS)
1998........................................................................... $ 50
1999........................................................................... 21
2000........................................................................... 12
2001........................................................................... 1
---
$ 84
---
---
</TABLE>
7. LINE OF CREDIT
The Company has a revolving line of credit with IBM Credit Corp. The amount
available to be drawn from the line is primarily based on 85% of eligible
accounts receivable plus the value of any IBM inventory on hand. The maximum
available to be drawn cannot exceed $4.5 million, unless a temporary extension
of the line is granted. Extensions had been granted at February 29, 1996 and
February 28, 1997 to $6,700,000 and $6,750,000, respectively. The line of credit
is secured by accounts receivable, inventory, other assets of the Company and
the personal guarantees of the principal shareholders.
The interest rate on the line of credit is prime plus 1.875%. Additionally,
a service fee totaling $15,000 annually is charged on this line.
The line requires the maintenance of certain financial ratios, including
minimum revenue to working capital, minimum net income after tax to revenue and
maximum liabilities to tangible net worth. The Company was in compliance with
all such covenants at August 31, 1997.
8. FLOOR PLAN FINANCING
Certain inventory purchases are financed through floor plan arrangements.
These arrangements require the maintenance of certain financial levels and
ratios, including minimum net worth, minimum current ratio and minimum working
capital levels. Amounts outstanding under these agreements are interest free for
the first 30 days and bear interest at rates based on prime plus 1.25 to 2.125%
thereafter. At August 31, 1997, the Company was in compliance with all such
covenants. At August 31, 1997, February 28, 1997 and February 29, 1996, the
Company had outstanding balances of $1,018,000, $3,160,000 and $2,268,000,
respectively. These amounts are included in accounts payable on the balance
sheet.
9. COMMITMENT AND CONTINGENCIES
OPERATING LEASES
The Company leases various office buildings and a warehouse. Except for its
main office, none of the leases extend beyond one year. Under the terms of this
lease, the Company is required to pay minimum annual rent of $191,000 through
January 14, 1998. The Company has an option to renew the lease for an additional
five years based on the current market rental at the time of exercising such
option.
F-37
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENT AND CONTINGENCIES (CONTINUED)
Minimum future lease payments under the above-mentioned lease for the term
of the lease amount to $87,500 for the remainder of fiscal 1998, $207,000 for
fiscal 1999 and 2000, and $214,000 for fiscal 2001, 2002 and 2003.
Rent expense, including lease payments, approximated $140,000 for the six
month period ended August 31, 1997, and $315,000, $306,000 and $303,000 for the
years ended February 28, 1995, February 29, 1996 and February 28, 1997,
respectively.
LITIGATION
CHMC is a party to litigation arising in the ordinary course of business
which, in the opinion of management, will not have a material adverse effect on
CHMC's financial condition or results of operations.
10. EMPLOYEE BENEFITS DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Savings Plan ("Plan") that covers substantially all
of its employees. Participants may make voluntary contributions to the Plan of
up to 15% of their compensation not to exceed Internal Revenue Service allowable
limits. The Company will contribute 50% of the amount contributed by an employee
that is not in excess of 3% of such employee's compensation.
During the six months ended August 31, 1997, and the years ended February
28, 1995, February 29, 1996 and February 28, 1997, employer contributions to the
Plan were $46,000, $41,000, $45,000 and $52,000, respectively.
11. INCOME TAXES
The provision for income taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
------------------------------------- -------------
FEB. 28, FEB. 29, FEB. 28, AUG. 31,
1995 1996 1997 1997
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Current expense:
Federal........................................... $ 272 $ 224 $ 452 $ 455
State............................................. 89 71 134 130
----- ----- ----- -----
361 295 586 585
Deferred expense (income):
Federal........................................... 25 (7) 9 -
State............................................. 10 (3) 3 -
----- ----- ----- -----
35 (10) 12 -
----- ----- ----- -----
Total......................................... $ 396 $ 285 $ 598 $ 585
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
F-38
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The components of net deferred taxes at the dates indicated below were as
follows (in thousands):
<TABLE>
<CAPTION>
FEB. 29 FEB. 28 AUG. 31
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax asset:
Accounts receivable............................................. $ 13 $ 11 $ 11
--- --- ---
Deferred tax liability:
Fixed assets.................................................... (18) (22) (22)
Other........................................................... - (6) (6)
--- --- ---
(18) (28) (28)
--- --- ---
Net deferred tax liability........................................ $ (5) $ (17) $ (17)
--- --- ---
--- --- ---
</TABLE>
For the six months ended August 31, 1997 and the years ended February 28,
1995, February 29, 1996 and February 28, 1997, the effective tax rates of 40%,
38%, 42% and 40%, respectively, approximated the combined Federal and State
statutory tax rate.
The Company is affiliated with Computer Hardware Service Company, Inc. (see
Note 13) under Internal Revenue Regulations, and accordingly, they share one
surtax exemption which was allocated evenly between the two companies.
12. STOCK OPTIONS
Effective June 1, 1996, the Board of Directors authorized a Stock Purchase
Plan (the "Plan") for three employees. Under the terms of the Plan, each
individual has an option to purchase 75,000 shares of stock at $.50 per share.
These options vest in five increments of 15,000 shares. The vesting schedule in
aggregate for all options is as follows:
<TABLE>
<CAPTION>
OPTION PERIOD
------------------------
<S> <C> <C>
FIRST DAY LAST DAY
NUMBER OF SHARES TO EXERCISE TO EXERCISE
- --------------------------------------------------------------------- ----------- -----------
45,000 shares........................................................ 6/1/96 5/31/98
45,000 shares........................................................ 6/1/97 5/31/99
45,000 shares........................................................ 6/1/98 5/31/00
45,000 shares........................................................ 6/1/99 5/31/01
45,000 shares........................................................ 6/1/00 5/31/02
</TABLE>
No shares have been exercised through February 28, 1997.
CHMC adopted the intrinsic value method of accounting for stock options
under APB 25 which resulted in compensation expense of $174,000 for the year
ended February 28, 1997. During the six months ended August 31, 1997, the Plan
was amended to reduce the number of options for each individual from 75,000 to
30,000. All other provisions of the Plan were unchanged. These options were
exercised in August 1997. Upon exercise, the new shareholders issued promissory
notes to the Company in the amount of $45,000. The notes are to be repaid upon
the sale of the Company's stock to Condor (Note 1) and have no stated interest
rate. As a result of the Plan amendment, compensation expense for the shares was
$135,000. The Company reduced its selling, general and administrative expenses
by $39,000 during the six month
F-39
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
period ended August 31, 1997 to offset the excess compensation expense recorded
during the year ended February 28, 1997.
FASB Statement No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION ("FAS 123"),
requires stock options to be valued using an approach such as the Black-Scholes
option pricing model. The Black-Scholes model calculates the fair value of the
grant based upon certain assumptions about the underlying stock. For this
calculation, CHMC has used an expected dividend yield of zero, an expected life
of the options of five years and an expected risk-free rate of return of 6%,
calculated as the rate offered on U.S. Government securities with the same term
as the expected life of the options. As permitted by FAS 123 for nonpublic
companies, no volatility factor has been used in this valuation. The weighted
average remaining contractual life of all options outstanding at February 28,
1997 was 4 years and 3 months. Using these assumptions, the weighted average
fair values of options granted during fiscal 1997 is $2 per share. No options
were granted in the six month period ended August 31, 1997 or in fiscal 1995.
Had compensation expense for CHMC's employee stock options been determined
on the fair value at the grant date for awards during the six months ended
August 31, 1997, or the year ended February 28, 1997, consistent with the
provisions of FAS 123, CHMC's net income would not have changed by a significant
amount.
13. RELATED PARTY TRANSACTIONS
The Company is affiliated with Computer Hardware Services Company, Inc.
("CHSC") through common ownership. There were no significant transactions
between the Company and CHSC during the six months ended August 31, 1997, and
the years ended February 28, 1995, February 29, 1996 and February 28, 1997.
The Company had guaranteed a mortgage of Computer Hardware Investors, in
which it is a partner. At February 29, 1996 and February 28, 1997, the
outstanding balance on this mortgage was $176,000 and $157,000, respectively.
Upon sale of the investment in Computer Hardware Investors (Note 4), the Company
withdrew its guarantee on the mortgage.
F-40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Federal Computer Corporation
We have audited the accompanying consolidated balance sheets of Federal
Computer Corporation and Subsidiaries as of October 31, 1995 and 1996 and July
31, 1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1996 and for the nine months ended July 31, 1997. These
financial statements 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 Federal
Computer Corporation and Subsidiaries as of October 31, 1995 and 1996 and July
31, 1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended October 31, 1996 and for the
nine months ended July 31, 1997, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Washington, D.C.
November 24, 1997
F-41
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
-------------------- ---------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 5,737 $ 4,229 $ 2,668
Marketable securities........................................................... 50 1,112 1,167
Accounts receivable............................................................. 14,642 3,389 14,367
Other current assets............................................................ 59 68 256
Income taxes receivable......................................................... - 239 -
--------- --------- ---------
Total current assets........................................................ 20,488 9,037 18,458
Property and equipment, net....................................................... 133 82 53
Investment in joint venture....................................................... 49 49 49
Other assets...................................................................... 15 16 16
Goodwill, net..................................................................... 600 333 133
--------- --------- ---------
Total assets................................................................ $ 21,285 $ 9,517 $ 18,709
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 9,097 $ 1,920 $ 10,146
Accrued expenses................................................................ 308 230 159
Note payable.................................................................... 3,425 - -
Commission payable.............................................................. 1,941 1,608 -
Income taxes payable............................................................ 301 - 240
Deferred income taxes........................................................... 212 418 42
--------- --------- ---------
Total current liabilities..................................................... 15,284 4,176 10,587
Deferred revenue.................................................................. 1,086 255 1,764
Deferred income taxes............................................................. 8 6 -
--------- --------- ---------
Total liabilities........................................................... 16,378 4,437 12,351
--------- --------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, cumulative and convertible, $.10 par value; 10,000 shares
authorized; 3,824 shares issued and outstanding at October 31, 1995........... - - -
Common stock, $.10 par value; 10,000 shares authorized; 3,295 shares issued and
outstanding................................................................... - - -
Additional paid-in capital...................................................... 1,089 1,089 1,089
Retained earnings............................................................... 6,279 3,991 5,270
Net unrealized gain (loss) on marketable securities............................. 3 - (1)
Unearned ESOP shares............................................................ (2,464) - -
--------- --------- ---------
Total shareholders' equity.................................................. 4,907 5,080 6,358
--------- --------- ---------
Total liabilities and shareholders' equity.................................. $ 21,285 $ 9,517 $ 18,709
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY
YEAR ENDED OCTOBER 31, 31,
------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Equipment sales and installation............................ $ 14,582 $ 36,464 $ 18,223 $ 18,403 $ 22,682
Maintenance................................................. 7,321 9,000 7,755 5,664 6,525
Net fee on agency contracts................................. 1,182 619 408 365 58
Equity in net earnings from joint venture less
distributions/commissions................................. 534 722 439 287 1,438
Consulting fees from affiliates............................. 740 394 - - -
Other, including interest and dividends..................... 2,332 924 562 513 392
--------- --------- --------- ----------- ---------
Total revenues........................................ 26,691 48,123 27,387 25,232 31,095
--------- --------- --------- ----------- ---------
Expenses:
Cost of equipment sales and installation.................... 13,144 32,261 13,932 14,293 20,977
Maintenance................................................. 5,271 6,471 5,236 3,840 4,334
Selling, general and administrative......................... 7,539 7,619 5,794 5,094 3,581
Interest and other.......................................... 150 211 49 43 13
--------- --------- --------- ----------- ---------
Total expenses........................................ 26,104 46,562 25,011 23,270 28,905
--------- --------- --------- ----------- ---------
Income before income taxes and change in accounting methods... 587 1,561 2,376 1,962 2,190
Income tax expense............................................ 17 673 1,073 785 911
--------- --------- --------- ----------- ---------
Net income before cumulative effect of change in accounting
methods..................................................... 570 888 1,303 1,177 1,279
Cumulative effect of a change in the method of accounting for
income taxes and for marketable securities, net of income
taxes....................................................... 40 - - - -
--------- --------- --------- ----------- ---------
Net income.................................................... $ 610 $ 888 $ 1,303 $ 1,177 $ 1,279
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
PREFERRED COMMON STOCK ADDITIONAL GAIN(LOSS) ON
STOCK -------------------------- PAID-IN RETAINED MARKETABLE
SHARES SHARES AMOUNT CAPITAL EARNINGS SECURITIES
----------- ----------- ------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1993, as previously
reported................................. 3,824 6,176 $ 1 $ 125 $ 7,452 $ -
Adjustment for merger of entities under
common control........................... - - - 1 284 -
--
----------- ----------- ----------- ----------- ---
Balance at October 31, 1993, as restated... 3,824 6,176 1 126 7,736 -
Retirement of common stock................. - (429) - - (392) -
Repayment of loan from ESOP................ - - - - - -
Unrealized loss on marketable securities... - - - - - (64)
Preferred stock dividends.................. - - - - (176) -
Net income................................. - - - - 610 -
--
----------- ----------- ----------- ----------- ---
Balance at October 31, 1994................ 3,824 5,747 1 126 7,778 (64)
Repurchase and retirement of
common stock............................. - (5,512) (1) (126) (2,352) -
Issuance of common stock
for business combination................. - 3,060 - 1,300 - -
Return of capital.......................... - - - (200) - -
Change in unrealized gain (loss) on
marketable securities, net of tax........ - - - - - 67
Release of unearned ESOP shares............ - - - (11) - -
Preferred stock dividends.................. - - - - (35) -
Net income................................. - - - - 888 -
--
----------- ----------- ----------- ----------- ---
Balance at October 31, 1995................ 3,824 3,295 - 1,089 6,279 3
Repurchase and retirement of
preferred stock.......................... (3,824) - - - (3,591) -
Change in unrealized gain (loss) on
marketable securities, net of tax........ - - - - - (3)
Net income................................. - - - - 1,303 -
--
----------- ----------- ----------- ----------- ---
Balance at October 31, 1996................ - 3,295 - 1,089 3,991 -
Change in unrealized gain (loss) on
marketable securities, net of tax........ - - - - - (1)
Net income................................. - - - - 1,279 -
--
----------- ----------- ----------- ----------- ---
Balance at July 31, 1997................... - 3,295 - $ 1,089 $ 5,270 $ (1)
--
--
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
<CAPTION>
UNEARNED TOTAL
ESOP SHAREHOLDERS'
SHARES EQUITY
----------- -------------
<S> <C> <C>
Balance at October 31, 1993, as previously
reported................................. $ (3,168) $ 4,410
Adjustment for merger of entities under
common control........................... - 285
----------- -------------
Balance at October 31, 1993, as restated... (3,168) 4,695
Retirement of common stock................. - (392)
Repayment of loan from ESOP................ 352 352
Unrealized loss on marketable securities... - (64)
Preferred stock dividends.................. - (176)
Net income................................. - 610
----------- -------------
Balance at October 31, 1994................ (2,816) 5,025
Repurchase and retirement of
common stock............................. - (2,479)
Issuance of common stock
for business combination................. - 1,300
Return of capital.......................... - (200)
Change in unrealized gain (loss) on
marketable securities, net of tax........ - 67
Release of unearned ESOP shares............ 352 341
Preferred stock dividends.................. - (35)
Net income................................. - 888
----------- -------------
Balance at October 31, 1995................ (2,464) 4,907
Repurchase and retirement of
preferred stock.......................... 2,464 (1,127)
Change in unrealized gain (loss) on
marketable securities, net of tax........ - (3)
Net income................................. - 1,303
----------- -------------
Balance at October 31, 1996................ - 5,080
Change in unrealized gain (loss) on
marketable securities, net of tax........ - (1)
Net income................................. - 1,279
----------- -------------
Balance at July 31, 1997................... - $ 6,358
----------- -------------
----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY
YEAR ENDED OCTOBER 31, 31,
------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 610 $ 888 $ 1,303 $ 1,177 $ 1,279
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation............................................... 27 66 52 39 29
Amortization of goodwill................................... - 200 267 200 200
Release of unearned ESOP shares............................ - 306 - - -
Deferred income tax provision (benefit).................... 189 90 206 - (383)
Undistributed equity in net earnings from joint ventures... (427) (198) (249) - -
Losses on disposition of property, equipment, and
marketable securities, net............................... 107 192 1 - 1
Cumulative effect of change in accounting for marketable
securities and income taxes.............................. (40) - - - -
Changes in assets and liabilities:
Accounts receivable...................................... (1,823) (6,306) 11,502 11,047 (10,978)
Due from affiliates...................................... (229) 577 - -- --
Other current assets..................................... (215) 876 (9) (111) (188)
Income taxes receivable.................................. (280) 282 (239) - 239
Other assets............................................. - 131 - - -
Accounts payable......................................... 1,273 1,514 (7,176) (7,442) 8,226
Accrued expenses......................................... 575 (654) (79) (19) (71)
Due to affiliates........................................ 522 (1,332) - - -
Commission payable....................................... - 1,941 (333) (610) (1,608)
Income taxes payable..................................... (323) 301 (301) 224 240
Deferred revenue......................................... (301) 59 (831) (220) 1,509
--------- --------- --------- ----------- ---------
Net cash (used in) provided by operating activities.... (335) (1,067) 4,114 4,285 (1,505)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................... (65) (45) (2) - -
Purchase of marketable securities............................ (1,559) (46) (1,068) (1,046) (56)
Sales of marketable securities............................... 1,652 3,331 - - -
Repayment of advance to shareholder.......................... 40 - - - -
Investment in joint venture.................................. (49) - - - -
Proceeds on sale of property and equipment and investments... 9 10 - - -
--------- --------- --------- ----------- ---------
Net cash provided by (used in) investing activities.... 28 3,250 (1,070) (1,046) (56)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit................ 3,955 5,277 420 420 3,750
Repayments of borrowings under line of credit................ (3,955) (1,853) (3,845) (3,845) (3,750)
Repurchase and retirement of common stock.................... (392) (2,479) - - -
Repurchase and retirement of preferred stock................. - - (1,127) - -
Return of capital............................................ - (200) - 210 -
--------- --------- --------- ----------- ---------
Net cash (used in) provided by financing activities.... (392) 745 (4,552) (3,215) -
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash and cash equivalents........... (699) 2,928 (1,508) 24 (1,561)
Cash and cash equivalents, beginning of period................. 3,508 2,809 5,737 5,737 4,229
--------- --------- --------- ----------- ---------
Cash and cash equivalents, end of period....................... $ 2,809 $ 5,737 $ 4,229 $ 5,761 $ 2,668
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid, net of refunds............................ $ 422 $ - $ 1,408 $ 706 $ 814
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Interest paid................................................ $ 42 $ 211 $ 49 $ 43 $ 13
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
Federal Computer Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS
Federal Computer Corporation and its subsidiaries (the "Company") are
engaged in the distribution, installation and maintenance of electronic data
processing equipment. The Company pursues this business as a systems integrator
combining data processing equipment obtained from one or more manufacturers into
a single systems configuration. The Company's principal clients are agencies of
the United States Government (the "Government").
The electronic data processing equipment is provided to the Government under
firm-fixed price contracts providing for, in certain cases, purchase options and
lease agency arrangements. Most contracts with the Government are subject to the
availability of annual funding. The Company's contracts provide the Government
with the option not to renew if funding is not received. The Company has never
experienced non-renewal of any significant contracts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The interim financial information for the nine months ended July 31, 1996 is
unaudited, and certain information and footnote disclosures related thereto,
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The unaudited interim
financial statements reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly present
the results of operations, changes in cash flows and financial position as of
and for the periods presented.The results for the interim periods presented are
not necessarily indicative of results to be expected for the full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company sells, installs and provides maintenance on electronic data
processing equipment. For equipment sales and installation, revenue is
recognized after all costs relevant to the sale have been incurred and the
related equipment has been shipped and accepted. Maintenance revenue is
recognized ratably over the maintenance contract period.
The Company enters into agency contracts between equipment vendors and the
Government when the Government leases electronic data processing equipment. The
Company simultaneously enters into agency contracts which provide for the lease
of equipment from vendors to satisfy the lease commitments with the Government.
The principal provisions of the agreements typically are: fixed contractual
payments between the Government, the Company and the vendor; Government payments
directly to an escrow agent who disburses the payment to the vendor and the
Company; no right of the Company to obtain ownership of the equipment; and the
return of the equipment to the vendor in the event of default. The net fee
earned under agency contracts is recognized ratably over the contract period.
Had the Company recognized revenue and the related costs from these
transactions, equipment sales and installation and maintenance revenue for the
years ended 1994, 1995 and 1996 and for the nine months ended July 31, 1997,
would have been approximately $30,795,000, $52,838,000, $30,757,000 and
$31,404,000, respectively.
F-46
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The related costs for the years ended 1994, 1995, and 1996 and for the nine
months ended July 31, 1997, would have been $27,377,000, $43,984,000,
$25,762,000 and $27,450,000, respectively.
The Company defers revenue to match the estimated future cost of providing
services or equipment in connection with its Government contracts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such determination
at each balance sheet date. At the time of purchase and as of October 31, 1995
and 1996 and July 31, 1997, the Company has considered all marketable securities
as available for sale and has recorded them at fair value, with unrealized gains
and losses, net of tax, reported as a separate component of shareholders'
equity. Net realized gains and losses are determined on the specific
identification cost basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful life.
Maintenance and repairs of property and equipment are charged to operations
and major improvements that extend the useful life are capitalized. Upon
retirement, sale or other disposition of property and equipment, the cost and
accumulated depreciation are eliminated from the accounts and any gain or loss
is included in operations.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method.
Deferred income taxes are recognized for the tax consequences in future years
for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes is the current tax expense for the period plus
the change during the period in deferred tax assets and liabilities.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, marketable securities
and accounts receivable. To date, the Company has not incurred significant
losses related to these financial instruments. The Company does not have a
formal policy regarding collateral to mitigate the concentrations of credit
risk. As of October 31, 1995 and 1996 and July 31, 1997, two customers accounted
for approximately 40%, 67% and 64% respectively, of non-related party billed and
unbilled accounts receivable.
F-47
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN JOINT VENTURE
The investment in joint venture is accounted for under the equity method.
Under this method, the original investment is recorded at cost and adjusted by
the Company's share of undistributed earnings. Undistributed earnings expected
to be received in the next fiscal year are recorded as accounts receivable. The
Company's share of earnings is reflected in the consolidated statements of
operations, net of contracted distributions and commissions.
GOODWILL
Goodwill represents the excess of consideration over the net assets acquired
resulting from acquisitions of companies accounted for by the purchase method.
These amounts are amortized on a straight-line basis over a three year period.
At each balance sheet date, management evaluates the recoverability of the
goodwill based on the undiscounted cash flow projections of each business
acquired.
Accumulated amortization related to goodwill as of October 31, 1995 and 1996
and July 31, 1997 was $200,000, $466,667 and $666,667, respectively.
EMPLOYEE STOCK OWNERSHIP TRUST
Effective November 1, 1994, the Company adopted Statement of Position 93-6
of the Accounting Standards Division of the American Institute of Certified
Public Accountants ("SOP 93-6") related to its Employee Stock Ownership Trust
(the "ESOP"). As required by SOP 93-6, the Company has applied the standard
prospectively, resulting in no cumulative effect or restatement of previously
issued financial statements. This standard requires compensation expense to be
measured using the fair value of shares released to the participants and
dividends paid on unallocated shares in the ESOP. Implementation of this
standard resulted in an additional charge to the statement of operations of
$130,000 for the year ended October 31, 1995. Effective October 29, 1996, the
Company redeemed all of the preferred stock and terminated the ESOP (see Note
14).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company calculates the fair value of financial instruments and includes
this additional information in the notes to the financial statements. The
carrying value of cash and cash equivalents, accounts receivable and accounts
payable approximates fair value because of the relatively short maturities of
these instruments. The carrying value of the note payable approximates fair
value since it carries a fluctuating market interest rate.
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 reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
3. REDEMPTION AND ACQUISITION
During 1995, the Company entered into a series of transactions whereby the
Company reacquired all of its outstanding common stock from the former majority
shareholder and subsequently issued new
F-48
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REDEMPTION AND ACQUISITION (CONTINUED)
common shares to acquire 100% of the outstanding common stock of six affiliate
companies (the Affiliates) (See Note 6).
The total consideration for the reacquisition of the outstanding common
stock on February 15, 1995 was $2,479,500, which included a $2,339,000 cash
payment to reacquire 5,512 shares of common stock outstanding and the transfer
of a life insurance policy covering the majority shareholder with a cash
surrender value of $140,500.
Following this reacquisition, the Company issued 3,060 shares of common
stock to acquire all of the outstanding common stock of six formerly affiliated
companies. The acquisition of these companies has been accounted for as a
purchase. The cost of this acquisition was $1,300,000 based on the negotiated
per share price for the reacquisition of the previously outstanding common
stock. The acquisition cost has been allocated on the basis of the estimated
fair value of the assets acquired as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Accounts receivable.................................................................. $ 500
Goodwill............................................................................. 800
---------
Purchase price....................................................................... $ 1,300
---------
---------
</TABLE>
PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma combined condensed statements of
operations set forth the consolidated results of operations of the Company for
the years ended October 31, 1995 and 1994 as if the above mentioned acquisition
had occurred as of November 1, 1993. The unaudited pro forma information does
not purport to be indicative of the actual financial position or the results
that would actually have occurred if the combination had been in effect for the
years ended October 31. The pro forma information is consistent with actual
results based on the fact that all operations of the acquired affiliates during
those periods were performed under agreements with the Company (in thousands).
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Revenue............................................................ $ 48,123 $ 26,691
Net income......................................................... $ 888 $ 610
</TABLE>
In conjunction with these transactions, the Company also acquired 100% of
the common stock of Federal Management Group ("FMG") and Computer Maintenance
International, Inc. ("CMI") for $200,000. The Company's majority shareholder at
the time of the transactions was also the 100% owner of these entities.
Therefore, the acquisitions of FMG and CMI were accounted for as exchanges
between entities under common control and recorded at historical cost in a
manner similar to a pooling-of-interests. Accordingly, the consolidated
financial statements were restated to include the accounts and operations of FMG
and CMI for all periods presented.
F-49
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REDEMPTION AND ACQUISITION (CONTINUED)
Total revenues and net income of the Company, CMI and FMG for the fiscal
year preceding the merger of entities under common control were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1994
----------------------
<S> <C> <C>
REVENUES NET INCOME
--------- -----------
The Company........................................................... $ 24,957 $ 577
CMI................................................................... 2,228 9
FMG................................................................... 2,499 23
--------- -----------
29,684 609
Eliminations.......................................................... (2,993) -
--------- -----------
Total................................................................. $ 26,691 $ 609
--------- -----------
--------- -----------
</TABLE>
4. MARKETABLE SECURITIES
The fair value of marketable securities, which consist entirely of equity
securities, was $50,000, $1,112,000 and $1,167,000 as of October 31, 1995 and
1996 and July 31, 1997, respectively. The cost of such securities was $45,000,
$1,113,000 and $1,169,000 as of October 31, 1995 and 1996 and July 31, 1997,
respectively.
Gross unrealized holding gains were $5,000, $3,000 and $1,000 for the years
ended October 31, 1995 and 1996 and the nine months ended July 31, 1997,
respectively. Gross unrealized holding losses were $1,000, $4,000 and $3,000 for
the years ended October 31, 1995 and 1996 and the nine months ended July 31,
1997, respectively. Proceeds from the sale of securities classified as available
for sale for the year ended October 31, 1995 were $3,331,000. For the year ended
October 31, 1995, gross realized gains and losses were $9,000 and $71,000,
respectively. There were no sales of such securities during the year ended
October 31, 1996 and the nine months ended July 31, 1997.
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due under contracts with the
Government for the purchase, installation and maintenance of electronic
processing equipment and certain amounts due from a joint venture (see Note 15).
Unbilled accounts receivable consist of items for which substantially all of
the related equipment had been shipped, but were not yet billed pursuant to the
terms of the related contracts. Management anticipates that all amounts included
in unbilled accounts receivable will be billed within the next operating cycle.
F-50
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCOUNTS RECEIVABLE (CONTINUED)
Accounts receivable consists of the following as of (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
-------------------- ---------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Billed........................................................ $ 8,780 $ 1,750 $ 11,676
Unbilled...................................................... 4,833 600 634
Amount due from joint venture................................. 1,029 1,039 2,057
--------- --------- ---------
$ 14,642 $ 3,389 $ 14,367
--------- --------- ---------
--------- --------- ---------
</TABLE>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
The Company defines affiliated entities to include those entities that
conduct joint business activities with the Company. Prior to the acquisition of
the Affiliates on February 15, 1995 (See Note 3), the Company shared certain
common facilities and resources with these affiliates. Typical arrangements with
the Affiliates called for the Company to provide working capital advances with
interest rates ranging from 9% to 12% due on demand or other funding in exchange
for the right to share in future profits under specified contracts.
Additionally, the Affiliates received certain commissions related to contracts
awarded to the Company and for certain consulting services performed on the
Company's behalf.
Consulting fees earned from the Affiliates under agreements entitling the
Company to receive a portion of the Affiliates' contract profits approximated
$740,000 and $394,000 for the years ended October 31, 1994 and 1995,
respectively. Consulting fees incurred with the Affiliates for their work in
helping to obtain and service certain contracts approximated $1,532,000 and
$496,000 for the years ended October 31, 1994 and 1995, respectively. Subsequent
to the acquisition of the Affiliates, no consulting fees have been earned from
or incurred with affiliates. For the years ended October 31, 1995 and 1996, the
Company pays commissions to each of the shareholders of the Company related to
their helping to obtain and service certain contracts. Commission expense
associated with this arrangement was approximately $2,300,000 and $3,000,000 for
the years ended October 31, 1995 and 1996, respectively. There was no such
commission expense incurred for the nine months ended July 31, 1997, based on a
contractual arrangement between the Company and the related shareholders waiving
their right to receive such commissions.
The Company previously owned a 22% limited partnership interest which the
Company's former majority shareholder was a general partner. The partnership
owned the building that the Company occupies. The Company was leasing the office
space in this building from the partnership on a month to month basis, and a
portion of the Company's office space was being subleased to FMG and CMI. On
January 10, 1995, the partnership sold the building to a third party and was
dissolved, resulting in a loss to the Company of $128,000 for the year ended
October 31, 1995.
During 1995, the Company has entered into a long term lease with the third
party for the same office space (see Note 11). Included in rent expense for the
year ended October 31, 1995 was approximately $44,000 paid to the partnership
for rent prior to the sale of the building. Additionally, sublease income from
CMI and FMG of approximately $39,400 was recorded prior to the sale of the
building.
F-51
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
-------------------- -----------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Owned assets:
Office equipment................................................................. $ 376 $ 255 $ 255
Computer equipment............................................................... 19 19 19
--------- --------- -----
395 274 274
Less accumulated depreciation and amortization..................................... (262) (192) (221)
--------- --------- -----
Property and equipment, net........................................................ $ 133 $ 82 $ 53
--------- --------- -----
--------- --------- -----
</TABLE>
Depreciation expense for the years ended October 31, 1994, 1995 and 1996 and
the nine months ended July 31, 1997 was $27,018, $65,655, $51,989 and $28,907,
respectively.
8. NOTE PAYABLE
The Company has a line of credit available with a bank which allows the
Company to borrow up to $4,500,000. The line of credit expires on March 31,
1998, bears interest at the bank's prime rate (8.5% as of July 31, 1997) plus 1%
and is collateralized by a blanket lien on the Company's accounts receivable and
deposits with the lender. Additionally, an unused fee of .25% per annum is
charged on the unused line of credit. The Company had no outstanding borrowings
under this line of credit as of October 31, 1996 and July 31, 1997. As of
October 31, 1995, the balance on the line of credit was $3,425,454.
In accordance with the line of credit agreement, the Company must maintain a
minimum tangible net worth of $3,500,000, a minimum current ratio of 1.25 to 1.0
and a quarterly average leverage ratio below 4.5 to 1.0 but not to exceed 6.0 to
1.0 at any one time during the year. The Company was in compliance with these
covenants at October 31, 1995 and 1996, and July 31, 1997.
9. DEFERRED REVENUE
Under the terms of certain long term contracts, the Company is required to
provide additional equipment at the option of the Government at prices which
would be less than the cost of acquiring the equipment. Additionally, the
Company enters into certain contracts which include a warranty period.
Therefore, the Company has deferred revenue to properly match against estimated
future costs associated with these arrangements. As of July 31, 1997, deferred
revenue related to the Company's contracts was $1,764,000 with estimated future
contractual receipts and expenditures of approximately $616,000 and $2,380,000
as of July 31, 1997, respectively.
F-52
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The components of the provision for income taxes consist of the following
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JULY
YEAR ENDED OCTOBER 31, 31,
------------------------------- -------------
1994 1995 1996 1997
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Current (benefit) expense:
Federal........................................................... $ (103) $ 493 $ 677 $ 1,089
State............................................................. (69) 90 191 204
--------- --------- --------- ------
(172) 583 868 1,293
--------- --------- --------- ------
Deferred expense (benefit):
Federal........................................................... 160 76 164 (286)
State............................................................. 29 14 41 (96)
--------- --------- --------- ------
189 90 205 (382)
--------- --------- --------- ------
Total............................................................... $ 17 $ 673 $ 1,073 $ 911
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
The Company's provision for income taxes differs from the provision that
would have resulted from applying the federal statutory rates to net income
before taxes. The reasons for these differences are explained in the following
table (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JULY
YEAR ENDED OCTOBER 31, 31,
------------------------------- -------------
1994 1995 1996 1997
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Provision based upon federal statutory rate of 34%... $ 200 $ 531 $ 808 $ 745
State taxes, net of federal benefit.................. 31 51 160 135
Amortization of assets not deductible................ - 76 101 76
Preferred stock dividends............................ (141) - - -
Other, net........................................... (73) 15 4 (45)
--------- --------- --------- ------
$ 17 $ 673 $ 1,073 $ 911
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
F-53
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The source and tax effects of temporary differences which give rise to the
net deferred tax liability are comprised of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
---------------------- ----------
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ----------
Current:
Net earnings from joint venture........................ $ 214 $ 443 $ 66
Accrued expenses....................................... - (25) (24)
Marketable securities.................................. 2 - -
Other.................................................. (4) - -
---------- ---------- ----------
Total current........................................ 212 418 42
---------- ---------- ----------
Noncurrent:
Capital loss carryover................................. (43) - -
Valuation allowance.................................... 43 - -
Other.................................................. 8 6 -
---------- ---------- ----------
Total noncurrent..................................... 8 6 -
---------- ---------- ----------
Total deferred tax liability............................. $ 220 $ 424 $ 42
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company had capital loss carryforwards of approximately $114,000 which
expired during fiscal year 1996.
The Company uses the estimated annual effective rate method for unaudited
interim income tax purposes. The difference between the federal statutory tax
rate and the Company's effective income tax rate for the nine-month period ended
July 31, 1996 is primarily attributable to goodwill amortization and state
taxes.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
The Company entered into a 10-year lease for office space beginning January
1, 1995. The Company is obligated to pay a base monthly rent which will increase
each year based on a percentage of the consumer price index. The lease also
provides for an early termination at the conclusion of the eighth year of the
lease. The Company's future minimum lease payments under this operating lease
are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
(IN
THOUSANDS)
Fiscal year ending October 31
1997......................................................................... $ 206
1998......................................................................... 206
1999......................................................................... 206
2000......................................................................... 206
2001......................................................................... 206
Thereafter................................................................... 240
------
$ 1,270
------
------
</TABLE>
F-54
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of July 31, 1997, future minimum lease payments under the lease described
above are $1,115,000. The reduction in this amount compared to October 31, 1996
is based on lease payments made during the nine months ended July 31, 1997. The
Company recorded rent expense of $264,000, $243,000, $394,000 and $236,000 for
the fiscal years ended October 31, 1994, 1995 and 1996 and the nine months ended
July 31, 1997, respectively.
YEAR 2000 ISSUE
The Company has not determined whether costs will be incurred in connection
with the year 2000 issue related to its computer systems, however, management
does not believe that such costs, if any, would have a material impact on the
financial statements.
INCOME TAX CONTINGENCY
The Company's deferred revenue balance consists of amounts deferred to match
with the future costs of providing maintenance and equipment in connection with
certain Government contracts. Revenue is deferred for both financial and income
tax reporting purposes. It is possible the Internal Revenue Service may question
the revenue deferral for income tax purposes. Management believes it is not
likely that this exposure will be assessed by the Internal Revenue Service, and
if assessed, would not have a material impact on the financial condition,
results of operations and cash flows of the Company.
12. MAJOR CUSTOMERS
The Company's primary customers are agencies or departments of the
Government. For the years ended October 31, 1994, 1995 and 1996 and the nine
months ended July 31, 1997, approximately 30%, 36%, 65% and 55%, respectively,
of contract revenue was derived from two agencies of the Government.
13. BENEFIT PLANS
The Company maintains a defined-contribution 401(k) plan for all full-time
employees of the Company. Employee contributions under this plan are voluntary
and determined on an individual basis with maximum annual contribution equal to
the amount allowable under federal tax regulations. Employer contributions are
discretionary. For the years ended October 31, 1994, 1995 and 1996 and the nine
months ended July 31, 1997, employer contributions to the plan were $12,518,
$37,669, $56,708 and $76,226, respectively.
During 1993, the Company established the Federal Computer Corporation
Employee Stock Ownership Plan (the "Plan"). The Plan was available to all
employees of the Company who had attained age 21 and completed one year of
service. Participants were entitled to the balance of their account in
accordance with vesting provisions set forth in the Plan. Had any participants
left the employ of the Company for reasons other than death, disability or
retirement, they would have forfeited the unvested portion of their participant
account balance. In connection with the Company's redemption of all shares owned
by participants of the Plan (See Note 14), the Plan was amended and restated to
become a profit sharing plan. The profit sharing plan calls for discretionary
contributions by the Company. There were no contributions made by the Company
for the year ended October 31, 1996 and the nine months ended July 31, 1997.
Participants are 100% vested in all balances in the profit sharing plan.
F-55
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHAREHOLDERS' EQUITY
All of the outstanding preferred stock of the Company was owned by Federal
Computer Corporation Employee Stock Ownership Trust (the "ESOP") prior to the
Company's reacquisition of such stock. The preferred stock was nonvoting,
required cumulative annual preferential dividends of $46.03 per share and had a
liquidation preference equal to $230.13 per share plus accumulated and unpaid
dividends. In addition, the preferred stock was convertible, at the option of
the holder, into 8/10 of a share of common stock and was callable at the option
of the Company at any time after October 29, 2003, at a price equal to the
liquidation preference ($880,017 at October 31, 1994) plus all accumulated and
unpaid dividends.
The obligation of the ESOP for the original purchase of the shares was
considered unearned ESOP shares and, as such, was recorded as a reduction of the
Company's shareholders' equity. The unearned shares were amortized as the
preferred stock was allocated to employees. The preferred stock was being
allocated ratably over ten years through annual tax deductible contributions
made to the ESOP and through dividends paid on the preferred stock. For the year
ended October 31, 1995, the Company expensed approximately $110,000 for ESOP
contributions based upon the estimated fair value of the shares allocated and
declared dividends of $176,000. Dividends declared on unallocated shares
totalled $140,000 and were charged to compensation expense, while dividends
declared on allocated shares totalled $35,000 and were recorded as a reduction
to retained earnings. The $11,000 excess of the original cost of the preferred
stock over the fair value of the shares allocated through the Company's
contribution was recorded as a reduction to paid in capital.
Effective October 29, 1996, the Company redeemed all of the preferred stock
owned by the ESOP. In consideration of the redemption, the Company paid
$1,126,550 to the ESOP and relieved the unearned ESOP share balance of
$2,464,000, which represented the shares that had not been allocated to
employees. The redemption was accounted for as a treasury stock transaction
under the cost method. The reacquisition price of $1,126,550 plus the unearned
ESOP shares balance was recorded as a reduction to retained earnings. In
accordance with Virginia corporate laws, the treasury stock was retired.
15. INVESTMENT IN JOINT VENTURE
The Company is a 38% partner in an unincorporated joint venture with INET,
Inc. (subsequently acquired by Wang Federal Systems) and International Data
Products Corporation. The purpose of the joint venture is to perform computer
integration, maintenance, contract management, product acquisition, and sales
and marketing under a contract with the Federal Bureau of Investigation. Under
the terms of the joint venture agreement, the Company paid $49,400 as a capital
contribution for its interest in the joint venture partnership. The joint
venture allocates and distributes income in proportion to the partners'
percentage of ownership. The Company's proportionate share of the joint venture
net earnings for the years ended October 31, 1994, 1995 and 1996 and the nine
months ended July 31, 1997 was $2,673,030, $3,031,685, $1,757,966 and
$1,437,680, respectively. At October 31, 1995 and 1996 and July 31, 1997, the
Company recorded accounts receivable of $198,056, $345,222 and $0, respectively,
from the joint venture for undistributed net earnings.
Prior to the acquisition of the affiliates (See Note 3), in 1995 the Company
distributed a portion of its proportionate share of joint venture net earnings
to the affiliates. During the years ended October 31, 1994 and 1995, the Company
reduced its proportionate share of the joint venture net earnings by $2,138,425
and $568,260, respectively, for distribution to these affiliates. Subsequent to
the acquisition of the affiliates, a portion of its proportionate share of joint
venture net earnings is paid to certain employees as contracted commissions. For
the years ended October 31, 1995 and 1996 and the nine-months ended July 31,
1997, the
F-56
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INVESTMENT IN JOINT VENTURE (CONTINUED)
Company reduced its proportionate share of the joint venture net earnings by
$1,741,020, $1,318,474 and $0, respectively as commissions paid to certain
employees. As described in Note 6, the Company entered into a contractual
arrangement with the employees which waived their right to receive commissions.
Commissions payable related to unpaid distributions from the joint venture as of
October 31, 1995 and 1996 and July 31, 1997 were $284,141, $186,611 and $0,
respectively.
Under the terms of the joint venture agreement, the Company is required to
provide certain maintenance services to the joint venture. These services are
performed by the Company and certain third party subcontractors. For the years
ended October 31, 1994, 1995 and 1996 and the nine-months ended July 31, 1997,
the Company recognized $2,493,183, $4,438,852, $5,098,600, and $4,292,000 of
maintenance revenue for services provided to the joint venture, of which
$830,847, $693,784 and $2,057,000, were due to the Company as accounts
receivable at October 31, 1995 and 1996 and July 31, 1997. The Company incurred
maintenance expense of $1,956,761, $3,698,454, $2,821,914 and $2,770,000 for the
years ended October 31, 1994 1995 and 1996 and the nine-months ended July 31,
1997, respectively.
Summarized unaudited financial information of the joint venture consists of
the following as of (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED OCTOBER 31, ENDED JULY 31,
------------------------------- --------------
1994 1995 1996 1997
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Gross revenues............................................... $ 31,176 $ 43,282 $ 37,360 $ 24,188
Operating expenses........................................... 24,142 35,304 32,736 20,405
--------- --------- --------- -------
Net earnings................................................. $ 7,034 $ 7,978 $ 4,624 $ 3,783
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
-------------------- ---------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
BALANCE SHEETS
Total assets................................................................. $ 3,683 $ 3,885 $ 2,536
Total liabilities............................................................ 3,032 3,304 2,436
--------- --------- ---------
Partnerships' equity......................................................... $ 651 $ 581 $ 100
--------- --------- ---------
--------- --------- ---------
</TABLE>
On October 31, 1997, the Company entered into an agreement to acquire INET,
Inc.'s 38% interest in the joint venture for approximately $1.3 million. This
agreement is contingent upon the successful attainment of an extension on the
contract that this joint venture services. Upon completion of this transaction
the Company will have a 76% share in the joint venture and will consolidate the
operations of the joint venture in the financial statements. There have been no
adjustments to reflect this transaction in the consolidated financial statements
as of July 31, 1997.
F-57
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES (IN
THOUSANDS):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED OCTOBER 31, ENDED JULY 31,
------------------------------- ---------------
1994 1995 1996 1997
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Issuance of common stock for acquisition............................. $ - $ 1,300 $ - $ -
Reduction of stockholders' equity for release of ESOP shares......... $ - $ 46 $ - $ -
Change in unrealized gain (loss) on marketable securities, before
taxes.............................................................. $ - $ 113 $ (5) $ -
Reduction of unearned ESOP shares upon repurchase and retirement of
preferred stock.................................................... $ - $ - $ 2,464 $ -
Accrued preferred stock dividends.................................... $ 176 $ - $ - $ -
Reclassification of ESOP note receivable............................. $ 352 $ - $ - $ -
</TABLE>
17. SUBSEQUENT EVENT-MERGER (UNAUDITED)
The Company has entered into an agreement with Condor for the acquisition of
all of the Company's outstanding common stock. This acquisition is subject to
the successful completion of an initial public offering of the common stock of
Condor. The consideration to be paid by Condor for this acquisition is
$15,000,000, $7,500,000 of which would be paid in cash and $7,500,000 of which
would be paid in common stock of Condor, plus an earn-out, resulting in
contingent consideration of up to $9,000,000.
F-58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Corporate Access, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Corporate Access, Inc. at
June 30, 1997, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Philadelphia, PA
July 18, 1997
F-59
<PAGE>
CORPORATE ACCESS, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER
1997 1997
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 109 $ 532
Restricted cash.......................................................................... 80 80
Accounts receivable, net of allowance for doubtful accounts of $10 and $18............... 2,030 2,496
Inventory................................................................................ 97 71
Prepaid expenses and other current assets................................................ 15 23
----------- -----------
Total current assets................................................................. 2,331 3,202
Fixed assets, net.......................................................................... 159 121
----------- -----------
Total assets......................................................................... $ 2,490 $ 3,323
----------- -----------
----------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable......................................................................... $ 1,354 $ 2,051
Accrued expenses......................................................................... 162 149
----------- -----------
Total current liabilities............................................................ 1,516 2,200
----------- -----------
----------- -----------
Stockholders' equity:
Common stock, $1.00 par value; 300,000 shares authorized, 3,700 shares issued and
outstanding............................................................................ 4 4
Additional paid-in capital............................................................... 180 180
Retained earnings........................................................................ 790 939
----------- -----------
Total stockholders' equity........................................................... 974 1,123
----------- -----------
Total liabilities and stockholders' equity........................................... $ 2,490 $ 3,323
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
CORPORATE ACCESS, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------
1997 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues.......................................................................... $ 17,518 $ 3,931 $ 4,747
Cost of revenues.................................................................. 14,999 3,311 4,118
----------- --------- ---------
Gross profit...................................................................... 2,519 620 629
Selling, general and administrative............................................... 1,855 387 466
----------- --------- ---------
Income from operations............................................................ 664 233 163
Other income (expense)............................................................ 30 (29) 1
----------- --------- ---------
Income before income taxes........................................................ 694 204 164
Provision for state income taxes.................................................. 34 14 11
----------- --------- ---------
Net income........................................................................ $ 660 $ 190 $ 153
----------- --------- ---------
----------- --------- ---------
Unaudited pro forma information:
Pro forma net income before provision for income taxes.......................... $ 694 $ 204 $ 164
Provision for income taxes...................................................... 273 82 66
----------- --------- ---------
Pro forma income (see Note 2)..................................................... $ 421 $ 122 $ 98
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
CORPORATE ACCESS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ ADDITIONAL PAID- RETAINED STOCKHOLDERS'
SHARES AMOUNT IN CAPITAL EARNINGS EQUITY
----------- ----------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996.............................. 3,700 $ 4 $ 180 $ 317 $ 501
Net income.......................................... - - - 660 660
Dividends........................................... - - - (187) (187)
----- ----- ----- ----- ------
Balance, June 30, 1997.............................. 3,700 4 180 790 974
Net income (unaudited).............................. -- -- -- 153 153
Dividends (unaudited)............................... -- -- -- (4) (4)
----- ----- ----- ----- ------
Balance, September 30, 1997......................... 3,700 $ 4 $ 180 $ 939 $ 1,123
----- ----- ----- ----- ------
----- ----- ----- ----- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
CORPORATE ACCESS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------
1997 1996 1997
------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 660 $ 190 $ 153
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation.................................................................... 76 19 51
Gain on sale of equipment....................................................... (11) 29
Increase (decrease) in cash from changes in operating assets and liabilities:
Accounts receivable........................................................... (687) (536) (466)
Inventory..................................................................... 39 12 26
Other current assets.......................................................... (8) (6) (8)
Accounts payable.............................................................. 303 238 697
Accrued expenses.............................................................. (26) (19) (13)
----- --------- ---------
Net cash provided by operating activities................................... 346 (73) 440
----- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.......................................................... (74) (7) (13)
Proceeds from sale of equipment................................................... 24 - -
----- --------- ---------
Net cash used in investing activities....................................... (50) (7) (13)
----- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends............................................................. (187) - (4)
----- --------- ---------
Net cash used in financing activities....................................... (187) - (4)
----- --------- ---------
Net increase in cash and cash equivalents........................................... 109 (80) 423
Cash and cash equivalents, beginning of period...................................... 80 80 189
----- --------- ---------
Cash and cash equivalents, end of period............................................ $ 189 $ - $ 612
----- --------- ---------
----- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................................ $ 1 $ 1 $ -
----- --------- ---------
----- --------- ---------
Cash paid for income taxes........................................................ $ 102 $ 23 $ 4
----- --------- ---------
----- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Corporate Access, Inc. (the "Company") was incorporated on December 9, 1986
as a Massachusetts corporation. The Company offers a variety of desktop computer
hardware, software and peripherals, as well as configuration and installation
services, to commercial clients and governmental entities in the Greater Boston
metropolitan area. All product sold by the Company is purchased from third
parties.
The Company and its stockholders intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company invests its excess cash in money market or overnight securities.
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. At June 30,
1997, the Company had invested $410,000 in overnight securities which included
$301,000 in outstanding checks.
INTERIM FINANCIAL INFORMATION
The balance sheet as of September 30, 1997 and the statement of operations,
of changes in stockholder's equity and of cash flows for the three months ended
September 30, 1996 and 1997, are unaudited, and certain information and footnote
disclosures related thereto, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's cash and cash equivalents are held in one
bank. In addition, the Company grants credit terms in the normal course of
business to its customers. As part of its ongoing procedures, the Company
monitors the creditworthiness of its customers. The Company does not believe
that it is subject to any unusual credit risk beyond the normal credit risk
attendant in its business.
At June 30, 1997, 10 customers accounted for approximately 57% of the
Company's accounts receivable, with one of these customers accounting for 23% of
the Company's accounts receivable.
During the year ended June 30, 1997, 10 customers accounted for
approximately 62% of the Company's net revenues, with one of these customers
accounting for approximately 30% of the Company's net revenue.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenues from product sales are recognized when the related product is
shipped. An allowance for doubtful accounts has been established for potentially
uncollectible accounts.
F-64
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Inventory is comprised entirely of goods held
for resale.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is calculated over the
estimated useful life of the assets as indicated in Note 3, primarily using the
double declining balance method. Leasehold improvements are depreciated over the
shorter of their estimated useful life or the remaining lease term. Repair and
maintenance costs are expensed as incurred.
INCOME TAXES
The Company has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
is, however, subject to certain state income taxes.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
3. FIXED ASSETS
Fixed assets at June 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
USEFUL LIVES IN
YEARS AMOUNT
----------------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Office furniture and equipment...................................... 7 $ 169
Motor vehicles...................................................... 5 87
Leasehold improvements.............................................. Lease term/life 58
-----
314
Less accumulated depreciation and amortization...................... (155)
-----
Net fixed assets.................................................... $ 159
-----
-----
</TABLE>
F-65
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LINES OF CREDIT
In February 1997, the Company entered into a wholesale financing agreement
with Deutsche Financial Services Corporation ("DFS"). Under this agreement, DFS
will pay certain of the Company's vendors for purchases of inventory. The
Company can have a maximum of $700,000 outstanding at any time under this
agreement. Amounts outstanding under this agreement are interest free for the
first 30 days after payment is made by DFS, and bear interest at 16% thereafter.
At June 30, 1997, there were no amounts outstanding in excess of 30 days. Under
the agreement, the line is voidable in the event that the Company merges with
another party. Outstanding amounts under this agreement are collateralized by
the business assets of the Company. At June 30, 1997, the Company had $153,000
outstanding under this agreement. This amount is included in accounts payable on
the balance sheet.
The Company has a revolving bank line of credit with Century Bank (the
"Bank"). Borrowings under the line are limited to 80% of the Company's eligible
accounts receivable (as defined), up to a maximum borrowing of $1,000,000. In
June 1997, the maximum borrowings under this line were reduced to $300,000. The
borrowings bear interest at the Bank's prime rate (8.5% at June 30, 1997). Under
the agreement the borrowings are collateralized by substantially all of the
Company's business assets. The Bank's security interest is subordinate to that
of DFS. If the Company fails to meet certain restrictive covenants, a personal
guarantee of one of the Company's stockholders is required to cover up to
$200,000 of the borrowings. At June 30, 1997, there were no borrowings
outstanding under the line. In connection with this line, the Company is
required to maintain a balance of $80,000 in an account with the Bank at all
times.
The Company has pledged its business assets to two vendors for inventory
purchased from the vendors. The security interests are subordinate to those of
DFS and the Bank. At June 30, 1997, the Company had accounts payable to these
vendors totaling $381,000.
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office and warehouse space in Andover, Massachusetts
under a non-cancelable operating lease agreement (expiring in June 2000) with an
entity in which an officer of the Company has ownership. The lease agreement
requires an annual rent plus a proportionate share of certain operating costs.
During the twelve months ended June 30, 1997, rent expense and operating costs
incurred by the Company under this lease amounted to $75,000.
The Company leases an automobile and certain office equipment under
non-cancelable operating leases expiring through October 1999. During the twelve
months ended June 30, 1997, the lease expense incurred under these agreements
totaled $5,000. Commitments under non-cancelable leases over the next five years
are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
1998........................................................................... $ 98
1999........................................................................... 98
2000........................................................................... 71
-----
$ 267
-----
-----
</TABLE>
F-66
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SUCCESS FEE
The Company has entered into an agreement with a consulting firm to locate a
buyer for the Company. In the event that the Company is sold, pursuant to this
agreement, the consulting firm is entitled to a success fee to be paid by the
Company. This fee is based upon a percentage of the selling price, but is not to
be less than $100,000. Had an acquisition been consummated at June 30, 1997, the
liability under this agreement would be approximately $364,000.
6. PROFIT SHARING PLAN
The Company sponsors a defined contribution profit sharing plan covering
substantially all of its employees who meet certain eligibility requirements.
Contributions to the plan are made at the discretion of the Company's Board of
Directors. During the year ended June 30, 1997, the Company contributed $34,000
to the plan.
7. RELATED PARTIES
The Company leases its office facilities from a related party (see Note 5).
8. INCOME TAXES
The provision for income taxes of $34,000 for the year ended June 30, 1997
was comprised of state income tax expense.
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
requires the disclosure of the fair value of financial instruments, both assets
and liabilities recognized and not recognized on the balance sheet, for which it
is practicable to estimate fair value. The carrying values of the Company's
financial instruments approximate fair value.
F-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Interactive Software Systems Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Interactive Software Systems Incorporated and its
subsidiary at December 31, 1995 and 1996, and September 30, 1997 and the results
of their operations and their cash flows for each of the three years ended
December 31, 1996, and the nine months ended September 30, 1997 in conformity
with generally accepted accounting principles. These financial statements 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boulder, CO
October 31, 1997
F-68
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 2,711 $ 2,832 $ 4,230
Accounts receivable, net of allowance for doubtful accounts of $52, $30 and $70
(unaudited) in 1995, 1996 and 1997, respectively.............................. 2,190 2,435 3,296
Income tax receivable........................................................... 28 226 269
Other current assets............................................................ 113 107 119
Deferred taxes, net............................................................. 70 59 85
--------- --------- ------
Total current assets...................................................... 5,112 5,659 7,999
--------- --------- ------
Investments....................................................................... 1,242 -
Property, equipment and software:
Office furniture and equipment, net of accumulated depreciation of $778, $1,028
and $749 (unaudited) in 1995 1996, and 1997 respectively...................... 454 425 450
Software, net of accumulated amortization of $1,069, $1,146 and $1,165
(unaudited) in 1995, 1996, and 1997, respectively............................. 70 64 111
Deferred taxes, net............................................................. 90 - -
--------- --------- ------
Total assets.............................................................. $ 6,968 $ 6,148 $ 8,560
--------- --------- ------
--------- --------- ------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............................................... $ 16 $ 8 $ 8
Accounts payable and accrued liabilities........................................ 282 576 975
Accrued compensation and employee benefits...................................... 497 678 833
Deferred revenue and customer deposits.......................................... 1,656 1,805 2,412
--------- --------- ------
Total current liabilities................................................. 2,451 3,067 4,228
--------- --------- ------
Deferred taxes, net............................................................... - - 37
Long-term debt.................................................................... 14 27 20
Mandatorily redeemable convertible preferred stock:
Series A mandatorily redeemable convertible preferred stock, $.10 par value;
1,147,959 and 0 shares authorized, issued and outstanding in 1995 and 1996,
respectively with a liquidation value of $3,500............................... 115 - -
Series B mandatorily redeemable convertible preferred stock, $.10 par value;
159,439 and 0 shares authorized, issued and outstanding in 1995 and 1996,
respectively with a liquidation value of $350................................. 16 - -
Additional paid-in capital...................................................... 5,172 - -
--------- --------- ------
5,303 - -
--------- --------- ------
Commitments and contingencies (Notes 3 and 5)
Shareholders' equity (deficit):
Common stock, $.01 par value; 7,500,000 shares authorized; 2,000,000, 2,640,787
(unaudited) and 2,640,787 (unaudited) shares issued and outstanding in 1995,
1996 and 1997, respectively................................................... 20 26 26
Additional paid-in capital...................................................... - 2,602 2,602
Retained (deficit) earnings..................................................... (820) 426 1,647
--------- --------- ------
Total liabilities and stockholders' equity................................ $ 6,968 $ 6,148 $ 8,560
--------- --------- ------
--------- --------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees................................................ $ 2,417 $ 2,780 $ 4,310 $ 3,434 $ 4,251
Services and other revenue.................................. 3,312 3,830 4,718 3,221 4,109
--------- --------- --------- ----------- ---------
Total revenues............................................ $ 5,729 6,610 9,028 6,655 8,360
--------- --------- --------- ----------- ---------
Costs and expenses:
Cost of software and other revenue.......................... 1,297 2,010 1,482 1,120 1,224
General and administrative.................................. 1,120 1,911 1,535 978 1,163
Selling and marketing....................................... 2,030 2,270 2,762 1,972 2,593
Research and development.................................... 1,018 804 766 522 933
Depreciation and amortization............................... 165 272 260 194 223
--------- --------- --------- ----------- ---------
Total costs and expenses.................................. 5,630 7,267 6,805 4,786 6,136
--------- --------- --------- ----------- ---------
Income (loss) from operations................................. 99 (657) 2,223 1,869 2,224
Other income (expense):
Interest income............................................. 163 169 101 71 107
Interest expense............................................ (4) (4) (199) (188) -
Other income................................................ - 1 8 7 15
--------- --------- --------- ----------- ---------
Total other income (expense).............................. 159 166 (90) (110) 122
--------- --------- --------- ----------- ---------
Income (loss) before income taxes............................. 258 (491) 2,133 1,759 2,346
(Provision for) benefit from income taxes..................... (82) 188 (737) (609) (795)
--------- --------- --------- ----------- ---------
Net income (loss)............................................. $ 176 $ (303) $ 1,396 $ 1,150 $ 1,551
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------------- PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............................ 2,000,000 $ 20 $ - $ 877 $ 897
Dividends paid........................................ - - - (800) (800)
Accrued dividends..................................... - - - (385) (385)
Net income............................................ - - - 176 176
---------- --- ----------- ----------- ------
Balance, December 31, 1994............................ 2,000,000 20 - (132) (112)
Accrued dividends..................................... - - - (385) (385)
Net loss.............................................. - - - (303) (303)
---------- --- ----------- ----------- ------
Balance, December 31, 1995............................ 2,000,000 20 - (820) (800)
Issuance of common stock on conversion of note
payable............................................. 640,787 6 2,602 - 2,608
Dividends paid........................................ - - - (150) (150)
Net income............................................ - - - 1,396 1,396
---------- --- ----------- ----------- ------
Balance, December 31, 1996............................ 2,640,787 26 2,602 426 3,054
Dividends paid........................................ - - - (330) (330)
Net income............................................ - - - 1,551 1,551
---------- --- ----------- ----------- ------
Balance, September 30, 1997........................... 2,640,787 $ 26 $ 2,602 $ 1,647 $ 4,275
---------- --- ----------- ----------- ------
---------- --- ----------- ----------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-71
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 176 $ (303) $ 1,396 $ 1,150 $ 1,551
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 394 826 304 264 262
Amortization of investment premiums.................... 71 53 - - -
Conversion of accrued interest......................... - - 74 - -
Deferred taxes......................................... 61 (213) 173 161 12
Increase (decrease) in cash from changes in operating
assets and liabilities:
Accounts receivable................................ 144 (773) (245) 126 (861)
Income tax receivable.............................. (145) 346 (198) (17) (43)
Other current assets............................... (90) (6) 5 66 (12)
Accounts payable and accrued liabilities........... 59 73 294 141 398
Accrued compensation and employee benefits......... (448) 111 183 (22) 153
Deferred revenue and customer deposits............. 102 340 149 (76) 607
--------- --------- --------- ----------- ---------
Net cash provided by operating activities.......... 324 454 2,135 1,793 2,067
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed asset additions.................................... (334) (284) (214) (89) (247)
Capitalized software development costs................... (325) (14) (71) (59) (84)
Purchases of investment securities....................... (2,499)
Sales of investment securities........................... 500 611 611
Maturities of investment securities...................... 664 621 621
--------- --------- --------- ----------- ---------
Net cash (used in) provided by investing
activities....................................... (2,658) 366 947 1,084 (331)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt..................... (15) (16) (311) (306) (8)
Dividends paid........................................... (800) - (150) (100) (330)
Redemption of preferred stock............................ - - (2,500) (2,500) -
--------- --------- --------- ----------- ---------
Net cash used by financing activities.............. (815) (16) (2,961) (2,906) (338)
--------- --------- --------- ----------- ---------
Net (decrease) increase in cash and cash equivalents....... (3,149) 804 121 (29) 1,398
Cash and cash equivalents at beginning of period........... 5,056 1,907 2,711 2,711 2,832
--------- --------- --------- ----------- ---------
Cash and cash equivalents at end of period................. $ 1,907 $ 2,711 $ 2,832 $ 2,682 $ 4,230
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest................................... $ 4 $ 5 $ 154 $ 131 $ -
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Cash paid for income taxes............................... $ 184 $ 4 $ 744 $ 403 $ 307
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Capital lease obligations................................ $ 11 $ 20 $ 6 $ 6 $ -
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Conversion of preferred stock to note payable............ $ - $ - $ 2,832 $ 2,832 $ -
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Conversion of note payable to common stock............... $ - $ - $ 2,534 $ - $ -
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-72
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Interactive Software Systems Incorporated (the "Company") was incorporated
in 1979 and restructured in 1987 for the development, sale and support of
software products for use in database management. The Company designs, markets
and serves end-user business production reporting and data query, access and
warehousing software, specializing in managing information across multiple
relational and production databases, platforms and applications in a
client/server environment.
The Company and its stockholders intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The consolidated statements of operations, and of cash flows for the nine
months ended September 30, 1996 are unaudited, and certain information and
footnote disclosures related thereto, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, the interim consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and reflect all adjustments, consisting only of normal
recurring adjustments necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
PRINCIPLES OF CONSOLIDATION
In February 1995, the Company incorporated a wholly-owned subsidiary, Visual
Reportwriter Software, B.V. ("VRS"), headquartered in The Netherlands. The
Company's consolidated financial statements include the accounts of VRS. All
significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of
Statement of Position 91-1, Software Revenue Recognition. The Company licenses
software under non-cancelable license agreements and provides related services,
including support, training and consulting.
Revenue from license fees is generated from both end users and resellers and
is recognized when a non-cancelable license agreement has been signed, the
product has been delivered, collection is probable and all significant
obligations relating to the license have been satisfied. Generally, license fees
from resellers are included as license fee revenue net of related costs.
Typically, the Company's software licenses do not include significant
post-delivery obligations to be fulfilled by the Company and payments are due
within a twelve-month period from date of delivery. Revenue from agreements for
supporting and providing periodic enhancements is recorded as deferred revenue
and is recognized ratably over the support service period, and includes a
portion of the related license fee equal to the fair value of any bundled
support services. Training and consulting services are not essential to the
functionality of the
F-73
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's software products and are separately priced. Accordingly, revenue from
these services is recorded separately from the license fee, as those services
are performed.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables.
During 1996, royalties from two major resellers comprised approximately 23%
and 18% of total revenue, respectively. At December 31, 1996, these resellers
accounted for approximately 33% and 0% of total accounts receivable,
respectively. During 1995 and 1994, royalties from a major reseller comprised
16% and 13% of total revenue, respectively. At December 31, 1995 and 1994, the
reseller accounted for 9% of total accounts receivable.
INVESTMENTS
Investments at December 31, 1995 were comprised of municipal bonds and
recorded at amortized cost. At December 31, 1995 fair market value of these
investments was $1,242,000.
SOFTWARE COSTS
The Company capitalizes internally developed software costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of development costs of new software products, as well as costs
incurred to enhance existing software products, begins once the technological
feasibility of the product is established. Capitalization ceases when such
software is ready for general release, at which time amortization of the
capitalized costs begins.
Amortization of capitalized internally developed software costs is computed
as the greater of: (a) the amount determined by the ratio of the product's
current revenue to its total expected future revenue or (b) the straight-line
method over the product's estimated useful life of two to three years. Software
amortization expense was $554,000, $77,000, and $37,000 in for the year ended
December 31, 1995, 1996, and the nine months ended September 30, 1997,
respectively. Included in the 1995 amortization expense was $226,000 of
writeoffs due to impairment of capitalized costs.
Maintenance of software products as well as research and development costs
related to new software products are charged to expense as incurred.
DEPRECIATION AND AMORTIZATION
Office furniture and equipment are recorded at cost and depreciated using
the straight-line method over estimated useful lives ranging from three to seven
years.
F-74
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are provided in accordance with the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
deferred tax assets and liabilities are recognized at the applicable income tax
rates based upon future tax consequences of temporary differences between the
tax basis and financial reporting basis of assets and liabilities.
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 reported amounts of assets and liabilities as of the
date of the financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from the estimates
making it reasonably possible that a change in these estimates could occur in
the near term.
3. LONG-TERM DEBT--CAPITALIZED LEASE OBLIGATIONS
Future minimum annual lease payments under capitalized leases are as follows
at September 30, 1997:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
1997........................................................................... $ 2
1998........................................................................... 11
1999........................................................................... 11
2000........................................................................... 8
-----
32
Less interest.................................................................. (4)
-----
28
Less current portion........................................................... (8)
-----
$ 20
-----
-----
</TABLE>
Net assets under capitalized leases were $25,000, $35,000, and $27,000 at
December 31, 1995 and 1996, and September 30, 1997, respectively.
4. CAPITAL STOCK AND STOCK OPTIONS
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1991, the Board of Directors authorized 1,307,398 shares of preferred
stock of which 1,147,959 and 159,439 are designated as Series A and Series B
mandatorily redeemable convertible preferred stock,
F-75
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
respectively. The following table reflects the activity in Series A and Series B
Preferred Stock for the years ended December 31, 1994, 1995 and 1996 (in
thousands):
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK ADDITIONAL
---------------------- PAID-IN
SHARES AMOUNT CAPITAL
--------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993................................... 1,307 $ 131 $ 4,403
Accrued dividends............................................ - - 385
--------- ----- -----------
Balance, December 31, 1994................................... 1,307 131 4,788
Accrued dividends............................................ - - 384
--------- ----- -----------
Balance, December 31, 1995................................... 1,307 131 5,172
Redemption of preferred shares............................... (1,307) (131) (5,172)
--------- ----- -----------
Balance, December 31, 1996................................... - $ - $ -
--------- ----- -----------
--------- ----- -----------
</TABLE>
Effective January 10, 1996, the Company entered into an agreement to redeem
all of the shares of the Preferred Stock owned by a private investor. In
connection therewith, 536,835 shares of Series A Stock and 75,343 shares of
Series B Stock were redeemed in cash at a redemption price of $4.07 per share.
The remaining 611,124 shares of Series A Stock and the remaining 84,904 shares
of Series B Stock, plus all accrued dividends, were converted into convertible
notes payable in the aggregate principal amount of $2,832,470. The notes were
convertible into the Company's common stock at a rate of $4.07 per share and
bore interest at 9.5% per year. Interest was payable quarterly. In October 1996,
the investor converted the outstanding notes and accrued interest in the
aggregate amount of $2,608,003 into 640,787 shares of common stock.
In October 1997, the Company repurchased 491,400 shares of Common Stock from
this investor for approximately $2.0M. After the repurchase, the investor held
149,387 shares of the Company's common stock.
In December 1997, the Company declared a dividend of $1.0M. This dividend
will be paid in early 1998.
STOCK COMPENSATION PLAN
The Company has a stock option plan. The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plan. As all options have been granted with an exercise price
equal to the fair market value of common stock on the date of grant, no
compensation cost has been recognized. Had compensation cost for the Company's
stock-based compensation plan been determined based on the fair value at the
grant dates for awards under the plan consistent
F-76
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
with the method of FASB Statement No. 123, "Accounting for Stock Based
Compensation," the Company's pro forma results of operations would have been as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, NINE MONTHS
-------------------- ENDED SEPT. 30
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Net income (loss):
As reported......................................... $ (303) $ 1,394 $ 1,551
Pro forma........................................... $ (335) $ 1,369 $ 1,528
</TABLE>
Under the Company's stock option plan, the Company may grant incentive and
non-qualified stock options to its employees and directors for up to 400,000
shares of common stock. Under the plan, options are granted at an exercise price
not less than the fair market value of the stock on the date of grant. The
options generally vest ratably over five years and expire 10 years after the
date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996: dividend yield of 1.4% for both
years; zero volatility for both years; risk-free interest rates of 7.78% and
5.57% in 1995 and 1996, respectively; and an expected option term of 6 years for
each year.
A summary of the status of the Company's fixed option plan as of December
31, 1995 and 1996 and September 30, 1997, and changes during the years then
ending is presented below. As of September 30, 1997, no options were vested.
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............... - $ - 127,000 $ 3.05 190,000 $ 3.05
Granted........................................ 161,000 3.05 65,000 3.05 - -
Exercised...................................... - - - - - -
Forfeited...................................... (34,000) 3.05 (2,000) 3.05 (6,000) $ 3.05
--------- ----- --------- ----- --------- -----
Outstanding at end of year..................... 127,000 $ 3.05 190,000 $ 3.05 184,000 $ 3.05
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted average fair value of options granted
during the year.............................. $ 0.94 $ 0.68
Weighted average remaining contractual life.... 8.31 years 7.58 years
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company maintains non-cancelable operating lease arrangements for office
space and office equipment. Rent expense related to these and other
month-to-month leases approximated $264,000,
F-77
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$273,000, and $255,000 for the years ended December 31, 1995 and 1996, and
September 30, 1997, respectively. Future minimum annual operating lease payments
are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
(IN
THOUSANDS)
1997........................................................................... $ 111
1998........................................................................... 348
1999........................................................................... 327
2000........................................................................... 325
2001........................................................................... 157
------
$ 1,268
------
------
</TABLE>
6. INCOME TAXES
Income (loss) before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------- MINE MONTHS ENDED
1994 1995 1996 SEPT. 30, 1997
--------- --------- --------- -------------------
<S> <C> <C> <C> <C>
Domestic..................................... $ 258 $ (312) $ 2,058 $ 1,806
Foreign...................................... - (180) 73 540
--------- --------- --------- ------
$ 258 $ (492) $ 2,131 $ 2,346
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
The provision for (benefit from) income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED
1994 1995 1996 SEPT. 30, 1997
--------- --------- --------- -------------------
Current tax expense
Federal....................................... $ 17 $ 19 $ 479 $ 499
State......................................... 4 6 86 79
Foreign....................................... - - - 205
--------- --------- --------- ------
Total current expense......................... 21 25 565 783
--------- --------- --------- ------
Deferred tax expense (benefit)
Federal....................................... 45 (192) 169 13
State......................................... 16 (21) 5 2
Foreign....................................... - - (2) (3)
--------- --------- --------- ------
Total deferred expense (benefit).............. 61 (213) 172 12
--------- --------- --------- ------
Total provision for (benefit from) income
taxes....................................... $ 82 $ (188) $ 737 $ 795
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
F-78
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differ from the amounts computed by
applying the federal statutory rate to income before income taxes. The amounts
are reconciled as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Statutory rate................................................ $ 88 $ (167) $ 725 $ 798
Non-deductible expenses....................................... 22 7 31 47
Income tax credits............................................ (41) (27) (27) (73)
State income taxes, net of federal benefit.................... 18 (18) 57 54
Tax exempt interest........................................... - (39) (15) -
Change in valuation allowance................................. - 61 (26) (40)
Other......................................................... (5) (5) (8) 9
--------- --------- --------- ---------
Provision (benefit) for income taxes.......................... $ 82 $ (188) $ 737 $ 795
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Capitalized software, net.................................... $ (234) $ (27) $ (25) $ (49)
Other........................................................ (6) (33) - -
--------- --------- --------- ---------
Gross deferred tax liabilities............................. (240) (60) (25) (49)
--------- --------- --------- ---------
Change in tax accounting method.............................. 104 78 54 36
Accrued expenses and allowance for doubtful accounts......... 10 45 30 60
Research credit carryforwards................................ 72 97 - -
Foreign net operating loss carryforward...................... - 66 40 -
--------- --------- --------- ---------
Gross deferred tax assets.................................. 186 286 124 96
--------- --------- --------- ---------
Valuation allowance.......................................... - (66) (40) -
--------- --------- --------- ---------
$ (54) $ 160 $ 59 $ 47
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The Company changed its accounting method for tax purposes from cash to
accrual during 1994. The net change is amortized for tax purposes over six
years.
7. EMPLOYEE BENEFIT PLAN
In January 1989, the Company implemented a 401(k) savings plan. Participants
may contribute up to 18% of their compensation, not to exceed the maximum
allowed by law. The Company made matching contributions of $0 and $69,000 in
1995 and 1996, respectively.
F-79
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
U.S. Communications, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholder's equity and of cash flows present
fairly, in all material respects, the financial position of U.S. Communications,
Inc. at December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the nine
months ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, PA
October 31, 1997
F-80
<PAGE>
U.S. COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 93 $ 22
Accounts receivable............................................................... 891 1,243
Inventory......................................................................... 204 60
Prepaid expenses and other current assets......................................... 3 2
------ ------
Total current assets.......................................................... 1,191 1,327
Fixed assets, net................................................................... 75 157
Other non-current assets............................................................ 2 4
------ ------
Total assets.................................................................. $ 1,268 $ 1,488
------ ------
------ ------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 6 $ 6
Current portion of capital lease obligation....................................... -- 27
Accounts payable.................................................................. 989 1,175
Other accrued expenses............................................................ 26 26
Deferred revenue.................................................................. -- 17
Income taxes payable.............................................................. 34 8
Notes payable..................................................................... 87 51
------ ------
Total current liabilities..................................................... 1,142 1,310
Long-term debt...................................................................... 12 46
------ ------
Total liabilities............................................................. 1,154 1,356
------ ------
Stockholder's equity:
Common stock, no par value, 100 shares authorized, issued and outstanding at
stated value.................................................................... 1 1
Retained earnings................................................................. 113 131
------ ------
Total stockholder's equity.................................................... 114 132
------ ------
Total liabilities and stockholder's equity.................................... $ 1,268 $ 1,488
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
U.S. COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPT. 30,
------------- ----------------------
1996 1996 1997
------------- ----------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues..................................................................... $ 7,215 $ 4,740 $ 6,024
Cost of revenues............................................................. 6,574 4,293 5,611
------ ----------- ---------
Gross profit................................................................. 641 447 413
Selling, general and administrative expenses................................. 475 336 367
------ ----------- ---------
Income from operations....................................................... 166 111 46
Interest expense............................................................. 21 17 13
------ ----------- ---------
Income before income taxes................................................... 145 94 33
Provision for income taxes................................................... 51 39 15
------ ----------- ---------
Net income................................................................... $ 94 $ 55 $ 18
------ ----------- ---------
------ ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
U.S. COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........................................... 100 $ 1 $ 19 $ 20
Net income........................................................... - - 94 94
--- ----- ----- -----
Balance, December 31, 1996........................................... 100 1 113 114
Net income........................................................... - - 18 18
--- ----- ----- -----
Balance, September 30, 1997.......................................... 100 $ 1 $ 131 $ 132
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
U.S. COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ------------------------
1996 1996 1997
------------- ------------- ---------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 94 $ 55 $ 18
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 13 7 45
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable, net.............................................. (456) (322) (352)
Inventory............................................................. (167) (755) 144
Prepaid expenses and other assets..................................... (4) (1) (1)
Accounts payable...................................................... 596 1,023 186
Other accrued liabilities............................................. 17 20 (26)
Deferred revenue...................................................... -- 17
----- ----- ---------
Net cash provided by operating activities........................... 93 27 31
----- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................ (22) (19) (127)
----- ----- ---------
Net cash used in investing activities............................... (22) (19) (127)
----- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in capital lease obligation...................................... 84
Payments on capital lease obligation...................................... (19)
Increase in notes payable................................................. 50
Decrease in notes payable................................................. 26 -- (36)
Payments on long term debt and notes payable.............................. (6) (8) (4)
----- ----- ---------
Net cash provided by (used in) financing activities................. 20 42 25
----- ----- ---------
Net increase (decrease) in cash............................................. 91 50 (71)
Cash, beginning of period................................................... 2 2 93
----- ----- ---------
Cash, end of period......................................................... $ 93 $ 52 $ 22
----- ----- ---------
----- ----- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................................... $ 24 $ 2 $ 12
----- ----- ---------
----- ----- ---------
Cash paid for income taxes................................................ $ 18 $ 52 $ 22
----- ----- ---------
----- ----- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
U.S. Communications, Inc. (the "Company") provides commercial and
governmental clients desktop system hardware and software supplies, technical
support and comprehensive training solutions. Clients are primarily government
agencies and private companies located in the eastern region of the U.S. The
computer training programs are held in the Company's training facility which is
located at the Company's headquarters in Annapolis, Maryland.
The Company was organized on June 27, 1994 as a Maryland corporation with
the President of the Company being the sole shareholder and director. Including
the President, the Company has approximately 24 employees fully dedicated to the
sales, service, training and administration activities of the Company. As the
Company relies on government agencies for the majority of its sales, the
retention of employees with strong client contacts is essential to the future
profitability of the Company. In addition, the President of the Company is an
integral part of the Company's operations.
The Company and its stockholder intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The statements of operations and statement of cash flows for the nine months
ended September 30, 1996, are unaudited, and certain information and footnote
disclosures related thereto, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash. In addition, the company grants credit terms in the normal course of
business to its customers. As part of its ongoing procedures, the Company
monitors the creditworthiness of its customers. The Company does not believe
that it is subject to any unusual credit risk beyond the normal credit risk
attendant in its business. The Company had net revenues representing
approximately 53% and 30% of total revenue from one customer for the years ended
December 31, 1996 and for the nine months ended September 30, 1997,
respectively. The customer also represented approximately 35% of the Company's
total accounts receivable balance at December 31, 1996 and September 30, 1997.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Training revenues are recognized upon the completion of the training course.
Hardware and software revenues requiring installation services are recognized
upon the installation or configuration of the product and the acceptance of the
product by the customer. The Company has no further obligation to the Customer
after installation of software. Installation revenue for hardware and software
not purchased
F-85
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from the Company is recognized upon completion of the installation or
configuration service. If no installation or configuration is included in the
sale, hardware and software revenues are recognized when goods are shipped to
the customer. The Company has recorded a $3,000 allowance for doubtful accounts
as management anticipates that all of the accounts receivable balance at
September 30, 1997 is collectible.
DEFERRED REVENUE
Deferred revenue represents deposits received related to training costs for
which revenue has not yet been earned.
INVENTORY
Inventory is stated as the lower of cost or market. Cost is determined using
the average cost method. Inventory is comprised entirely of hardware and
software held for resale.
FIXED ASSETS
Equipment and furniture are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets which range
up to 7 years. Leasehold improvements are recorded at cost and amortized using
the straight-line method over the lesser of the lease term or the estimated
useful life. Equipment under the capital lease is recorded at the present value
of the maximum lease payments. The amortization is computed using the straight
line method over the term of the lease. Maintenance and repairs are expensed as
incurred.
INCOME TAXES
Income taxes are provided in accordance with the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
deferred tax assets and liabilities are recognized at the applicable income tax
rates based upon future tax consequences of temporary differences between the
tax basis and financial reporting basis of assets and liabilities.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
F-86
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FIXED ASSETS
Fixed assets at December 31, 1996 and September 30, 1997, respectively,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
AVERAGE DECEMBER 31 SEPTEMBER 30
USEFUL LIFE 1996 1997
----------- --------------- ---------------
<S> <C> <C> <C>
Leasehold improvements............................... 3 years $ 21 $ 21
Furniture and fixtures............................... 7 years 15 22
Computers and office equipment....................... 3 years 27 63
Automobiles, trucks and other........................ 5 years 27 27
Property under capital lease......................... 3 years -0- 84
--- -----
90 217
--- -----
Less accumulated depreciation and amortization....... (15) (60)
--- -----
$ 75 $ 157
--- -----
--- -----
</TABLE>
4. NOTES PAYABLE
As of December 31, 1996 and September 30, 1997, notes payable consisted of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1996 1997
--------------- -----------------
<S> <C> <C>
Note payable with Resellers Credit Corporation, with monthly
interest payments at prime plus 3%; principal is due on
demand......................................................... $ 50 $ 50
Loan from shareholder at 0% interest and due on demand; no
written agreement exists....................................... 37 1
--- ---
Total........................................................ $ 87 $ 51
--- ---
--- ---
</TABLE>
The Resellers Credit Corporation ("RCC") loan of $50,000 is secured by a
security interest in accounts receivable and specified inventory and includes
certain restrictions and conditions. The Company pays interest to RCC on the
outstanding balance at a rate equal to Chase Manhattan Bank's prime rate (8.25%
at December 31, 1996 and 8.5% at September 30, 1997) plus 3% per annum. The
Company also pays an advance fee equal to .25% on each advance. The outstanding
principal is due on demand.
F-87
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt at December 31, 1996 and September 30, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1996 1997
--------------- -----------------
<S> <C> <C>
Note payable with monthly payments of $283 including interest at
3.9% due in October 1999, secured by a vehicle................. $ 9 $ 7
Note payable with monthly payments of $278 including interest at
3.9% due in October 1999, secured by a vehicle................. 9 7
Less current portion of debt..................................... (6) (6)
--
---
Total........................................................ $ 12 $ 8
--
--
---
---
</TABLE>
The aggregate maturities of long-term notes payable are as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------------
<S> <C>
(IN THOUSANDS)
1997........................................................................... $ 2
1998........................................................................... 6
1999........................................................................... 6
---
Total...................................................................... $ 14
---
---
</TABLE>
6. LINES OF CREDIT
The Company had a $100,000 line of credit facility with RCC as well as a
Short-Term Accounts Receivable ("STAR") agreement obtained on May 3, 1996.
Effective May , 1997, the line of credit was increased to $150,000 and was
further increased to $200,000 effective June, 1997. The line of credit facility
was temporarily increased to $300,000 from October 2, 1997 through January 31,
1998. Both agreements are secured by a security interest in accounts receivable
and specified inventory and includes certain restrictions and conditions. The
Company uses the facilities to purchase merchandise from approved manufacturers.
The following table summarizes the conditions of the two credit facilities:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF SEPTEMBER 30, 1997 HANDLING
-------------------------------- -------------------------------- CHARGE
OUTSTANDING UNUSED OUTSTANDING UNUSED INTEREST RATE ON NEW
AMOUNT AMOUNT AMOUNT AMOUNT PER ANNUM ADVANCES
----------- ------------------- ----------- ------------------- ----------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
RCC........ $ 45,000 $55,000 $ 79,000 $121,000 Prime + 3% .25%
STAR....... $ 0 customer specific $ 158,000 customer specific Prime + 3% after 40 days .5%
</TABLE>
Prime rate is equivalent to Chase Manhattan Bank's prime rate (8.25% at
December 31, 1996 and 8.5% at September 30, 1997). Outstanding borrowings at
December 31, 1996 and September 30, 1997 are included in accounts payable at the
respective dates.
F-88
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LEASE COMMITMENTS
The Company conducts its operations and training classes from facilities
that are leased for a combined monthly rent of $3,000. The lease for operations
space began on July 1, 1996 and the lease for training class space began on
December 1, 1996. Both leases are under non-cancelable operating leases which
expire on June 30, 1999, with a 4% escalation each year.
The Company also leases automobiles, and office equipment under long-term
operating leases with terms of two to five years. In addition, the Company
leases computer equipment under a capital lease.
Total rental expense included in operations is $28,000 and $61.370 for the
year ended December 31, 1996 and the nine months ended September 30, 1997.
Total future minimum lease payments as of September 30, 1997 for all leasing
arrangements were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
AMOUNT AMOUNT
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
1997..................................................................... $ 15 8
1998..................................................................... 55 32
1999..................................................................... 32 32
----- ---
Total................................................................ $ 102 72
-----
-----
Interest................................................................. 7
---
PV of net lease payments................................................. 65
Less current portion..................................................... 27
---
Long term obligation under capital lease................................. $ 38
---
---
</TABLE>
8. INCOME TAXES
The components of the provision for income taxes for the year ended December
31, 1996 and nine months ended September 30, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
--------------------- ---------------------
<S> <C> <C>
Current income tax expense:
Federal.............................................. $ 41 $ 11
State................................................ 10 4
--- ---
Total income tax....................................... $ 51 $ 15
--- ---
--- ---
</TABLE>
For the year ended December 31, 1996 and nine months ended September 30,
1997, the effective tax rate of 35% and 37%, respectively approximated the
combined federal and state income tax rates. Deferred taxes are immaterial.
F-89
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
InVenture Group, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholder's equity and of cash flows present fairly,
in all material respects, the financial position of InVenture Group, Inc. at
December 31, 1996 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Philadelphia, PA
July 15, 1997
F-90
<PAGE>
INVENTURE GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER
31, SEPTEMBER 30,
ASSETS 1996 1997
----------- -------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash.............................................................. $ 80 $ 13
Accounts receivable, net of allowance for doubtful accounts of $35
and $30......................................................... 629 738
Accounts receivable, officers and employees....................... 54 2
Accounts receivable, affiliates................................... 62 -
Deferred income taxes............................................. 26 11
Prepaid expenses and other current assets......................... 52 95
----------- ------
Total current assets.......................................... 903 859
Fixed assets, net................................................... 153 153
Intangible assets, net.............................................. 9 22
Other non-current assets............................................ 175 -
----------- ------
Total assets.................................................. $ 1,240 $ 1,034
----------- ------
----------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 830 $ 626
Accounts payable, officers........................................ 37
Other accrued expenses............................................ 410 66
Income taxes payable.............................................. 27 133
Other current liabilities......................................... 1 -
----------- ------
Total current liabilities..................................... 1,268 862
----------- ------
Deferred income taxes............................................... 15 4
----------- ------
Stockholder's equity:
Common stock, no par value; 10,500 shares authorized, issued and
outstanding..................................................... 11 11
Retained (deficit) earnings....................................... (54) 157
----------- ------
Total stockholder's equity.................................... (43) 168
----------- ------
Total liabilities and stockholder's equity.................... $ 1,240 $ 1,034
----------- ------
----------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-91
<PAGE>
INVENTURE GROUP, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------- --------------------
1996 1996 1997
------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues........................................................................ $ 5,416 $ 4,253 $ 3,210
Cost of revenues................................................................ 3,948 3,165 1,603
------ --------- ---------
Gross profit.................................................................... 1,468 1,088 1,607
Selling, general and administrative expenses.................................... 1,464 1,028 1,378
------ --------- ---------
Income from operations.......................................................... 4 60 229
Other income.................................................................... 19 14 123
------ --------- ---------
Income before income taxes...................................................... 23 74 352
Provision for income taxes...................................................... 7 30 141
------ --------- ---------
Net income...................................................................... $ 16 $ 44 $ 211
------ --------- ---------
------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-92
<PAGE>
INVENTURE GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
--------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........................................... 10,500 $ 11 $ (70) $ (59)
Net income........................................................... - - 16 16
--------- ----- ----- -----
Balance, December 31, 1996........................................... 10,500 11 (54) (43)
Net income........................................................... - - 211 211
--------- ----- ----- -----
Balance, September 30, 1997 (unaudited).............................. 10,500 $ 11 $ 157 $ 168
--------- ----- ----- -----
--------- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE>
INVENTURE GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- ------------------------
1996 1996 1997
--------------- ------------- ---------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 16 $ 44 $ 211
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 77 57 61
Deferred income taxes................................................. 2 - 4
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable, net............................................ 188 16 (67)
Prepaid expenses and other current assets........................... (39) (103) 135
Accounts payable.................................................... 468 489 (225)
Other accrued expenses.............................................. 7 (23) (309)
Income taxes payable................................................ 20 32 107
Deferred revenue.................................................... (467) (468) -
--- --- ---------
Net cash provided by (used in) operating activities............... 272 44 (83)
--- --- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................... (79) (69) (17)
Purchase of trademark................................................... (10) (10) -
Acquisition of IGI Services, Inc........................................ - - (82)
Software development costs.............................................. (8) - -
--- --- ---------
Net cash used in investing activities............................. (97) (79) (99)
--- --- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to affiliates, net............................................. (200) (62) 62
Officers loans, net..................................................... (12) (9) 53
--- --- ---------
Net cash (used in) provided by financing activities............... (212) (71) 115
--- --- ---------
Net decrease in cash...................................................... (37) (106) (67)
Cash, beginning of period................................................. 117 117 80
--- --- ---------
Cash, end of period....................................................... $ 80 $ 11 $ 13
--- --- ---------
--- --- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes.............................................. $ 9 $ - $ 8
--- --- ---------
--- --- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
InVenture Group, Inc. ("InVenture" or the "Company") creates and executes
strategic marketing programs for resellers and manufacturers of information
technology products and services as well as commercial customers in other
industries. InVenture provides a comprehensive portfolio of marketing services,
including marketing strategy, corporate identity, creation and maintenance
programs, creative development, merchandising programs, publications, website
development, direct mail advertising, event planning and empowerment programs.
The Company and its stockholders intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The balance sheet as of September 30, 1997 and the statements of operations,
of changes in stockholder's equity and of cash flows for the nine months ended
September 30, 1996 and 1997, are unaudited, and certain information and footnote
disclosures related thereto, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit
risks consist primarily of accounts receivable. In addition, the Company grants
credit terms in the normal course of business to its customers. As part of its
ongoing procedures, the Company monitors the creditworthiness of its customers.
The Company does not believe that it is subject to any unusual credit risk
beyond the normal credit risk attendant in its business.
The Company had net revenues of approximately $3.9 million and $625,000 from
two customers during 1996 which represent 84% of total revenues. Accounts
receivable from these two customers totaled $334,000 at December 31, 1996.
In the third quarter of 1997, the contract with the customer that accounted
for $625,000 expired and was not renewed.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenues are recognized upon completion and/or delivery of specific
projects. An allowance for doubtful accounts has been established for
potentially uncollectible accounts.
F-95
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Equipment and furniture are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets which range
up to 7 years. Leasehold improvements are recorded at cost and are amortized
over the shorter of the estimated lives of the related assets or the term of the
lease.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach in accounting for income taxes. The
asset and liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between carrying amounts and the tax bases of all assets and liabilities.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
3. FIXED ASSETS
Fixed assets as of December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
AVERAGE
USEFUL
LIFE AMOUNT
---------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Leasehold improvements............................................ 5 years $ 22
Equipment......................................................... 3-7 years 306
Furniture and fixtures............................................ 3-7 years 26
Software.......................................................... 3 years 11
-----
365
Less accumulated depreciation and amortization.................... (212)
-----
Fixed assets, net................................................. $ 153
-----
-----
</TABLE>
There were no significant operating leases other than leases for office
space (see Note 4).
Depreciation and amortization expense for the year ended December 31, 1996
was $76,000.
4. COMMITMENTS
The Company leases office space in Pittsburgh, Pennsylvania, under an
agreement that provides for escalating rent. Rent expense is normalized over the
term of the lease, which expires in April 2000. The difference between cash
payments and rent expense is carried as accrued rent.
F-96
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
1997........................................................................... $ 188
1998........................................................................... 183
1999........................................................................... 184
2000........................................................................... 73
2001........................................................................... 1
-----
Total.......................................................................... $ 629
-----
-----
</TABLE>
Rent expense for the year ended December 31, 1996 was $194,000.
5. EMPLOYEE BENEFIT PLAN
The Company has an employee savings plan (the "Plan") which permits
participants who make contributions by salary reduction pursuant to section
401(k) Savings Plan of the Internal Revenue Code. The Company matches employee
contributions 100% for the first 3% of compensation deferred plus 50% of the
next 3% of compensation deferred. Amounts deferred over 6% are not matched.
Participants in the Plan vest in the employer contributions pro rata over 3
years. During 1996, the Company contributed $21,000 to the Plan.
6. RELATED PARTIES
During 1996, the Company purchased $32,000 of prepress services from IGI
Services, Inc. ("IGI"), a related organization that is owned by the stockholder
of the Company. The Company also advanced $56,000 to IGI during 1996, net of
repayments of $39,000. IGI shares office space with InVenture and InVenture
provides administrative services to IGI. The total charges to IGI for office
space and administrative services for the year ended December 31, 1996 were
$42,000. In addition, InVenture annually (through July 1, 1996) submitted to IGI
a print brokerage fee amounting to 7.0% of all InVenture print purchases, or
$47,000 for the year ended December 31, 1996. The net receivable at December 31,
1996 is $62,000 and is recorded in the balance sheet as accounts receivable,
affiliates. The Company believes the fees paid to IGI were equivalent to those
that would be paid under an arms'-length transaction. See Note 9 regarding a
related subsequent event.
During 1996, the Company advanced funds and provided marketing services to
The Sound Marketing Group ("SMG"), an organization with common ownership,
totaling $168,000. This amount has been recorded as a note receivable in the
December 31, 1996 balance sheet and is included in other non-current assets. The
note is payable beginning January 1, 1998 with payments on the outstanding
principal amortized over 60 months and bears interest at 6.65%.
At December 31, 1996, the Company had advanced funds totaling $42,000 to the
stockholders of the Company. This amount is included in the accounts receivable,
officers and employees balance at December 31, 1996 and is payable on demand.
F-97
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision for income taxes at December 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
Current taxes:
Federal...................................................................... $ 5
State........................................................................ -
-----
Current tax expense.......................................................... 5
Deferred taxes:
Federal tax benefit.......................................................... (5)
State tax expense............................................................ 7
-----
Deferred tax expense......................................................... 2
-----
Provision for income taxes................................................... $ 7
-----
-----
</TABLE>
Deferred tax liabilities (assets) at December 31, 1996 were comprised of the
following:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
Depreciation................................................................... $ 15
-----
Deferred tax liabilities....................................................... 15
-----
Allowance for doubtful accounts................................................ (12)
Vacation accrual............................................................... (6)
Accrued rent................................................................... (8)
-----
Deferred tax asset............................................................. (26)
-----
Net deferred tax asset....................................................... $ (11)
-----
-----
</TABLE>
The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rates due to use of graduated tax rates at lower
income brackets, non-deductible expenses and state income taxes.
8. SUBSEQUENT EVENTS
ACQUISITION OF IGI
Effective May 31, 1997, the Company acquired all of the operating assets of
IGI Services, Inc. ('IGI'), a company engaged in the business of operating an
electronic service bureau that supplies high resolution negatives and positives
from computer files for the publishing and advertising industries. The purchase
price of the acquisition included a cash payment of $22,000, forgiveness of
account receivable from IGI in the amount of $60,000 and the assumption of
liabilities totaling $22,000.
F-98
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased based on the fair values at the date of acquisition. The
purchase price was allocated as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
Accounts receivable............................................................ $ 43
Equipment...................................................................... 46
Intangibles.................................................................... 12
Prepaids and other assets...................................................... 3
Accounts payable............................................................... (22)
-----
$ 82
-----
-----
</TABLE>
The operating results of IGI have been included in the unaudited statement
of operations from the date of acquisition. The following unaudited pro forma
information has been prepared assuming that this acquisition had taken place at
the beginning of the respective period. This pro forma financial information is
presented for informational purposes only and may not be indicative of what the
actual results of operations might have been if the acquisition had been
effective at the beginning of 1996.
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
(IN
THOUSANDS)
Net sales...................................................................... $ 5,674
Net income..................................................................... $ 14
</TABLE>
SETTLEMENT OF LIABILITY
During October 1997, the Company entered into an agreement with a vendor to
whom InVenture owed $321,000. The vendor agreed to accept assignment of the
Company's receivable from SMG in full settlement of this liability upon the
effectiveness of the Condor transaction. As the receivable was $222,000 at the
time of this agreement, a gain of $99,000 will be recorded upon effectiveness of
the Offering.
F-99
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
MIS Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholder's equity and of cash flows present
fairly, in all material respects, the financial position of MIS Technologies,
Inc. at December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the nine
months ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, PA
October 31, 1997
F-100
<PAGE>
MIS TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 20 $ 151
Investments....................................................................... 75 75
Accounts receivable, less allowance for doubtful accounts of $13.................. 296 579
Other current assets.............................................................. 5 10
----- -----
Total current assets.......................................................... 396 815
Fixed assets, net................................................................... 22 21
----- -----
Total assets.................................................................. $ 418 $ 836
----- -----
----- -----
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Lines of credit................................................................... $ 193 $ 371
Accrued expenses.................................................................. 107 226
Shareholder note payable.......................................................... 20 -
----- -----
Total current liabilities..................................................... 320 597
----- -----
Stockholder's equity:
Common stock, no par value, 1,000 shares authorized, 500 shares issued and
outstanding..................................................................... 2 2
Retained earnings................................................................. 96 237
----- -----
Total stockholder's equity.................................................... 98 239
----- -----
Total liabilities and stockholder's equity.................................... $ 418 $ 836
----- -----
----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ----------------------
1996 1996 1997
------------- ----------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues.................................................................. $ 2,582 $ 1,895 $ 3,387
Cost of revenues.......................................................... 1,426 1,213 1,841
------ ----------- ---------
Gross profit.............................................................. 1,156 682 1,546
Selling, general and administrative expenses.............................. 1,150 592 1,347
------ ----------- ---------
Income from operations.................................................... 6 90 199
Net interest expense...................................................... 12 9 26
------ ----------- ---------
Net (loss) income......................................................... $ (6) $ 81 $ 173
------ ----------- ---------
------ ----------- ---------
Unaudited pro forma information (see Note 2):
Pro forma net income before provision for income taxes.................. $ (6) $ 81 $ 173
Provision for income taxes.............................................. - 32 69
------ ----------- ---------
Pro forma income.......................................................... $ (6) $ 49 $ 104
------ ----------- ---------
------ ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995............................................ 500 $ 2 $ 151 $ 153
Distributions to stockholder.......................................... - - (49) (49)
Net loss.............................................................. - - (6) (6)
--- ----- ----- -----
Balance, December 31, 1996............................................ 500 2 96 98
Distributions to stockholder.......................................... - - (32) (32)
Net income............................................................ - - 173 173
--- ----- ----- -----
Balance, September 30, 1997........................................... 500 $ 2 $ 237 $ 239
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-103
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- ------------------------
1996 1996 1997
--------------- ------------- ---------
<S> <C> <C> <C>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED)
<S> <C> <C> <C>
Net (loss) income........................................................... $ (6) $ 81 $ 173
Adjustments to reconcile net (loss) income to net cash provided by (used
in) operating activities:
Depreciation............................................................. 12 8 10
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable.................................................... (88) (3) (283)
Other assets........................................................... (6) (5) (5)
Accrued liabilities.................................................... 57 26 119
Shareholder receivable................................................. - - (20)
--- ----- ---------
Net cash used by operating activities................................ (31) 107 (6)
--- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................ (15) (12) (9)
--- ----- ---------
Net cash used in investing activities................................ (15) (12) (9)
--- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in borrowings under lines of credit............................... 65 39 178
Distributions to shareholder............................................... (49) (67) (32)
--- ----- ---------
Net cash provided by financing activities............................ 16 (28) 146
--- ----- ---------
Net (decrease) increase in cash.............................................. (30) 67 131
Cash, beginning of period.................................................... 50 125 20
--- ----- ---------
Cash, end of period.......................................................... $ 20 $ 192 $ 151
--- ----- ---------
--- ----- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................................... $ 17 $ 11 $ 26
--- ----- ---------
--- ----- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-104
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MIS Technologies, Inc. (the "Company") is an S corporation headquartered in
Tulsa, Oklahoma. The Company, founded in 1984, provides clients temporary
contract information, staffing and permanent placement of qualified
professionals with information technology experience. In addition to these
serivices, the Company works with clients to assess their management information
systems and staffing needs.
The Company and its stockholder intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The interim statements of operations and of cash flows for the nine months
ended September 30, 1996 are unaudited, and certain information and footnote
disclosures related thereto, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
At December 31, 1996, the Company had four significant customers which
accounted for 24%, 15%, 11% and 10%, respectively, of total 1996 revenue.
Additionally, one significant customer accounted for 24% of the Company's
accounts receivable as of December 31, 1996. At September 30, 1997, the Company
had 2 significant accounts which each accounted for 10% of the total 1997
revenue through September 30, 1997.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenues from contract services as the work is
performed and recognizes revenues from permanent placement services upon
commencement of employment. An allowance for doubtful accounts has been
established for potentially uncollectible accounts.
INVESTMENTS
Investments consist of certificates of deposit with original maturities of
more than 90 days. The carrying value of these assets approximates the fair
market value.
OTHER CURRENT ASSETS
Other current assets consist primarily of employee receivables.
F-105
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost. Expenditures incurred that enhance the
utility or extend the life of a fixed asset are capitalized, while repair and
maintenance costs are expensed as incurred. Costs of assets acquired through
acquisition have been recorded at their respective fair value at the date of
acquisition. Depreciation is computed using the double declining balance method
over the following estimated useful lives of the related assets:
<TABLE>
<CAPTION>
YEARS
-----------------
<S> <C>
Furniture and equipment........................................................ 4-7
Computers and accessories...................................................... 3-5
</TABLE>
INCOME TAXES
The Company has elected S corporation status as defined by the Internal
Revenue Code and relevant state tax code whereby the Company is not subject to
taxation. Under S corporation status the stockholder reports his share of the
Company's taxable earnings or losses in his personal returns. Accordingly, the
financial statements include no provision for income taxes. If the Company were
subject to taxation, deferred tax assets and liabilities would be established
based on temporary differences between the book and tax basis of assets and
liabilities. Due to differences in book and tax accounting treatment for certain
items, including accounts receivable, property and equipment and accrued
liabilities, the stockholder's basis in the Company's net assets for book
purposes exceeds the related tax basis by $165,000.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
3. FIXED ASSETS
Fixed assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------- -------------------
<S> <C> <C>
Furniture and equipment................................ $ 41 $ 50
Computers and accessories.............................. 20 20
--- ---
61 70
Less accumulated depreciation.......................... (39) (49)
--- ---
$ 22 $ 21
--- ---
--- ---
</TABLE>
F-106
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED EXPENSES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
AMOUNT
---------------------
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------- ---------------------
<S> <C> <C>
(IN THOUSANDS)
Salaries and wages..................................... $ 32 $ 133
Vacation and sick pay.................................. 28 34
Commissions............................................ 35 29
Other accrued liabilities.............................. 12 30
----- -----
$ 107 $ 226
----- -----
----- -----
</TABLE>
5. SHAREHOLDER NOTE AND LINES OF CREDIT
Shareholder note and lines of credit at December 31, 1996 and September 30,
1997 consisted of the following:
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
BancFirst $600,000 line of credit dated September 11, 1997
expiring September 6, 1998; interest paid monthly at prime
plus 1.5% (9.75% at September 30, 1997), principal due at
maturity...................................................... $ -- $ 350
BancFirst $600,000 line of credit dated September 11, 1996
expiring September 6, 1997; interest paid monthly at prime
plus 1.75% (10% at December 31, 1996), principal due at
maturity...................................................... 175 --
Wells Fargo $40,000 line of credit dated July 31, 1997 expiring
July 31, 1998; interest paid monthly at prime plus 4.0%
(12.25% at September 30, 1997), principal paid in monthly
installments of varying amounts............................... -- 21
Wells Fargo $40,000 line of credit dated July 31, 1996 expiring
July 31, 1997; interest paid monthly at prime plus 4.0% (13%
at December 31, 1996), principal paid in monthly installments
of varying amounts............................................ 18 --
----- -----
$ 193 $ 371
----- -----
----- -----
</TABLE>
The BancFirst line of credit is secured by a continuing security interest in
the Company's cash, accounts receivable and equipment. The Wells Fargo line of
credit is unsecured. Additionally, the Company's sole shareholder has personally
guaranteed the lines of credit. The Company made cash interest payments of
$17,000 and $26,000 during the period ended December 31, 1996, and year ended
September 30, 1997 respectively.
In addition, at December 31, 1996, the Company was obligated to repay a
$20,000 shareholder note payable to its sole shareholder. The Company repaid the
shareholder during 1997.
F-107
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under long-term leases
which are accounted for as operating leases.
Future minimum lease payments for long-term operating leases as of December
31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
YEAR (IN THOUSANDS)
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 16
1998........................................................................... 47
1999........................................................................... 23
2000........................................................................... 16
2001........................................................................... 3
2002........................................................................... 1
-----
Total.................................................................... $ 106
-----
-----
</TABLE>
Rent expense for the period ended December 31, 1996 and the year ended
September 30, 1997 was $36,000 and $40,000, respectively.
7. SUBSEQUENT EVENT
The Company has entered into an agreement with Kinnaird Technical Resources,
Inc. ("KTR") to merge the two companies whereby KTR will become a wholly-owned
subsidiary of MIS. Management has elected to effect the merger concurrent with
the successful agreement with Condor. KTR operates as an independent branch of
MIS. During the period ended September 30, 1997 and the year ended December 31,
1996, commissions totaling $127,000 and $79,000, respectively, were paid by MIS
to KTR for contract and temporary placement services performed by KTR. In
addition, certain administrative expenses related to KTR's operations totaling
$21,000 and $23,000 were paid directly by MIS during the period ended September
30, 1997 and year ended December 31, 1996, respectively.
F-108
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
Offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the shares of Common Stock to which it relates or an offer
to, or a solicitation of, any person in any jurisdiction in which such offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 15
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 23
Business.................................................................. 38
Management................................................................ 48
Certain Transactions...................................................... 54
Principal Stockholders.................................................... 58
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 63
Underwriting.............................................................. 65
Legal Matters............................................................. 66
Experts................................................................... 67
Additional Information.................................................... 67
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
Until , 1998 (25 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments of
subscriptions.
5,900,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
, 1997
-------------------
VOLPE BROWN WHELAN & COMPANY
FURMAN SELZ
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with this Offering. All of
such amounts (except the SEC Registration Fee and the NASD Filing Fee) are
estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 30,841
Nasdaq National Market Listing Fees............................. 42,750
NASD Filing Fee................................................. 10,678
Blue Sky Fees and Expenses...................................... 3,000
Printing and Engraving Costs.................................... *
Legal Fees and Expenses......................................... *
Accounting Fees and Expenses.................................... *
Transfer Agent and Registrar Fees and Expenses.................. *
Miscellaneous................................................... *
---------
Total..................................................... $4,900,000
</TABLE>
- ------------------------
* To be provided.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's By-Laws provide that the Company shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL"), as amended from time to time, indemnify all persons whom it may
indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, I.E., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such adjudication of
liability.
Article Seven of the Company's Certificate of Incorporation provides that
the Company's directors will not be personally liable to the Company or its
stockholders for monetary damages resulting from breaches of their fiduciary
duty as directors except (a) for any breach of the duty of loyalty to the
Company or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the DGCL, which makes directors liable for unlawful dividends or
unlawful stock repurchases or redemptions, or (d) for transactions from which
directors derive improper personal benefit.
The Underwriting Agreement filed as Exhibit 1 provides that the Underwriters
named therein will indemnify and hold harmless the Company and each director,
officer or controlling person of the Company from and against certain
liabilities, including liabilities under the Securities Act. The Underwriting
II-1
<PAGE>
Agreement also provides that such Underwriters will contribute to certain
liabilities of such persons under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold by the Company within the past three years which were not registered under
the Securities Act.
In November 1996, the Company sold 7,500,000 shares of Common Stock to
Commonwealth, 500,000 shares to the Hill-Craft Irrevocable Family Trust, 400,000
shares to James P. Horner, 100,000 shares to Gary Wright and 200,000 shares to
David C. Mathes. In January 1997, the Company sold 300,000 shares to the
Hill-Craft Irrevocable Family Trust, 35,000 shares to James Pirello, 20,000
shares to Forrest Walpole, 20,000 shares to Dan McCann and 5,000 shares to
Michael Welch. In February 1997, the Company sold 100,000 shares to Gregory
Bosiack and 30,000 shares to Fearghal McCarthy. In March 1997, the Company sold
350,000 shares to Santanu Sarkar, 250,000 shares to Sean Coleman, and 20,000
shares to William Coleman. In August 1997 and October 1997, the Company sold an
aggregate of 800,000 shares to Daniel Roche. In September 1997, the Company sold
200,000 shares to the Hill-Craft Irrevocable Family Trust. Each of these sales
was in consideration of the provision prior to the date of such sale of
consulting, financial advisory and/or related services with a value per share
equal to the par value per share of the Common Stock. In April 1997, the Company
sold 150,000 shares to Edward J. Mathias and 75,000 shares to Raymond Ranelli,
in each case for cash consideration of $.67 per share. In November 1997, the
Company sold 100,000 shares to Edward J. Doyle, 50,000 shares to William J.
Caragol, Jr. and 20,000 shares to Fearghal McCarthy, in each case for cash
consideration equal to par value per share. The Company will effect a
one-for-5.26227 reverse stock split effective on the day immediately preceding
the date of the Prospectus.
Simultaneously with the completion of this Offering, the Company will issue
2,153,355 shares of its Common Stock in connection with the Mergers of the eight
Founding Companies. The Company also will assume options to purchase 177,000
shares of common stock of certain of the Founding Companies which, following the
Mergers, will constitute options to purchase an aggregate of 64,970 shares of
Common Stock of the Company.
Each of the transactions described in this Item 15 was effected or will be
effected without registration of the relevant security under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act
and/or Regulation D thereunder for transactions not involving a public offering
and/ or Rule 701 under the Securities Act.
(b) Financial Statement Schedules
None
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1 -- Form of Underwriting Agreement
2.1* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MST
Acquisition Corp., Management Support Technology Corporation and the Stockholders named therein
2.2* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, CHMC
Acquisition Corp., Computer Hardware Maintenance Company, Inc. and the Stockholders named therein
2.3* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Federal
Acquisition Corp., Federal Computer Corporation and the Stockholders named therein
2.4* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Corporate Access Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein
2.5* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Interactive Acquisition Corp., Interactive Software Systems Incorporated and the Stockholders named
therein
2.6* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, US Comm
Acquisition Corp., U.S. Communications, Inc. and the Stockholders named therein
2.7* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
InVenture Acquisition Corp., InVenture Group, Inc. and the Stockholders named therein
2.8* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MIS
Acquisition Corp., MIS Technologies, Inc. and the Stockholders named therein
3.1* -- Amended and Restated Certificate of Incorporation of the Company
3.2* -- By-Laws of the Company as amended
4 -- Form of Certificate Evidencing Ownership of Common Stock of the Company
5 -- Opinion of Morgan, Lewis & Bockius LLP
10.1 -- 1997 Long-Term Incentive Plan of the Company
10.2* -- Employment Agreement between the Company and Kennard F. Hill
10.3 -- Form of Employment Agreement between the Company and C. Lawrence Meador
10.4 -- Employment Agreement between the Company and Daniel J. Roche
10.5* -- Employment Agreement between the Company and Santanu J. Sarkar
10.6 -- Lease between Tysons II Development Co. Limited Partnership and the Company and the Guarantee
thereof and Form of Amendment of Lease between Tysons II Development Co. Limited Partnership and
the Company
10.7 -- Employment Agreement between the Company and William J. Caragol, Jr.
21* -- List of Subsidiaries of the Company
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Deloitte & Touche LLP
23.4 -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)
23.5* -- Consent of C. Lawrence Meador to be named as a director
23.6* -- Consent of Edward J. Mathias to be named as a director
23.7 -- Consent of William M. Newport to be named as a director
23.8 -- Consent of Peter T. Garahan to be named as a director
24* -- Powers of Attorney
27 -- Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the Underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be the initial bona fide
offering thereof.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of McLean, the Commonwealth of Virginia, on the 12th day of December, 1997.
<TABLE>
<S> <C> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC.
By: /s/ KENNARD F. HILL
-----------------------------------------
Kennard F. Hill
President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------------------ ----------------------
<C> <S> <C>
/s/ J. MARSHALL COLEMAN
------------------------------------ Chairman of the Board December 12, 1997
J. Marshall Coleman
/s/ KENNARD F. HILL
------------------------------------ President, Chief Executive Officer and December 12, 1997
Kennard F. Hill Director (Principal Executive Officer)
/s/ SANTANU SARKAR
------------------------------------ Chief Financial Officer (Principal December 12, 1997
Santanu Sarkar Financial and Accounting Officer)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1 -- Form of Underwriting Agreement
2.1* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MST
Acquisition Corp., Management Support Technology Corporation and the Stockholders named therein
2.2* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, CHMC
Acquisition Corp., Computer Hardware Maintenance Company, Inc. and the Stockholders named therein
2.3* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Federal
Acquisition Corp., Federal Computer Corporation and the Stockholders named therein
2.4* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Corporate Access Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein
2.5* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Interactive Acquisition Corp., Interactive Software Systems Incorporated and the Stockholders named
therein
2.6* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, US Comm
Acquisition Corp., U.S. Communications, Inc. and the Stockholders named therein
2.7* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
InVenture Acquisition Corp., InVenture Group, Inc. and the Stockholders named therein
2.8* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MIS
Acquisition Corp., MIS Technologies, Inc. and the Stockholders named therein
3.1* -- Amended and Restated Certificate of Incorporation of the Company
3.2* -- By-Laws of the Company as amended
4 -- Form of Certificate Evidencing Ownership of Common Stock of the Company
5 -- Opinion of Morgan, Lewis & Bockius LLP
10.1 -- 1997 Long-Term Incentive Plan of the Company
10.2* -- Employment Agreement between the Company and Kennard F. Hill
10.3 -- Form of Employment Agreement between the Company and C. Lawrence Meador
10.4 -- Employment Agreement between the Company and Daniel J. Roche
10.5* -- Employment Agreement between the Company and Santanu J. Sarkar
10.6 -- Lease between Tysons II Development Co. Limited Partnership and the Company and Guarantee thereof
and Form of Amendment of Lease between Tysons II Development Co. Limited Partnership and the
Company
10.7 -- Employment Agreement between the Company and William J. Caragol, Jr.
21* -- List of Subsidiaries of the Company
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Deloitte & Touche LLP
23.4 -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)
23.5* -- Consent of C. Lawrence Meador to be named as a director
23.6* -- Consent of Edward J. Mathias to be named as a director
23.7 -- Consent of William M. Newport to be named as a director
23.8 -- Consent of Peter T. Garahan to be named as a director
24* -- Powers of Attorney
27 -- Financial Data Schedule
</TABLE>
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* Previously filed.
<PAGE>
Exhibit 1
5,900,000 Shares (1)
CONDOR TECHNOLOGY SOLUTIONS, INC.
Common Stock
UNDERWRITING AGREEMENT
December __, 1997
Volpe Brown Whelan & Company, LLC
Furman Selz LLC
As Representatives of the several Underwriters
c/o Volpe Brown Whelan & Company, LLC
One Maritime Plaza, 11th Floor
San Francisco, California 94111
Gentlemen & Ladies:
Condor Technology Solutions, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell 5,900,000 shares of its authorized but
unissued Common Stock, $.01 par value (the "Common Stock)(the "Firm Shares").
The Company proposes to grant to the Underwriters (as defined below) an
option to purchase up to 885,000 additional shares of Common Stock (the
"Optional Shares" and, with the Firm Shares, collectively, the "Shares").
The Common Stock is more fully described in the Registration Statement and
the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Shares by the several underwriters, for whom you are acting,
named in Schedule I hereto (collectively, the "Underwriters," which term
shall also include any underwriter purchasing Shares pursuant to Section 3(b)
hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.
Section 1. Representations and Warranties of the Company. The
Company hereby represents and warrants to the several Underwriters as of the
date hereof and as of each Closing Date (as defined below) that:
(a) The Company and its subsidiaries set forth in the first column of
Schedule II hereto (the "Merger Subsidiaries") have entered into the
Agreements and Plans of Organization
- -----------------------
(1) Plus an option to purchase up to 885,000 additional shares to cover
over-allotments.
1
<PAGE>
identified in the second column of Schedule II (the "Merger Agreements") with
each of the respective companies listed in the third column of Schedule II
(each a "Founding Company" and, together, the "Founding Companies") pursuant
to which each Merger Subsidiary will be merged with and into one or more
Founding Companies (each such transaction, a "Merger" and, collectively, the
"Mergers") simultaneously with the closing of the sale of the Shares. The
Founding Companies will be the surviving corporations following the Mergers,
and will by virtue of the Mergers become wholly owned subsidiaries of the
Company simultaneously with the closing of the sale of the Shares. For the
purposes of this Agreement, unless the context expressly otherwise requires,
references to "the Company and its subsidiaries, taken as a whole" shall be
deemed to include the Founding Companies as if the Mergers had already been
completed.
(b) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-37179),
including the related preliminary prospectus, for the registration under the
Securities Act of 1933, as amended (the "Securities Act") of the Shares.
Copies of such registration statement and of each amendment thereto, if any,
including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission (the "Rules and
Regulations")) heretofore filed by the Company with the Commission have been
delivered to you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement, including all exhibits and pro forma and
historical financial statements and all information omitted therefrom in
reliance upon Rule 430A and contained in the Prospectus referred to below, in
the form in which it became effective, and any registration statement filed
pursuant to Rule 462(b) of the Rules and Regulations with respect to the
shares (a "Rule 462(b) registration statement"), and, in the event of any
amendment thereto after the effective date of such registration statement
(the "Effective Date"), shall also mean (from and after the effectiveness of
such amendment) such registration statement as so amended (including any Rule
462(b) registration statement). The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares first filed with
the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is
required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall
also mean (from and after the filing with the Commission of such supplement
or the effectiveness of such amendment) such prospectus as so supplemented or
amended. The term "Preliminary Prospectus" as used in this Agreement shall
mean each preliminary prospectus included in such registration statement
prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, no stop order suspending the effectiveness of the Registration
Statement or preventing the use of the Prospectus is in effect and no
proceedings for that purpose have been instituted or are pending or
contemplated by the Commission. No post-effective amendment to the
Registration Statement has been filed as of the date of this Agreement. The
Company has caused to be delivered to you copies of each Preliminary
Prospectus and has consented to the use of such copies for the purposes
permitted by the Securities Act.
2
<PAGE>
(c) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of Delaware, has, and after
giving effect to the Mergers will have, the full corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as being
conducted, and is, and after giving effect to the Mergers will be, duly
qualified as a foreign corporation and in good standing in all jurisdictions
in which the character of the property owned or leased or the nature of the
business transacted by it makes qualification necessary (except where the
failure to be so qualified would not have a material adverse effect on the
business, business prospects, properties, condition (financial or otherwise)
or results of operations of the Company and its subsidiaries, taken as a
whole (a "Material Adverse Effect")).
(d) The Company does not own or control, directly or indirectly,
any corporation, association or other entity, other than the Merger
Subsidiaries. Each of the Merger Subsidiaries has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation and has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus. None of such Merger Subsidiaries qualifies as a "significant
subsidiary" within the meaning of Rule 1-02 of S-X promulgated by the
Commission; all of the issued shares of capital stock of each Merger
Subsidiary have been duly and validly authorized and issued, are fully paid
and non-assessable and are owned directly by the Company, free and clear of
all liens, encumbrances, equities or claims. Pursuant to the Merger
Agreements, each of the Merger Subsidiaries will merge with and into a
respective Founding Company and, upon consummation of the Mergers, each of
the Merger Subsidiaries will cease to exist as a separate entity and the
Founding Companies will be the only subsidiaries of the Company.
(e) Each of the Founding Companies has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has, and after giving effect to the
Mergers will have, the corporate power and authority to own its property and
to conduct its business as described in the Prospectus and is, and after
giving effect to the Mergers will be, duly qualified to transact business and
in good standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in good standing would
not have a Material Adverse Effect; all of the issued shares of capital stock
of each Founding Company prior to its Merger have been duly and validly
authorized and issued, are fully paid and non-assessable, and upon
consummation of the Mergers, all of the shares of capital stock of each
Founding Company will be duly and validly authorized and issued, fully paid
and nonassessable and owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims.
(f) The shares of capital stock of the Company to be issued
pursuant to the Mergers have been duly authorized and, when issued pursuant
to the terms of the Merger Agreements, will be validly issued, fully paid and
non-assessable and will not be subject to any preemptive or similar rights.
The shares of Common Stock to be issued pursuant to the Merger
3
<PAGE>
Agreements, when so issued, will have been issued in compliance with the
Securities Act, in transactions which will be exempt from the registration
requirements of Section 5 of the Securities Act.
(g) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, the Company, the Merger
Subsidiaries and the Founding Companies have not suffered a Material Adverse
Effect, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of business,
neither the Company, the Merger Subsidiaries nor the Founding Companies has
entered into any material transaction not referred to in the Registration
Statement and the Prospectus.
(h) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Optional Shares are to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the Rules
and Regulations thereunder; on the Effective Date, the Registration Statement
did not contain any untrue statement of a material fact as to the Company or
any of the Founding Companies and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
with regard to each such company therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Optional Shares are to be purchased, will not contain any
untrue statement of a material fact regarding the Company or any Founding
Company or omit to state any material fact necessary in order to make the
statements therein regarding any such company, in the light of the
circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties in this subparagraph (h)
shall apply to statements in, or omissions from, the Registration Statement
or the Prospectus made in reliance upon and in conformity with information
herein or otherwise furnished in writing to the Company by or on behalf of
the Underwriters for use in the Registration Statement or the Prospectus.
(i) The Company has authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus. The issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, and were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities. Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company and of the Founding Companies and the
related notes thereto included in the Prospectus, neither the Company, any
Merger Subsidiary nor any Founding Company has any outstanding options to
purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description of
the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required by the Securities Act and the Rules and Regulations to
be shown with respect to such plans, arrangements, options and rights.
4
<PAGE>
(j) Prior to the Closing Date, the Shares to be issued and sold by
the Company will be authorized for listing on the Nasdaq National Market upon
official notice of issuance without any waivers of listing requirements.
(k) The Shares will be, when issued and sold to the Underwriters as
provided herein, validly issued, fully paid and nonassessable and conform to
the description thereof in the Prospectus. No further approval or authority
of the stockholders or the Board of Directors of the Company will be required
for the issuance and sale of the Shares to be sold by the Company as
contemplated herein. The Shares will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest, and will
conform to the description thereof contained in the Prospectus. No preemptive
right, co-sale right, registration right, right of first refusal or other
similar right to subscribe for or purchase securities of the Company exists
with respect to the issuance and sale of the Shares by the Company pursuant
to the Merger Agreements or this Agreement. No stockholder of the Company or
of any Founding Company has any right which has not been waived to require
the Company to register the sale of any shares owned by such stockholder
under the Securities Act in the public offering contemplated by this
Agreement.
(l) The Company has full corporate power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities arising
under federal and state securities laws. The making and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby (i) will not violate any provisions of the respective
charter, bylaws or other organizational documents of the Company, the Merger
Subsidiaries or the Founding Companies; and (ii) will not conflict with,
result in a material breach or violation of, or constitute, either by itself
or upon notice or the passage of time or both, a material default under (A)
any agreement, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which the Company, the Merger Subsidiaries or
any of the Founding Companies is a party or by which the Company, the Merger
Subsidiaries or any of the Founding Companies or any of their respective
properties may be bound or affected, or (B) any statute or any authorization,
judgment, decree, order, rule or regulation of any court or any regulatory
body, administrative agency or other governmental body applicable to the
Company, any Merger Subsidiary, any Founding Company or any of their
respective properties. No consent, approval, authorization or other order of
any court, regulatory body, administrative agency or other governmental body
that has not already been obtained is required for the execution and delivery
of this Agreement or the consummation of the transactions contemplated by
this Agreement, except for compliance with the Securities Act, the Blue Sky
laws applicable to the public offering of the Common Shares by the several
Underwriters and the clearance of such offering with the National Association
of Securities Dealers, Inc. ("NASD").
5
<PAGE>
(m) The making and performance by the Company, the Merger
Subsidiaries and the Founding Companies of the Merger Agreements and the
consummation of the transactions contemplated thereby (i) will not violate
any provisions of the respective charter, bylaws or other organizational
documents of the Company, the Merger Subsidiaries or the Founding Companies
and (ii) will not conflict with, result in a material breach or violation of,
or constitute, either by itself or upon notice or the passage of time or
both, a material default under (A) any agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which the
Company, the Merger Subsidiaries or the Founding Companies is a party or by
which the Company, the Merger Subsidiaries or the Founding Companies or any
of their respective properties may be bound or affected, or (B) any statute
or any authorization, judgment, decree, order, rule or regulation of any
court or any regulatory body, administrative agency or other governmental
body applicable to the Company, the Merger Subsidiaries or any of their
respective properties. No consent, approval, authorization or other order of
any court, regulatory body, administrative agency or other governmental body
that has not already been obtained is required for the execution and delivery
of the Merger Agreements or the consummation of the transactions contemplated
thereby, other than the filing with applicable state authorities of
certificates of merger or similar documents required under relevant state
laws to effect the consummation of the Mergers.
(n) The pro forma combined financial statements of the Company and
the historical financial statements of each of the Company and of the
Founding Companies and the related notes thereto included in the Registration
Statement and the Prospectus present fairly in all material respects the pro
forma combined or historical financial position of the Company and each of
the Founding Companies, as the case may be, as of the respective dates of
such financial statements and schedules, and the results of their operations
and their cash flows for the respective periods covered thereby. Such
statements, schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods specified, as certified by the respective independent
accountants whose reports are included in the Prospectus. The pro forma
combined financial information , and the related notes thereto included in
the Registration Statement and the Prospectus has been prepared in accordance
with the applicable requirements of the Securities Act and are based upon
good faith estimates and assumptions believed by the Company. No other
financial statements or schedules are required to be included in the
Registration Statement. The selected financial data set forth in the
Prospectus under the captions "Capitalization" and "Selected Consolidated
Financial Information" fairly present the information set forth therein on
the basis stated in the Registration Statement.
(o) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (iii) access to assets
is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. The representations and warranties given by
the Company and its officers to its
6
<PAGE>
independent public accountants for the purpose of supporting the letters
referred to in Section 9(f) hereof are true and correct.
(p) Price Waterhouse LLP which has certified certain financial
statements of the Company and certain Founding Companies, Deloitte & Touche
LLP which has certified the financial statements of Management Support
Technology Corporation and Coopers & Lybrand L.L.P., which has certified the
financial statements of Federal Computer Corporation, are and, during the
periods covered by their reports were, independent public accountants as
required by the Securities Act.
(q) Neither the Company, any Merger Subsidiary nor any Founding
Company is (i) in violation or default of any provision of its respective
charter, bylaws or other organizational documents; or (ii) in a material
breach of or default with respect to any provision of any agreement,
judgment, decree, order, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which it is a party or by which it
or any of its properties are bound; and there does not exist any state of
facts which, with notice or lapse of time or both would constitute such a
breach or default on the part of the Company, the Merger Companies or the
Founding Companies, taken as a whole.
(r) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and Regulations
which have not been described or filed as required. The contracts so
described in the Prospectus are in full force and effect on the date hereof.
(s) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or threatened to which the
Company, the Merger Subsidiaries or any Founding Company is or is threatened
to be made a party or of which property owned or leased by any of such
companies is or is threatened to be made the subject, which actions, suits or
proceedings could, individually or in the aggregate, prevent or adversely
affect the transactions contemplated by this Agreement or result in a
Material Adverse Effect; and no labor disturbance by the employees of the
Company or any of the Founding Companies exists or is imminent which could
result in a Material Adverse Effect. Neither the Company nor any of the
Founding Companies is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body. Except as disclosed in the
Prospectus, there are no material legal or governmental actions, suits or
proceedings pending or, to the Company's knowledge, threatened against any
executive officers or directors of the Company.
(t) The Company or the applicable Founding Company has good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except (i) those, if any, reflected in such financial statements (or
elsewhere in the Prospectus); or (ii) those which are not material in amount
to the Company or the applicable Founding Company, and do not adversely
affect the use made and proposed to be made of such property by the Company
or the Founding Companies. The Company or the applicable
7
<PAGE>
Founding Company holds its leased properties under valid and binding leases.
Except as disclosed in the Prospectus, the Company and the Founding Companies
collectively own or lease all such properties as are necessary to their
operations as now conducted or as proposed to be conducted.
(u) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) neither the Company, the
Merger Subsidiaries nor any Founding Company has (A) incurred any liabilities
or obligations, indirect, direct or contingent, or (B) entered into any oral
or written agreement or other transaction, which in the case of (A) or (B) is
not in the ordinary course of business; (ii) neither the Company, the Merger
Subsidiaries nor any Founding Company has sustained any material loss or
interference with their respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) neither the Company, the Merger Subsidiaries nor any Founding Company
has paid or declared any dividends or other distributions with respect to
their respective capital stock and the Company, the Merger Subsidiaries and
the Founding Companies are not in default in the payment of principal or
interest on any outstanding debt obligations; (iv) there has not been any
change in the capital stock of the Company, any Merge Subsidiary or any
Founding Company (other than upon the sale of the Shares hereunder or upon
the exercise of any options or warrants disclosed in the Prospectus); (v)
there has not been any material increase in the short- or long-term debt of
the Company, the Merger Subsidiaries and the Founding Companies; and (vi)
there has not been any material adverse change or any development involving
or which may reasonably be expected to involve a prospective material adverse
change, in the business, business prospects, condition (financial or
otherwise), properties, or results of operations of the Company or the
Founding Companies.
(v) The Company is and the Founding Companies are conducting
business in compliance with all applicable laws, rules and regulations of the
jurisdictions in which they are conducting business, except where the failure
to be so in compliance would not have a Material Adverse Effect.
(w) The Company, the Merger Subsidiaries and the Founding Companies
have filed all necessary federal, state and foreign income and franchise tax
returns, and all such tax returns are complete and correct in all material
respects, and the Company and the Founding Companies have not failed to pay
any taxes which were payable pursuant to said returns or any assessments with
respect thereto. The Company has no knowledge of any tax deficiency which has
been or is likely to be threatened or asserted against the Company, the
Merger Subsidiaries or any Founding Company.
(x) The Company has not distributed, and will not distribute prior
to the later to occur of (i) completion of the distribution of the Shares, or
(ii) the expiration of any time period within which a dealer is required
under the Securities Act to deliver a prospectus relating to the Shares, any
offering material in connection with the offering and sale of the Shares
other than the Prospectus, the Registration Statement and any other materials
permitted by the Securities Act and consented to by the Underwriters.
8
<PAGE>
(y) Each of the Company and the Founding Companies maintains
insurance of the types and in the amounts generally deemed adequate for their
business, including, but not limited to, directors' and officers' insurance,
insurance covering real and personal property owned or leased by the Company
and the Founding Companies against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect. The Company has not been refused any
insurance coverage sought or applied for, and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not constitute a Material Adverse Effect.
(z) Neither the Company nor any Founding Company nor, to the best
of the Company's knowledge, any of their respective employees or agents has
at any time during the last five years (i) made any unlawful contribution to
any candidate for foreign office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any foreign,
federal or state governmental officer or official or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(aa) The Company has not, and to the Company's knowledge, none of the
Founding Companies have, taken nor will take, directly or indirectly, any
action designed to or that might be reasonably expected to, cause or result
in stabilization or manipulation of the price of the Common Stock in
contravention of the provisions of the Commission's Regulation M.
(bb) The Company has caused (i) each of its executive officers and
directors as set forth in the Prospectus; (ii) each holder of the outstanding
Common Stock (including shares issuable upon the exercise or conversion of
any option, warrant or other security); and (iii) each person expected to
become a director or executive officer of the Company, to furnish to the
Underwriters an agreement in form and substance satisfactory to Volpe Brown
Whelan & Company, LLC ("VBW") pursuant to which each such party has agreed
that during the period of one year after the date the Registration Statement
becomes effective (the "Lock-Up Period"), without the prior written consent
of VBW, such party will not (A) offer, sell, contract to sell, make any short
sale (including, without limitation, short sales against the box), pledge or
otherwise dispose of, directly or indirectly, any shares of Common Stock,
options to acquire Common Stock or securities convertible into or
exchangeable or exercisable for, or any other rights to purchase or acquire,
Common Stock (including, without limitation, Common Stock that may be deemed
to be beneficially owned in accordance with the Rules and Regulations) other
than the exercise or conversion of options, warrants or convertible
securities outstanding and held by such person prior to the date hereof; or
(B) enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in (A) or (B) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise
provided, however, that bona fide gift transactions and transfers which will
not result in any change in beneficial ownership may be permitted if the
transferee enters into a lock-up agreement in substantially the same form
covering the remainder of the Lock-Up Period.
9
<PAGE>
(cc) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba.
(dd) Except as specifically disclosed in the Prospectus, the Company and
the Founding Companies have sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct their respective businesses as now conducted; the expiration of any
trademarks, trade names, patent rights, copyrights, licenses, approvals or
governmental authorizations would not have a Material Adverse Effect; the
Company has no knowledge of any infringement by the Company or any Founding
Company of trademarks, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and no claims have
been made or are threatened against the Company or any Founding Company
regarding trademark, trade name, patent, copyright, license, trade secret or
other infringement which could have a Material Adverse Effect.
(ee) The Company is not, and after giving effect to the Mergers and the
offering and sale of the Shares and the application of the proceeds thereof
as described in the Prospectus, will not be, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
Section 2. Purchase of the Shares by the Underwriters.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and
sell 5,900,000 of the Firm Shares to the several Underwriters and each of the
Underwriters agrees to purchase from the Company the respective aggregate
number of Firm Shares set forth opposite its name in Schedule I. The price at
which such Firm Shares shall be sold by the Company and purchased by the
several Underwriters shall be $___ per share. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 2, the agreement of each Underwriter
is to purchase only the respective number of shares of the Firm Shares
specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 9 or 10 hereof) to purchase
and pay for the number of Shares agreed to be purchased by such Underwriter
or Underwriters, the Company shall immediately give notice thereof to you,
and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, all or any part of Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such
shares and portion, the number of Shares which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares
and portion which the defaulting Underwriter or Underwriters agreed to
purchase; provided, however, that the non-defaulting Underwriters shall not
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be obligated to purchase the portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such Shares
exceeds 10% of the total number of Shares which all Underwriters agreed to
purchase hereunder. If the total number of Shares which the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall
have the right, within 24 hours next succeeding the 24-hour period above
referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such Shares and portion on the terms
herein set forth. In any such case, either you or the Company shall have the
right to postpone the Closing Date determined as provided in Section 4 hereof
for not more than seven business days after the date originally fixed as the
Closing Date pursuant to Section 4 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company
shall make arrangements within the 24-hour periods stated above for the
purchase of all of the Shares which the defaulting Underwriter or
Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the
Company to any non-defaulting Underwriter and without any liability on the
part of any non-defaulting Underwriter to the Company. Nothing in this
paragraph (b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter
under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to 885,000 Optional Shares from the Company at
the same price per share as the Underwriters shall pay for the Firm Shares.
Said option may be exercised only to cover over-allotments in the sale of the
Firm Shares by the Underwriters and may be exercised in whole or in part at
any time or before the 30th day after the date of this Agreement upon written
or telegraphic notice by you to the Company setting forth the aggregate
number of Optional Shares as to which the several Underwriters are exercising
the option. Delivery of certificates for the Optional Shares, and payment
therefor, shall be made as provided in Section 4 hereof. The number of
Optional Shares to be purchased by each Underwriter shall be the same
percentage of the total number of Optional Shares to be purchased by the
several Underwriters as such Underwriter is purchasing of the Firm Shares, as
adjusted by you in such manner as you deem advisable to avoid fractional
shares.
Section 3. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of the
Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information (insofar as such information relates to the
Underwriters) set forth in the last paragraph on the front cover page and
under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Shares constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration
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Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf
of the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
Section 4. Delivery of and Payment for the Shares.
(a) Delivery of certificates for the Firm Shares and the Optional Shares
(if the option granted by Section 2(c) hereof shall have been exercised not
later than 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date), and payment therefor, shall be made at the
office of Morgan, Lewis & Bockius LLP at 7:00 a.m., San Francisco time, on
the fourth business day after the date of this Agreement, or at such time on
such other day not later than seven full business days after such fourth
business day, as shall be agreed upon in writing by the Company and you. The
date and hour of such delivery and payment (which may be postponed as
provided in Section 2(b) hereof) is herein called the "Closing Date."
(b) If the option granted by Section 2(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding
the Closing Date, delivery of certificates for the shares of Optional Shares,
and payment therefor, shall be made at the office of Morgan, Lewis & Bockius
at 7:00 a.m., San Francisco time, on the third business day after the
exercise of such option.
(c) Payment for the Shares shall be made to the Company or its order by
(i) one or more certified or official bank check or checks in next-day funds
(and the Company agrees not to deposit any such check in the bank on which
drawn until the day following the date of its delivery to the Company or the
Custodian, as the case may be) or (ii) federal funds wire transfer. Such
payment shall be made upon delivery of certificates for the shares to you for
the respective accounts of the several Underwriters (including without
limitation by "full-fast" electronic transfer by Depository Trust Company)
against receipt therefor signed by you. Certificates for the Shares to be
delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Firm Shares, and at least one business day prior
to the purchase thereof, in the case of the Optional Shares. Such
certificates will be made available to the Underwriters for inspection,
checking and packaging at the offices of agent of VBW's clearing agent, Bear
Stearns Securities Corp., on the business day prior to the Closing Date or, in
the case of the Optional Shares, by 3:00 p.m., New York time, on the business
day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Optional
Shares are purchased for the account of such Underwriter. Any such payment by
you shall not relieve such Underwriter from any of its obligations hereunder.
Section 5. Covenants of the Company. The Company covenants and agrees
as follows:
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(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at
the time of effectiveness of the Registration Statement in reliance on Rule
430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act or
the Rules and Regulations.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, (ii)
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement, (iii) the institution or notice of intended
institution of any action or proceeding for that purpose, (iv) the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction, or (v) the receipt
by it of notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be
issued, to obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together
with, in each case, all exhibits thereto unless previously furnished to you)
and will also deliver to you, for distribution to the Underwriters, a
sufficient number of additional conformed copies of each of the foregoing
(but without exhibits) so that one copy of each may be distributed to each
Underwriter; (ii) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as many
copies of the Prospectus as you may reasonably request; and (iii) thereafter
from time to time during the period in which a prospectus is required by law
to be delivered by an Underwriter or dealer, likewise send to the
Underwriters as many additional copies of the Prospectus and as many copies
of any supplement to the Prospectus and of any amended prospectus, filed by
the Company with the Commission, as you may reasonably request for the
purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser of the Shares, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus so that
the Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
existing at the time such Prospectus is delivered to such purchaser, not
misleading. If, after the initial public offering of the Shares by the
Underwriters and during such
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<PAGE>
period, the Underwriters shall propose to vary the terms of offering thereof
by reason of changes in general market conditions or otherwise, you will
advise the Company in writing of the proposed variation, and, if in the
opinion either of counsel for the Company or of counsel for the Underwriters
such proposed variation requires that the Prospectus be supplemented or
amended, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus setting forth such
variation. The Company authorizes the Underwriters and all dealers to whom
any of the Shares may be sold by the several Underwriters to use the
Prospectus, as from time to time amended or supplemented, in connection with
the sale of the Shares in accordance with the applicable provisions of the
Securities Act and the applicable Rules and Regulations thereunder for such
period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Shares for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, in keeping such qualifications in good standing under said securities
or blue sky laws; provided, however, that the Company shall not be obligated
to file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Shares.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders
of the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) For a period of one year commencing with the date hereof, the
Company agrees, at the Company's expense, to cause the Company's regularly
engaged independent certified public accountants to review (but not audit)
the Company's financial statements in accordance with the procedures
specified by the American Institute of Certified Public Accountants for a
review of interim financial information as described in Statement on Auditing
Standards No. 71 "Interim Financial Information" for each of the three fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's Quarterly Report on Form 10-Q with the Commission and
the mailing of quarterly financial information to stockholders of the Company.
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(j) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the NASD of the Registration Statement, any Preliminary
Prospectus and the Prospectus; (ii) the furnishing to the Underwriters and
the persons designated by them of copies of any Preliminary Prospectus and of
the several documents required by paragraph (c) of this Section 5 to be so
furnished; (iii) the printing of this Agreement and related documents
delivered to the Underwriters; (iv) the preparation, printing and filing of
all supplements and amendments to the Prospectus referred to in paragraph (d)
of this Section 5, (v) the furnishing to you and the Underwriters of the
reports and information referred to in paragraph (g) of this Section 5; and
(vi) the printing and issuance of stock certificates, including the transfer
agent's fees.
(k) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters)
paid by or for the account of the Underwriters or their counsel in qualifying
the Shares under state securities or blue sky laws and in the review of the
offering by the NASD.
(l) The provisions of paragraphs (j) and (k) of this Section are
intended to relieve the Underwriters from the payment of the expenses and
costs which the Company hereby agrees to pay and shall not affect any
agreement which the Company may make, or may have made, with any other party
for the sharing of any such expenses and costs.
(m) The Company hereby agrees that, without the prior written consent of
VBW, the Company will not, for a period of one year following the date the
Registration Statement becomes effective, (i) offer, sell, contract to sell,
make any short sale (including, without limitation, short sales against the
box), pledge or otherwise dispose of, directly or indirectly, any shares of
Common Stock or any options to acquire shares of Common Stock, options to
acquire Common Stock or securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire Common Stock
(including, without limitation, Common Stock that may be deemed to be
beneficially owned in accordance with the Rules and Regulations) other than
the exercise or conversion of options, warrants or convertible securities
outstanding and held by such person prior to the date hereof; or (ii) enter
into any swap or other agreement that transfers, in whole or in part, any of
the economic consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise;
provided, however, that bona fide gift transactions and transfers which will
not result in any change in beneficial ownership may be permitted if the
transferee enters into a lock-up agreement in substantially the same form
covering the remainder of the Lock-Up Period. The foregoing sentence shall
not apply to (A) the Shares to be sold to the Underwriters pursuant to this
Agreement; (B) shares of Common Stock issued by the Company upon the exercise
of options granted prior to the date hereof under the option plans of the
Company (the "Option Plans", all as described in footnote (__) to the table
under the caption "Capitalization" in the Preliminary Prospectus; and (C)
options to purchase Common Stock granted after the date
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<PAGE>
hereof under the Option Plans, provided that such options by their terms are
not exercisable until after the Lock-Up Period.
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after
written notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
Section 6. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several,
to which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or the common law or otherwise, and the agrees to reimburse
each such Underwriter and controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties,
in each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus
or the Prospectus (as amended or as supplemented if the Company shall have
filed with the Commission any amendment thereof or supplement thereto) or the
omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that (1) the
indemnity agreements of the Company contained in this paragraph (a) shall not
apply to any such losses, claims, damages, liabilities or expenses if such
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to
the Company by or on behalf of any Underwriter for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto, and (2) the indemnity agreement
contained in this paragraph (a) with respect to any Preliminary Prospectus
shall not inure to the benefit of any Underwriter from whom the person
asserting any such losses, claims, damages, liabilities or expenses purchased
the Shares which are the subject thereof (or to the benefit of any person
controlling such Underwriter) if at or prior to the written confirmation of
the sale of such Shares a
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copy of the Prospectus (or the Prospectus as amended or supplemented) was not
sent or delivered to such person and the untrue statement or omission of a
material fact contained in such Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented) unless the failure
is the result of noncompliance by the Company with paragraph (c) of Section 5
hereof. The indemnity agreements of the Company contained in this paragraph
(a) and the representations and warranties of the Company contained in
Section 2 hereof shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified party
and shall survive the delivery of and payment for the shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act, from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Securities Act, the
Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as
part thereof and any Rule 462(b) registration statement) or any
post-effective amendment thereto (including any Rule 462(b) registration
statement) or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading; or (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, if such statement or omission was made in reliance upon and in
conformity with information furnished as herein stated or otherwise furnished
in writing to the Company by or on behalf of such indemnifying Underwriter
for use in the Registration Statement or the Prospectus or any such amendment
thereof or supplement thereto. The indemnity agreement of each Underwriter
contained in this paragraph (b) shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the
shares.
(c) Each party indemnified under the provision of paragraphs (a) and (b)
of this Section 6 agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such paragraphs, it
will promptly give written notice (the "Notice") of such service or
notification to the party or parties from whom
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indemnification may be sought hereunder. No indemnification provided for in
such paragraphs shall be available to any party who shall fail so to give the
Notice if the party to whom such Notice was not given was unaware of the
action, suit, investigation, inquiry or proceeding to which the Notice would
have related and was prejudiced by the failure to give the Notice, but the
omission so to notify such indemnifying party or parties of any such service
or notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution
or otherwise than on account of such indemnity agreement. Any indemnifying
party shall be entitled at its own expense to participate in the defense of
any action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(the "Notice of Defense") to the indemnified party, to assume (alone or in
conjunction with any other indemnifying party or parties) the entire defense
of such action, suit, investigation, inquiry or proceeding, in which event
such defense shall be conducted, at the expense of the indemnifying party or
parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided,
however, that (i) if the indemnified party or parties reasonably determine
that there may be a conflict between the positions of the indemnifying party
or parties and of the indemnified party or parties in conducting the defense
of such action, suit, investigation, inquiry or proceeding or that there may
be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties shall be entitled to
conduct the defense to the extent reasonably determined by such counsel to be
necessary to protect the interests of the indemnified party or parties and
(ii) in any event, the indemnified party or parties shall be entitled to have
counsel chosen by such indemnified party or parties participate in, but not
conduct, the defense. If, within a reasonable time after receipt of the
Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 6 for any legal or
other expenses subsequently incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear the
legal and other expenses incurred in connection with the conduct of the
defense as referred to in clause (i) of the proviso to the preceding sentence
and (B) the indemnifying party or parties shall bear such other expenses as
it or they have authorized to be incurred by the indemnified party or
parties. If, within a reasonable time after receipt of the Notice, no Notice
of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party
or parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section 6 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a) or
(b) of this Section 6, then each indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by
such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 6 (i) in such
proportion as is appropriate to reflect the relative benefits received by
each indemnifying party from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law,
in such
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proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each
indemnifying party in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares
received by the Company and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Shares. Relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to in the first sentence of
this paragraph (d). The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities, or actions in respect thereof,
referred to in the first sentence of this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation, preparing to defend or defending
against any action or claim which is the subject of this paragraph (d).
Notwithstanding the provisions of this paragraph (d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this paragraph (d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly
give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in paragraph (c) of this Section
6).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act is a party
to such claim, action, suit or proceeding) unless such settlement, compromise
or consent includes an unconditional release of such Underwriter and each
such controlling person from all liability arising out of such claim, action,
suit or proceeding.
19
<PAGE>
Section 7. Reimbursement of Certain Expenses. In addition to their
other obligations under Section 6 of this Agreement, the Company hereby
agrees to reimburse on a monthly basis the Underwriters for all reasonable
legal and other expenses incurred in connection with investigating or
defending any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged
statement or omission, described in paragraph (a) of Section 6 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 7 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them; and
(ii) such persons shall provide to the Company, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
Section 8. Termination. This Agreement may be terminated by you at
any time prior to the Closing Date by giving written notice to the Company in
accordance with Section 9, or if after the date of this Agreement trading in
the Common Stock shall have been suspended, or if there shall have occurred
(i) the engagement in hostilities or an escalation of major hostilities by
the United States or the declaration of war or a national emergency by the
United States on or after the date hereof; (ii) any outbreak of hostilities
or other national or international calamity or crisis or change in economic
or political conditions if the effect of such outbreak, calamity, crisis or
change in economic or political conditions in the financial markets of the
United States or the Company's industry sector would, in the Underwriters'
reasonable judgment, make the offering or delivery of the Shares
impracticable; (iii) suspension of trading in securities generally or a
material adverse decline in value of securities generally on the New York
Stock Exchange, the American Stock Exchange, or The Nasdaq Stock Market, or
limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system; (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of, or commencement of any proceeding or
investigation by, any court, legislative body, agency or other governmental
authority which in the Underwriters' reasonable opinion materially and
adversely affects or will materially or adversely affect the business or
operations of the Company; (v) declaration of a banking moratorium by either
federal or New York State authorities; or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary
or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If
this Agreement shall be terminated pursuant to this Section 9, there shall be
no liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (j) and (k) of Section 5 hereof.
Section 9. Conditions of Underwriters' Obligations. The obligations
of the several Underwriters to purchase and pay for the Shares shall be
subject to the performance by the Company of all of its obligations to be
performed hereunder at or prior to the Closing Date or any later date on
which Optional Shares are to be purchased, as the case may be, and to the
following further conditions:
20
<PAGE>
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Shares hereunder and
the validity and form of the certificates representing the Shares, all
corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to
the financial statements contained therein), shall have been approved at or
prior to the Closing Date by Sachnoff & Weaver, Ltd., counsel for the
Underwriters.
(c) You shall have received from Morgan, Lewis & Bockius LLP, counsel
for the Company, an opinion, addressed to the Underwriters and dated the
Closing Date, covering the matters set forth in Annex A, and if Optional
Shares are purchased at any date after the Closing Date, additional opinions
from each such counsel, addressed to the Underwriters and dated such later
date, confirming that the statements expressed as of the Closing Date in such
opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct, and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, respectively, not misleading; (ii)
since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment; (iii) since the respective dates as
of which information is given in the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein,
there has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, and, since such dates, except in the
ordinary course of business, neither the Company nor any of the Founding
Companies has entered into any material transaction not referred to in the
Registration Statement in the form in which it originally became effective
and the Prospectus contained therein; (iv) the Commission has not issued any
order preventing or suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness of the Registration
Statement has been issued; and to the best knowledge of the respective
signers, no proceedings for that purpose have been instituted or are pending
or contemplated under the Securities Act; (v) neither the Company nor any of
the Merger Subsidiaries or the Founding Companies has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus; (vi) there are not any pending or known threatened legal
proceedings to which the Company, any Merger Subsidiary or any Founding
Company is a party or of which property of the Company or any Founding
Company is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus; (vii) there are not any
franchises, contracts, leases or other documents which are required to be
filed as exhibits to the
21
<PAGE>
Registration Statement which have not been filed as required; and (vii) the
representations and warranties of the Company herein are true and correct in
all material respects as of the Closing Date or any later date on which
Optional Shares are to be purchased, as the case may be.
(e) You shall have received on the Closing Date and on any later date on
which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in the
form in which it originally became effective and the Prospectus contained
therein and any supplements or amendments thereto, and that the statements
included in clauses (i) through (viii) of paragraph (d) of this Section 9 are
true and correct.
(f) You shall have received from Price Waterhouse LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any
later date on which Optional Shares are purchased, confirming that they are
independent public accountants with respect to the Company within the meaning
of the Securities Act and the applicable published rules and regulations
thereunder and based upon the procedures described in their letter delivered
to you concurrently with the execution of this Agreement (the "Original
Letter"), but carried out to a date not more than three business days prior
to the Closing Date or such later date on which Optional Shares are purchased
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such
later date, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of the Original Letter or to reflect the
availability of more recent financial statements, data or information. The
letters shall not disclose any change, or any development involving a
prospective change, in or affecting the business or properties of the
Company, the Merger Subsidiaries or any of the Founding Companies which, in
your sole judgment, makes it impractical or inadvisable to proceed with the
public offering of the shares or the purchase of the Optional Shares as
contemplated by the Prospectus.
(g) You shall have received from Price Waterhouse LLP a letter stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their
examination of the Company's financial statements as at September 30, 1997,
did not disclose any weakness in internal controls that they considered to be
material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 5 hereof.
(i) Prior to the Closing Date, the Shares shall have been duly
authorized for listing by the Nasdaq National Market upon official notice of
issuance.
22
<PAGE>
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of outstanding Common Stock,
other than holders holding less than 1% of the Company's Common Stock as of
immediately prior to the closing hereunder who became such only by virtue of
the Merger Agreements, in form reasonably satisfactory to VBW, stating that
without the prior written consent of VBW, such person or entity will not,
during the Lock-Up Period (i) offer, sell, contract to sell, make any short
sale (including, without limitation, short sales against the box), pledge, or
otherwise dispose of, directly or indirectly, any shares of Common Stock,
options to acquire Common Stock or securities convertible into or
exchangeable or exercisable for, or any other rights to purchase or acquire,
Common Stock (including, without limitation, Common Stock that may be deemed
to be beneficially owned in accordance with the Rules and Regulations) other
than the exercise or conversion of options, warrants or convertible
securities outstanding and held by such person prior to the date hereof or
(ii) enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise;
provided, however, that bona fide gift transactions and transfers which will
not result in any change in beneficial ownership may be permitted if the
transferee enters into a lock-up agreement in substantially the same form
covering the remainder of the Lock-Up Period.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Sachnoff & Weaver, Ltd., counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to
the Underwriters and without liability of the Underwriters to the Company;
provided, however, that (i) in the event of such termination, the Company
agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 5 hereof; and (ii) if this Agreement is terminated by
you because of any refusal, inability or failure on the part of the Company
to perform any agreement herein, to fulfill any of the conditions herein, or
to comply with any provision hereof other than by reason of a default by any
of the Underwriters, the Company will reimburse the Underwriters severally
upon demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the transactions contemplated hereby.
Section 10. Conditions of the Obligation of the Company . The
obligation of the Company to deliver the Shares shall be subject to the
conditions that (a) the Registration Statement shall have become effective
and (b) no stop order suspending the effectiveness thereof shall be in effect
and no proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company by giving
notice to you. Any such termination shall
23
<PAGE>
be without liability of the Company to the Underwriters and without liability
of the Underwriters to the Company; provided, however, that in the event of
any such termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 5 hereof.
Section 11. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of the Company and the several Underwriters and,
with respect to the provisions of Section 6 hereof, the several parties (in
addition to the Company and the several Underwriters) indemnified under the
provisions of said Section 6, and their respective personal representatives,
successors and assigns. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any
provision herein contained. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the Shares from
any of the several Underwriters.
Section 13. Notices. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Volpe Brown Whelan
& Company, LLC, One Maritime Plaza, 11th Floor, San Francisco, California
94111, Attention: Steven D. Piper; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 1650 Tysons Boulevard, Suite
600, McLean, Virginia 22102, Attention: Kennard F. Hill. All notices given
by telegraph shall be promptly confirmed by letter.
Section 14. Miscellaneous. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and
effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or their respective directors or
officers, and (c) delivery and payment for the Shares under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (m) and (n) of Section 5 hereof shall be
of no further force or effect.
Section 15. Partial Unenforceability. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision
hereof. If any Section, paragraph or provision of this Agreement is for any
reason determined to be invalid or unenforceable, there shall be deemed to be
made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 16. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining
to conflicts of laws) of the State of California.
24
<PAGE>
Section 17. General. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in
several counterparts, each one of which shall be an original, and all of
which shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This
25
<PAGE>
Agreement may be amended or modified, and the observance of any term of this
Agreement may be waived, only by a writing signed by the Company and you.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof,
whereupon, when confirmed and accepted by the Underwriters as evidenced by
the signature of Volpe Brown Whelan & Company, LLC below, it will become a
binding agreement between the Company and the several Underwriters, including
you, all in accordance with its terms.
Very truly yours,
Condor Technology Solutions, Inc.
By:
----------------------------
Title:
-------------------------
The foregoing Underwriting Agreement
is hereby confirmed and accepted by us
in San Francisco, California as of the
date first above written.
Volpe Brown Whelan & Company, LLC
Furman Selz LLC
Acting for ourselves and as Representatives
of the several Underwriters named in the
attached Schedule I
By:
----------------------------
Principal
26
<PAGE>
Schedule I
UNDERWRITERS
Number of
Shares
to be
Underwriters Purchased
- ------------ ---------
Volpe Brown Whelan & Company, LLC .............
Furman Selz LLC................................
Total ..................................... 5,900,000
-----------
-----------
27
<PAGE>
Exhibit 4
Condor
Number Technology Shares
Solutions, Inc.
CONDOR TECHNOLOGY SOLUTIONS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 206772 10 5
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK
OF THE PAR VALUE OF $0.01 PER SHARE OF
CONDOR TECHNOLOGY SOLUTIONS, INC. transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney
upon surrender of this certificate properly endorsed. This certificate and the
shares represented hereby are issued and shall be held subject to all of the
provisions of the Certificate of Incorporation of the Corporation and any
amendments thereto, to all of which the holder, by acceptance hereof, assents.
This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
SEAL /s/ J. Marshall Coleman /s/ Kennard F. Hill
------------------------ --------------------------
Secretary Chief Executive Officer
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, NY) Transfer Agent
and Registrar
<PAGE>
The following abbreviations, when used in the Inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common UNIF GIFT MIN ACT-_______ Custodian _______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as tenants Act _________________________
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPESET NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within Certificate and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________________________
____________________________________________
NOTICE: THE SIGNATURE TO THE ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATIONS OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed:
___________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: LISA MARTIN
680 BLAIR MILL ROAD 210-830-2185
HORSHAM, PA 19044 PROOF OF NOVEMBER 8, 1997
(215) 657-3480 CONDOR TECHNOLOGY
H 53633bk
- ---------------------------------- --------------------------------------
SALES: J. NAPOLITANO: 212-557-9100 OPERTOR ag
- ---------------------------------- --------------------------------------
/NET/BANKNOTE/ZIP/Condor 53833 NEW
<PAGE>
Exhibit 5
[Morgan, Lewis & Bockius LLP Letterhead]
December 12, 1997
Condor Technology Solutions, Inc.
1650 Tysons Boulevard
Suite 600
McLean, Virginia 22102
Re: Issuance of 6,785,000 Shares of Common Stock
pursuant to Registration Statement on Form S-1
----------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Condor Technology Solutions, Inc., a
Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act"), of a Registration Statement on Form S-1 (the
"Registration Statement") relating to the public offering by the Company of
an aggregate of 6,785,000 shares (including 885,000 shares subject to an
over-allotment option)(the "Shares") of the Company's Common Stock, $.01 par
value per share.
In so acting, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of (a) the Amended and Restated
Certificate of Incorporation of the Company, (b) the By-laws of the Company
as amended, and (c) such other documents, records, certificates and other
instruments of the Company as in our judgment are necessary or appropriate
for purposes of this opinion.
Based on the foregoing, we are of the following opinion:
1. The Company is a corporation duly incorporated and validly
existing in good standing under the laws of Delaware.
2. The Shares have been duly authorized by the Company and, when
issued and paid for as contemplated by the Registration
Statement, will be duly and validly issued and fully paid
and non-assessable.
<PAGE>
Condor Technology Solutions, Inc.
December 12, 1997
Page 2
We render the foregoing opinion as members of the Bar of the State of
New York and express no opinion as to any law other than the General
Corporation Law of the State of Delaware.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement. In giving this consent, we do not admit that we are
acting within the category of persons whose consent is required under Section
7 of the Act.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
----------------------------------
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
1997 LONG-TERM INCENTIVE PLAN
1. Purpose. The purpose of this 1997 Long-Term Incentive Plan (the "Plan")
of Condor Technology Solutions, Inc., a Delaware corporation (the "Company"), is
to advance the interests of the Company and its stockholders by providing a
means to attract, retain, motivate and reward executive officers, key employees,
directors and consultants of and service providers to the Company and its
subsidiaries (including consultants and others providing services of substantial
value) and to enable such persons to acquire or increase their proprietary
interest in the Company, thereby promoting a closer identity of interests
between such persons and the Company's stockholders.
2. Definitions. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, Dividend Equivalents and Other
Stock-Based Awards are set forth in Section 6 of the Plan. Such awards, together
with any other right or interest granted to a Participant under the Plan, are
termed "Awards." For purposes of the Plan, the following additional terms shall
be defined as set forth below:
(a) "Award Agreement" means any written agreement, contract, notice or
other instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or, if there is no
designated Beneficiary or surviving designated Beneficiary, then the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(c) "Beneficial Owner" and related terms shall have the meaning ascribed
under Section 13(d) of the Exchange Act, including Rule 13d-3, and any successor
thereto.
(d) "Board" means the Board of Directors of the Company.
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit plan
of the Company, acquires a voting security of the Company and thereafter
is, directly or indirectly, the Beneficial Owner of voting securities
representing 50 percent or more of the total voting power of all of the
then-outstanding voting securities of the Company;
<PAGE>
(ii) the following individuals no longer constitute a majority of
the members of the Board: (A) the individuals who, as of the closing date
of the Initial Public Offering, constitute the Board (the "Original
Directors"); (B) the individuals who thereafter are elected to the Board
and whose election, or nomination for election, to the Board was approved
by a vote of at least two-thirds (2/3) of the Original Directors then
still in office (such directors becoming "Additional Original Directors"
immediately following their election); and (C) the individuals who are
elected to the Board and whose election, or nomination for election, to
the Board was approved by a vote of at least two-thirds (2/3) of the
Original Directors and Additional Original Directors then still in office
(such directors also becoming "Additional Original Directors" immediately
following their election);
(iii) the stockholders of the Company approve a merger,
consolidation, recapitalization or reorganization of the Company, or a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least 75 percent of the
total voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being Beneficially
Owned by at least 75 percent of the holders of outstanding voting
securities of the Company immediately prior to the transaction, with the
voting power of each such continuing holder relative to other such
continuing holders not substantially altered in the transaction; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.
(f) "Code" means the Internal Revenue Code of 1986, as amended from time
to time. References to any provision of the Code shall be deemed to include
regulations thereunder and successor provisions and regulations thereto.
(g) "Committee" means the Compensation Committee of the Board, or such
other Board committee as may be designated by the Board to administer the Plan;
provided, however, that the Committee shall consist solely of two or more
directors. In appointing members of the Committee, the Board will consider
whether each member will qualify as a "Non-Employee Director" within the meaning
of Rule 16b-3(b)(3) and as an "outside director" within the meaning of Treasury
Regulation 1.162-27(e)(3) under Code Section 162(m), but such members are not
required to so qualify at the time of appointment or during their term of
service on the Committee.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time. References to any provision of the Exchange Act shall be
deemed to include rules thereunder and successor provisions and rules thereto.
-2-
<PAGE>
(i) "Fair Market Value" means, with respect to Stock, Awards or other
property, the fair market value of such Stock, Awards or other property
determined by such methods or procedures as shall be established from time to
time by the Committee; provided, however, that (i) if the Stock is listed on a
national securities exchange or quoted in an interdealer quotation system, the
Fair Market Value of such Stock on a given date shall be based upon the last
sales price or, if unavailable, the average of the closing bid and asked prices
per share of the Stock on such date (or, if there was no trading or quotation in
the Stock on such date, on the next preceding date on which there was trading or
quotation) as reported in the Wall Street Journal (or other reporting service
approved by the Committee), (ii) the "Fair Market Value" of Stock subject to
Options granted effective upon commencement of the Initial Public Offering shall
be the Initial Public Offering price of the shares so issued and sold in the
Initial Public Offering, as set forth in the first final prospectus used in such
offering (the provisions of clause (i) notwithstanding) and (iii) the "Fair
Market Value" of Stock prior to the date of the Initial Public Offering shall be
as determined by the Board of Directors.
(j) "Initial Public Offering" shall mean the Company's first public
offering of shares of Stock in a firm commitment underwriting registered with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
(k) "ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
(l) "Non-Employee Director" means a director of the Company who is not, at
the time an Option is to be granted under Section 8(a) or (b) (or, in the case
of an Option granted under Section 8(a)(i) in connection with the Initial Public
Offering, who is not at the date the Initial Public Offering is closed), an
employee of the Company or any subsidiary of the Company.
(m) "Non-Employee Director Initial Option" or "Annual Option" means an
Option to purchase the number of shares specified in or under Section 8(a) or
(b), subject to adjustment as provided in Section 4(c), granted to a
Non-Employee Director.
(n) "Participant" means a person who, at a time when eligible under
Section 5 hereof, has been granted an Award under the Plan.
(o) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(p) "Stock" means the Common Stock, $.01 par value, of the Company and
such other securities as may be substituted or resubstituted for Stock pursuant
to Section 4.
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3. Administration.
(a) Authority of the Committee. Except as otherwise provided below, the
Plan shall be administered by the Committee. The Committee shall have full and
final authority to take the following actions, in each case subject to and
consistent with the provisions of the Plan:
(i) to select persons to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to each
such person;
(iii) to determine the number of Awards to be granted, the number of
shares of Stock to which an Award will relate, the terms and conditions of
any Award granted under the Plan (including, but not limited to, any
exercise price, grant price or purchase price, any restriction or
condition, any schedule for lapse of restrictions or conditions relating
to transferability or forfeiture, exercisability or settlement of an
Award, and waivers or accelerations thereof, performance conditions
relating to an Award (including waivers and modifications thereof), based
in each case on such considerations as the Committee shall determine), and
all other matters to be determined in connection with an Award;
(iv) to determine whether, to what extent and under what
circumstances an Award may be settled, or the exercise price of an Award
may be paid, in cash, Stock, other Awards or other property, or an Award
may be cancelled, forfeited or surrendered;
(v) to determine whether, to what extent and under what
circumstances cash, Stock, other Awards or other property payable with
respect to an Award will be deferred either automatically, at the election
of the Committee or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need not
be identical for each Participant;
(vii) to adopt, amend, suspend, waive and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
(viii)to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Award, rules and regulations, Award Agreement or other instrument
hereunder; and
(ix) to make all other decisions and determinations as may be
required under the terms of the Plan or as the Committee may deem
necessary or advisable for the administration of the Plan.
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Other provisions of the Plan notwithstanding, the Board shall perform the
functions of the Committee for purposes of granting Awards (subject to the
Section 8, which provides for certain automatic grants) to Non-Employee
Directors, and the Board may perform any function of the Committee under the
Plan for any other purpose, including without limitation for the purpose of
ensuring that transactions under the Plan by Participants who are then subject
to Section 16 of the Exchange Act in respect of the Company are exempt under
Rule 16b-3. In any case in which the Board is performing a function of the
Committee under the Plan, each reference to the Committee herein shall be deemed
to refer to the Board, except where the context otherwise requires.
(b) Manner of Exercise of Committee Authority. Any action of the Committee
with respect to the Plan shall be final, conclusive and binding on all persons,
including the Company, subsidiaries of the Company, Participants, any person
claiming any rights under the Plan from or through any Participant and
stockholders, except to the extent the Committee may subsequently modify, or
take further action not consistent with, its prior action. If not specified in
the Plan, the time at which the Committee must or may make any determination
shall be determined by the Committee, and any such determination may thereafter
by modified by the Committee (subject to Section 9(e)). The express grant of any
specific power to the Committee, and the taking of any action by the Committee,
shall not be construed as limiting any power or authority of the Committee. The
Committee may delegate to officers or managers of the Company or any subsidiary
of the Company the authority, subject to such terms as the Committee shall
determine, to perform such functions as the Committee may determine, to the
extent permitted under applicable law.
(c) Limitation of Liability. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other information
furnished to him by any officer or other employee of the Company or any
subsidiary, the Company's independent certified public accountants or any
executive compensation consultant, legal counsel or other professional retained
by the Company to assist in the administration of the Plan. No member of the
Committee, or any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
its behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action, determination or
interpretation.
4. Stock Subject to Plan.
(a) Amount of Stock Reserved. The total amount of Stock that may be
subject to outstanding Awards, determined as of the time immediately after
the grant of any Award, shall not exceed 12% of the total number of shares of
Stock then outstanding, minus the number of shares previously issued pursuant
to awards granted under the Plan. The foregoing notwithstanding, the number
of shares that may be delivered upon the exercise of ISOs shall not exceed
1,000,000 (subject to adjustment as provided in Section 4(c)), provided,
however, that
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shares subject to ISOs, Restricted Stock or Deferred Stock Awards shall not be
deemed delivered if such Awards are forfeited, expire or otherwise terminate
without delivery of shares to the Participant. If an Award valued by reference
to Stock may only be settled in cash, the number of shares to which such Award
relates shall be deemed to be Stock subject to such Award for purposes of this
Section 4(a). Any shares of Stock delivered pursuant to an Award may consist, in
whole or in part, of authorized and unissued shares, treasury shares or shares
acquired in the market for a Participant's Account.
(b) Annual Per-Participant Limitations. During any calendar year, no
Participant may be granted Options and SARs exercisable for more than 400,000
shares of Stock and Awards other than Options and SARs that may be settled by
delivery of more than 200,000 shares of Stock, subject to adjustment as provided
in Section 4(c). In addition, with respect to Awards that may be settled in cash
(in whole or in part), no Participant may be paid during any calendar year cash
amounts relating to such Awards that exceed the greater of the Fair Market Value
of the 200,000 shares of Stock at the date of grant or the date of settlement of
Award. This provision sets forth separate limitations, so that Awards that may
be settled solely by delivery of Stock will not operate to reduce the amount of
cash-only Awards, and vice versa; nevertheless, Awards that may be settled in
Stock or cash must not exceed any applicable limitation.
(c) Adjustments. In the event that the Committee shall determine that any
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase or exchange of Stock or other
securities, Stock dividend or other special, large and non-recurring dividend or
distribution (whether in the form of cash, securities or other property),
liquidation, dissolution or other similar corporate transaction or event,
affects the Stock such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Participants under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Stock reserved and available for Awards
under Section 4(a), including shares reserved for ISOs and Restricted and
Deferred Stock, (ii) the number and kind of shares of Stock specified in the
Annual Per-Participant Limitations under Section 4(b), (iii) the number and kind
of shares of Stock to be subject to Non-Employee Director Initial and Annual
Options thereafter granted, (iv) the number and kind of shares of outstanding
Restricted Stock or other outstanding Award in connection with which shares have
been issued, (v) the number and kind of shares that may be issued in respect of
other outstanding Awards and (vi) the exercise price, grant price or purchase
price relating to any Award (or, if deemed appropriate, the Committee may make
provision for a cash payment with respect to any outstanding Award). In
addition, the Committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, events described in the
preceding sentence) affecting the Company or any subsidiary or the financial
statements of the Company or any subsidiary, or in response to changes in
applicable laws, regulations, or accounting principles. The foregoing
notwithstanding, no adjustments shall be authorized under this Section 4(c) with
respect to ISOs or SARs in tandem therewith to the extent that such authority
would cause the Plan to fail to comply with Section 422(b)(1) of the Code.
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5. Eligibility. Executive officers and key employees of the Company and
its subsidiaries, including any director or officer who is also such an
executive officer or key employee, directors of the Company, and persons who
provide consulting or other services to the
Company deemed by the Committee to be of substantial value to the Company, are
eligible to be granted Awards under the Plan. In addition, a person who has been
offered employment by the Company or its subsidiaries or agreed to become a
director of the Company (including as provided in Section 8(a)(i)) is eligible
to be granted an Award under the Plan; provided, however, that such Award shall
be cancelled if such person fails to commence such employment or service as a
director, and no payment of value may be made in connection with such Award
until such person has commenced such employment or service.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth
in this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of employment or
service of the Participant. The Committee shall retain full power and discretion
to accelerate, waive or modify, at any time, any term or condition of an Award
that is not mandatory under the Plan. Except as expressly provided by the
Committee (including for purposes of complying with requirements of the Delaware
General Corporation Law relating to lawful consideration for issuance of
shares), no consideration other than services will be required for the grant
(but not the exercise) of any Award.
(b) Options. The Committee is authorized to grant Options (including
"reload" options automatically granted to offset specified exercises of Options)
on the following terms and conditions ("Options"):
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee;
provided, however, that, except as provided in Section 7(a), such exercise
price shall be not less than the Fair Market Value of a share on the date
of grant of such Option.
(ii) Time and Method of Exercise. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part, the
methods by which such exercise price may be paid or deemed to be paid, the
form of such payment, including, without limitation, cash, Stock, other
Awards or awards granted under other Company plans or other property
(including notes or other contractual obligations of Participants to make
payment on a deferred basis, such as through "cashless exercise"
arrangements, to the extent permitted by applicable law), and the methods
by which Stock will be delivered or deemed to be delivered to
Participants.
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(iii) ISOs. The terms of any ISO granted under the Plan shall comply
in all respects with the provisions of Section 422 of the Code, including
but not limited to the requirement that no ISO shall be granted more than
10 years after the effective date of the Plan. Anything in the Plan to the
contrary notwithstanding, no term of the Plan relating to ISOs shall be
interpreted, amended, or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify either the Plan
or any ISO under Section 422 of the Code, unless requested by the affected
Participant.
(c) Stock Appreciation Rights. The Committee is authorized to grant SARs
on the following terms and conditions ("SARs"):
(i) Right to Payment. An SAR shall confer on the Participant to whom
it is granted a right to receive, upon exercise thereof, the excess of (A)
the Fair Market Value of one share of Stock on the date of exercise (or,
if the Committee shall so determine in the case of any such right other
than one related to an ISO, the Fair Market Value of one share at any time
during a specified period before or after the date of exercise), over (B)
the grant price of the SAR as determined by the Committee as of the date
of grant of the SAR, which, except as provided in Section 7(a), shall be
not less than the Fair Market Value of one share of Stock on the date of
grant.
(ii) Other Terms. The Committee shall determine the time or times at
which an SAR may be exercised in whole or in part, the method of exercise,
method of settlement, form of consideration payable in settlement, method
by which Stock will be delivered or deemed to be delivered to
Participants, whether or not an SAR shall be in tandem with any other
Award, and any other terms and conditions of any SAR. Limited SARs that
may only be exercised upon the occurrence of a Change in Control may be
granted on such terms, not inconsistent with this Section 6(c), as the
Committee may determine. Limited SARs may be either freestanding or in
tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant Restricted
Stock on the following terms and conditions ("Restricted Stock"):
(i) Grant and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions, if any, as
the Committee may impose, which restrictions may lapse separately or in
combination at such times, under such circumstances, in such installments,
or otherwise, as the Committee may determine. Except to the extent
restricted under the terms of the Plan and any Award Agreement relating to
the Restricted Stock, a Participant granted Restricted Stock shall have
all of the rights of a stockholder including, without limitation, the
right to vote Restricted Stock or the right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment or service (as determined under criteria
established by the
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Committee) during the applicable restriction period, Restricted Stock that
is at that time subject to restrictions shall be forfeited and reacquired
by the Company; provided, however, that the Committee may provide, by rule
or regulation or in any Award Agreement, or may determine in any
individual case, that restrictions or forfeiture conditions relating to
Restricted Stock will be waived in whole or in part in the event of
termination resulting from specified causes.
(iii) Certificates for Stock. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of
the Participant, such certificates may bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, the Company may retain physical possession of the
certificate, in which case the Participant shall be required to have
delivered a stock power to the Company, endorsed in blank, relating to the
Restricted Stock.
(iv) Dividends. Dividends paid on Restricted Stock shall be either
paid at the dividend payment date in cash or in shares of unrestricted
Stock having a Fair Market Value equal to the amount of such dividends, or
the payment of such dividends shall be deferred and/or the amount or value
thereof automatically reinvested in additional Restricted Stock, other
Awards, or other investment vehicles, as the Committee shall determine or
permit the Participant to elect. Stock distributed in connection with a
Stock split or Stock dividend, and other property distributed as a
dividend, shall be subject to restrictions and a risk of forfeiture to the
same extent as the Restricted Stock with respect to which such Stock or
other property has been distributed, unless otherwise determined by the
Committee.
(e) Deferred Stock. The Committee is authorized to grant Deferred Stock
subject to the following terms and conditions ("Deferred Stock"):
(i) Award and Restrictions. Delivery of Stock will occur upon
expiration of the deferral period specified for an Award of Deferred Stock
by the Committee (or, if permitted by the Committee, as elected by the
Participant). In addition, Deferred Stock shall be subject to such
restrictions as the Committee may impose, if any, which restrictions may
lapse at the expiration of the deferral period or at earlier specified
times, separately or in combination, in installments or otherwise, as the
Committee may determine.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment or service (as determined under criteria
established by the Committee) during the applicable deferral period or
portion thereof to which forfeiture conditions apply (as provided in the
Award Agreement evidencing the Deferred Stock), all Deferred Stock that is
at that time subject to such forfeiture conditions shall be forfeited;
provided, however, that the Committee may provide, by rule or regulation
or in
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any Award Agreement, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Deferred Stock will be
waived in whole or in part in the event of termination resulting from
specified causes.
(f) Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of Company obligations to pay cash under other plans or compensatory
arrangements.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents entitling the Participant to receive cash, Stock, other Awards or
other property equal in value to dividends paid with respect to a specified
number of shares of Stock ("Dividend Equivalents"). Dividend Equivalents may be
awarded on a free-standing basis or in connection with another Award. The
Committee may provide that Dividend Equivalents shall be paid or distributed
when accrued or shall be deemed to have been reinvested in additional Stock,
Awards or other investment vehicles, and subject to such restrictions on
transferability and risks of forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant such other Awards that may be
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Stock and factors that may influence the
value of Stock, as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee and Awards valued by
reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries ("Other Stock-Based Awards"). The
Committee shall determine the terms and conditions of such Awards. Stock issued
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Stock,
other Awards or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may be granted
pursuant to this Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with or in substitution for any other Award granted
under the Plan or any award granted under any other plan of the Company, any
subsidiary or any business entity to be acquired by the Company or a subsidiary,
or any other right of a Participant to receive payment from the Company or any
subsidiary. Awards granted in addition to or in tandem with other Awards or
awards may be granted either as of the same time as or a different time from the
grant of such other Awards or awards.
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(b) Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee; provided, however, that in no event shall the
term of any ISO or an SAR granted in tandem therewith exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code).
(c) Form of Payment Under Awards. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a subsidiary
upon the grant, exercise or settlement of an Award may be made in such forms as
the Committee shall determine, including, without limitation, cash, Stock, other
Awards or other property, and may be made in a single payment or transfer, in
installments or on a deferred basis. Such payments may include, without
limitation, provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of Dividend
Equivalents in respect of installment or deferred payments denominated in Stock.
(d) Rule 16b-3 Compliance.
(i) Six-Month Holding Period. Unless a Participant could otherwise
dispose of equity securities, including derivative securities,
acquired under the Plan without incurring liability under
Section 16(b) of the Exchange Act, equity securities acquired
under the Plan must be held for a period of six months
following the date of such acquisition, provided that this
condition shall be satisfied with respect to a derivative
security if at least six months elapse from the date of
acquisition of the derivative security to the date of
disposition of the derivative security (other than upon
exercise or conversion) or its underlying equity security.
(ii) Other Compliance Provisions. With respect to a Participant who
is then subject to Section 16 of the Exchange Act in respect
of the Company, the Committee shall implement transactions
under the Plan and administer the Plan in a manner that will
ensure that each transaction by such a Participant is exempt
from liability under Rule 16b-3, except that such a
Participant may be permitted to engage in a non-exempt
transaction under the Plan if written notice has been given to
the Participant regarding the non-exempt nature of such
transaction. The Committee may authorize the Company to
repurchase any Award or shares of Stock resulting from any
Award in order to prevent a Participant who is subject to
Section 16 of the Exchange Act from incurring liability under
Section 16(b). Unless otherwise specified by the Participant,
equity securities, including derivative securi ties, acquired
under the Plan which are disposed of by a Participant shall be
deemed to be disposed of in the order acquired by the
Participant.
(e) Loan Provisions. With the consent of the Committee, and subject at all
times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and
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other binding obligations or provisions applicable to the Company, the Company
may make, guarantee or arrange for a loan or loans to a Participant with respect
to the exercise of any Option or other payment in connection with any Award,
including the payment by a Participant of any or all federal, state or local
income or other taxes due in connection with any Award. Subject to such
limitations, the Committee shall have full authority to decide whether to make a
loan or loans hereunder and to determine the amount, terms and provisions of any
such loan or loans, including the interest rate to be charged in respect of any
such loan or loans, whether the loan or loans are to be with or without recourse
against the borrower, the terms on which the loan is to be repaid and
conditions, if any, under which the loan or loans may be forgiven.
(f) Performance-Based Awards. The Committee may, in its discretion,
designate any Award the exercisability or settlement of which is subject to the
achievement of performance conditions as a performance-based Award subject to
this Section 7(f). The performance objectives for an Award subject to this
Section 7(f) shall consist of one or more business criteria and a targeted level
or levels of performance with respect to such criteria, as specified by the
Committee. Such levels of performance may be expressed in absolute or relative
levels. Achievement of performance objectives with respect to such Awards shall
be measured over a period of not less than one year nor more than five years, as
the Committee may specify. Performance objectives may differ for such Awards to
different Participants. The Committee shall specify the weighting to be given to
each performance objective for purposes of determining the final amount payable
with respect to any such Award. The Committee may, in its discretion, reduce the
amount of a payout otherwise to be made in connection with an Award subject to
this Section 7(f), and the Committee may consider other performance criteria in
exercising such discretion. All determinations by the Committee as to the
achievement of performance objectives shall be in writing.
(g) Acceleration upon a Change of Control. Notwithstanding anything
contained herein to the contrary, unless otherwise provided by the Committee in
an Award Agreement, all conditions and restrictions relating to an Award,
including limitations on exercisability, risks of forfeiture, deferral periods
and conditions and restrictions requiring the continued performance of services
or the achievement of performance objectives with respect to the exercisability
or settlement of such Award, shall immediately lapse upon a Change in Control.
8. Options Granted Automatically to Non-Employee Directors.
(a) Initial Option Grants. A Non-Employee Director Initial Option will be
automatically granted (i) at the commencement of the Initial Public Offering to
each Non-Employee Director at that date and to each other person who has agreed
to become a director and who, if he or she were serving at the date of
commencement of the Initial Public Offering, would qualify as a Non-Employee
Director at that date, and (ii), after the Initial Public Offering, at the
effective date of any other director's initial election to the Board of
Directors if he or she qualifies as a Non-Employee Director at that date. The
foregoing notwithstanding, any Initial Option granted at the commencement of the
Initial Public Offering shall be cancelled and
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forfeited if the Initial Public Offering is not consummated or if, in the case
of an Initial Option granted to a person who has agreed to become a director,
such person does not commence serving as a Non-Employee Director at or promptly
following the closing of the Initial Public Offering.
(b) Annual Option Grants. A Non-Employee Director Annual Option will be
automatically granted, at the close of business on the date of final adjournment
of each annual meeting of stockholders of the Company, to each member of the
Board of Directors who then qualifies as a Non-Employee Director. The foregoing
notwithstanding, any person who has been automatically granted a Non-Employee
Director Initial Option under Section 8(a)(ii) shall not be automatically
granted a Non-Employee Director Annual Option at the first annual meeting of
stockholders following such grant of the Initial Option if such annual meeting
takes place within three months after the effective date of such grant of the
Initial Option.
(c) Number of Shares Subject to Automatic Option Grants. In the case of
any Initial or Annual Option granted on or before the date of the first annual
meeting of stockholders following the Initial Public Offering, the number of
shares of Stock to be subject to each Initial Option shall be 10,000, and the
number of shares of Stock to be subject to each Annual Option shall be 5,000, in
each case subject to adjustment as provided in Section 4(c). In the case of any
Initial or Annual Option granted thereafter, the number of shares of Stock to be
subject to each Initial and Annual Option shall be the applicable number
specified in the preceding sentence or, if so determined by the Board, such
other number of shares specified in the most recent resolution of the Board
adopted on or prior to the date of the annual meeting of stockholders that
coincides with or most recently precedes the date of grant of the Option.
(d) Other Non-Employee Director Initial and Annual Option Terms. Other
terms of Initial and Annual Options shall be as follows:
(i) The exercise price per share of Stock purchasable upon exercise
of a Non-Employee Director Initial or Annual Option will be equal to 100%
of the Fair Market Value of a share of Stock on the date of grant of the
Option.
(ii) A Non-Employee Director Initial or Annual Option will expire at
the earlier of (A) 10 years after the date of grant or (B) one year after
the date the Participant ceases to serve as a director of the Company for
any reason.
(iii) Each Non-Employee Director Initial or Annual Option may be
exercised, prior to its expiration, commencing one year after the date of
grant, or at such earlier date as may be specified by the Board of
Directors; provided, however, that an Option may be exercised following a
Participant's termination of service as a director for reasons other than
death or disability only if the director served for at least 11 months
after the date of grant or the option was otherwise exercisable at the
date of termination of service.
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(e) Method of Exercise. A Participant may exercise a Non-Employee Director
Initial or Annual Option, in whole or in part, at such time as it is exercisable
and prior to its expiration, by giving written notice of exercise to the
Secretary of the Company, specifying the Option to be exercised and the number
of shares to be purchased, and paying in full the exercise price in cash
(including by check) or by surrender of shares already owned by the Participant
(except for shares acquired from the Company by exercise of an option less than
six months before the date of surrender) having a Fair Market Value at the time
of exercise equal to the exercise price, or by a combination of cash and shares.
(f) Availability of Shares. If an automatic grant of Options authorized
under Section 8(a) or (b) cannot be made in full due to the limitation set forth
in Section 4(a), such grant shall be made (together with other automatic grants
to occur at the same time) to the greatest extent then permitted under Section
4(a).
9. General Provisions.
(a) Compliance With Laws and Obligations. The Company shall not be
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system or
any other law, regulation or contractual obligation of the Company until the
Company is satisfied that such laws, regulations and other obligations of the
Company have been complied with in full. Certificates representing shares of
Stock issued under the Plan will be subject to such stop-transfer orders and
other restrictions as may be applicable under such laws, regulations and other
obligations of the Company, including any requirement that a legend or legends
be placed thereon.
(b) Limitations on Transferability. Awards and other rights under the Plan
will not be transferable by a Participant except by will or the laws of descent
and distribution or to a Beneficiary in the event of the Participant's death,
shall not be pledged, mortgaged, hypothecated or otherwise encumbered, or
otherwise subject to the claims of creditors, and, in the case of ISOs and SARs
in tandem therewith, shall be exercisable during the lifetime of a Participant
only by such Participant or his guardian or legal representative; provided,
however, that such Awards and other rights (other than ISOs and SARs in tandem
therewith) may be transferred to one or more transferees during the lifetime of
the Participant to the extent and on such terms as then may be permitted by the
Committee.
(c) No Right to Continued Employment or Service. Neither the Plan nor any
action taken hereunder shall be construed as giving any employee, director or
other person the right to be retained in the employ or service of the Company or
any of its subsidiaries, nor shall it interfere in any way with the right of the
Company or any of its subsidiaries to terminate any
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employee's employment or other person's service at any time or with the right of
the Board or stockholders to remove any director.
(d) Taxes. The Company and any subsidiary is authorized to withhold from
any Award granted or to be settled, any delivery of Stock in connection with an
Award, any other payment relating to an Award or any payroll or other payment to
a Participant amounts of withholding and other taxes due or potentially payable
in connection with any transaction involving an Award, and to take such other
action as the Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations.
(e) Changes to the Plan and Awards. The Board may amend, alter, suspend,
discontinue or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of stockholders or Participants, except that
any such action shall be subject to the approval of the Company's stockholders
at or before the next annual meeting of stockholders for which the record date
is after such Board action if such stockholder approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to stockholders for approval; provided, however, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to
him. The Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate, any Award theretofore granted and any Award
Agreement relating thereto; provided, however, that, without the consent of an
affected Participant, no such action may materially impair the rights of such
Participant under such Award.
(f) No Rights to Awards; No Stockholder Rights. No Participant or employee
shall have any claim to be granted any Award under the Plan (except for a
director who has become entitled to Options under Section 8), and there is no
obligation for uniformity of treatment of Participants and employees. No Award
shall confer on any Participant any of the rights of a stockholder of the
Company unless and until Stock is duly issued or transferred and delivered to
the Participant in accordance with the terms of the Award or, in the case of an
Option, the Option is duly exercised.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
provided, however, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Stock, other Awards or other property pursuant to any Award, which
trusts or other
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arrangements shall be consistent with the "unfunded" status of the Plan unless
the Committee otherwise determines with the consent of each affected
Participant.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor any submission of the Plan or amendments thereto to the stockholders
of the Company for approval shall be construed as creating any limitations on
the power of the Board to adopt such other compensatory arrangements as it may
deem desirable, including, without limitation, the granting of stock options
otherwise than under the Plan, and such arrangements may be either applicable
generally or only in specific cases.
(i) No Fractional Shares. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Governing Law. The validity, construction and effect of the Plan, any
rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Delaware, without giving
effect to principles of conflicts of laws, and applicable federal law.
(k) Effective Date; Plan Termination. The Plan shall become effective as
of the date of its adoption by the Board, subject to stockholder approval prior
to the commencement of the Initial Public Offering, and shall continue in effect
until terminated by the Board.
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this _____ day of _____, 1997, between Condor
Technology Solutions, Inc., a Delaware corporation (the "Company"), and C.
Lawrence Meador (the "Executive").
WHEREAS, the Executive is currently the President, Chief Executive Officer and
sole shareholder of Management Support Technology Corp., a Delaware corporation
("MST"); and
WHEREAS, as a result of the proposed business combination (the "Business
Combination") pursuant to that certain Agreement and Plan of Organization among
the Company, its wholly-owned subsidiary MST Acquisition Corp., MST and the
Executive (the "Merger Agreement"), MST will become a wholly-owned subsidiary of
the Company; and
WHEREAS, the parties hereto wish to enter into an employment agreement to
continue the employment of the Executive as the President and Chief Executive
Officer of MST and to employ the Executive as the Vice Chairman of the Company
following the Business Combination, and to set forth certain additional
agreements between the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and representations
contained herein, the parties hereto agree as follows:
1. TERM.
The Company will employ the Executive and will cause MST to employ the
Executive, and the Executive will serve the Company and MST, under the terms
of this Agreement for an initial term of three (3) years, commencing on the
closing of the initial public offering of the Company's Common Stock (the
"Closing Date"). Effective as of the expiration of such initial three-year
term and as of each anniversary date thereof, the term of this Agreement
shall be extended for an additional 12-month period unless, not later than
two months prior to each such respective date, either party shall have given
notice to the other party that the term shall not be so extended.
Notwithstanding the foregoing, the Executive's employment hereunder may be
earlier terminated, as provided in Section 4 hereof. The term of this
Agreement, as in effect from time to time in accordance with the foregoing,
shall be referred to herein as the "Term." The period of time between the
commencement and the termination of the Executive's employment hereunder
shall be referred to herein as the "Employment Period."
2. EMPLOYMENT.
(a) Positions. The Company hereby (i) employs the Executive for the
Employment Period as Chief Executive Officer of MST and, effective as of the
Closing Date, as Vice
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Chairman of the Company, (ii) agrees to elect the Executive to serve as a
director of MST, and (iii) agrees to use its best efforts to cause the Executive
to be nominated for election as a director of the Company, all for the
Employment Term and on the terms and conditions set forth in this Agreement and
conditioned on the Executive not being at any applicable time in breach of this
Agreement.
(b) Authority, Duties and Reporting. The Executive shall exercise such
authority, perform such executive duties and functions and discharge such
responsibilities as are reasonably associated with the Executive's positions,
commensurate with the authority vested in the Executive's positions, pursuant to
this Agreement and consistent with the By-Laws of the Company and MST,
respectively. Without limiting the generality of the foregoing, (i) in his
capacity as Vice Chairman of the Company, the Executive shall report directly
and be responsible to the Board of Directors of the Company, and (ii) in his
capacity as President and Chief Executive Officer of MST the Executive shall
report directly and be responsible to the President and Chief Executive Officer
of the Company and the Board of Directors of MST. During the Employment Period,
the Executive shall devote his full business time, skill and efforts to the
business of the Company and MST; provided, however, that so long as Executive
and the Company (acting through its Board of Directors) agree that Executive's
service as Chief Information Officer of CIGNA Property & Casualty ("CIGNA") is
consistent with the Company's objectives, the Company shall not require
Executive to engage in activities that create a conflict of interest with his
duties as Chief Information Officer of CIGNA and the Executive shall continue to
serve in such capacity. Notwithstanding the foregoing, the Executive may
devote his time to various personal endeavors including educational, civic,
professional and other personal matters without seeking or obtaining approval
by the Board of Directors of the Company (except with respect to serving on
the boards of directors of other companies, for which the Executive will seek
the approval of the Board of Directors), provided such activities and service
do not materially interfere or conflict with the performance of his duties
hereunder and provided further that such activities consistent with the
Executive's past practices will not be deemed to materially interfere or
conflict with the performance of his duties hereunder.
(c) Location of Performance by Executive. The Company agrees that the
executive offices of MST shall remain in the Boston, Massachusetts metropolitan
area for the Term and that the Executive shall perform his duties primarily at
such offices, except to the extent that the Executive performs his duties at
CIGNA's offices. The Executive shall not be
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required to relocate by the Company.
3. COMPENSATION AND BENEFITS.
(a) Salary. During the Employment Period, the Company shall pay or cause
MST to pay to the Executive, as compensation for the performance of his duties
and obligations under this Agreement, a base salary at the rate of $431,815 per
annum, payable in arrears not less frequently than monthly (except as set forth
in the proviso at the end of this sentence) in accordance with the normal
payroll practices of MST; provided, however, that no monthly payments of the
Executive's base salary shall be paid in 1997 and that the Executive's base
salary for 1997 will be payable on January 30, 1998 if MST's 1997 pre-tax
revenues equal or exceed $2,500,000 (it being agreed that for the purpose of
calculating MST's 1997 pre-tax revenues, expense costs or other charges,
whether they be legal, accounting, administrative or other, that are incurred
by MST as a result of or are related to the transactions contemplated by the
Agreement and Plan of Organization among the Company, MST Acquisition Corp.,
MST and the Executive, dated as of October 1, 1997, shall be excluded in
determining MST's 1997 pre-tax revenues). Such base salary shall be subject
to review each year for possible increase by the Board of Directors of the
Company, but shall in no event be decreased from its then-existing level
during the Employment Period.
(b) Annual Bonus. During the Employment Period, with respect to a given
fiscal year, the Company shall pay the Executive bonuses identical to the
bonuses paid to the Chief Executive Officer of the Company for such fiscal
year. Annual bonuses shall be payable by December 31 of each year.
(c) Special Bonuses. In addition to the bonuses to which the Executive
is entitled pursuant to Section 3(b) of this Agreement, for each potential
acquisition target or a potential joint venture identified by the Executive
that eventually is successfully acquired or consummated by the Company or its
affiliate with the assistance of the Executive as reasonably required by the
Company and as is compatible with the Executive's duties hereunder, the
Company shall pay to the Executive immediately upon consummation of the
transaction cash compensation of one percent (1%) of (i) the total purchase
price (including deferred portions of the purchase price) in the case of an
acquisition or (ii) the total investment by the Company or its affiliate in
the joint venture in the case of a joint venture. In addition, if in 1997
the Executive identifies an acquisition or joint venture candidate that
provides consulting services similar to that of MST, and the Company acquires
such candidate, such candidate's 1997 pre-tax revenues shall be added to
MST's 1997 pre-tax revenues for purposes of calculating MST's 1997 pre-tax
revenues for the purposes of Section 3(a) of this Agreement.
(d) Stock Options. During the Employment Term, the Company shall grant
and deliver to the Executive options to purchase such number of shares of the
Company's common stock as equals the greater of (i) the number of shares
subject to options granted to the Chairman of the Company and (ii) the number
of shares subject to options granted to the Chief Executive Officer of the
Company, such options to vest equally over three years and to have an
exercise price equal to the fair market value of the common stock at the date
of grant.
(e) Other Benefits. During the Employment Period, the Executive shall
be entitled to participate in all of the employee benefit plans, programs and
arrangements of the Company in effect during the Employment Period that are
generally available to senior executives of the
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Company, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans, programs and arrangements. In addition,
during the Employment Period, the Executive shall be entitled to fringe benefits
and perquisites comparable to those of other senior executives of the Company,
including, but not limited to, four weeks of paid vacation per year and the
fringe benefits and perquisites currently provided to the Executive by MST,
other than the provision to the Executive of a Company car.
(f) Business Expenses. During the Employment Period, the Company shall
reimburse the Executive for all documented reasonable business expenses incurred
by the Executive in the performance of his duties under this Agreement, in
accordance with the Company's policies.
(g) Indemnification. During the Employment Period and thereafter, the
Company shall indemnify the Executive to the fullest extent permitted by
applicable law, and the Executive shall be entitled to the protection of any
insurance policies the Company may elect to maintain generally for the benefit
of its directors and officers, with respect to all costs, charges and expenses,
including attorneys' fees, whatsoever incurred or sustained by the Executive in
connection with any action, suit or proceeding (other than any action, suit or
proceeding brought by the Company against the Executive) to which he may be made
a party by reason of being or having been a director, officer or employee of the
Company or MST or his serving or having served any other enterprise as a
director, officer or employee at the request of the Company.
4. TERMINATION OF EMPLOYMENT.
(a) Termination for Cause. The Company may terminate the Executive's
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4 (c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder if
such termination shall be the result of:
(i) willful fraud or dishonesty in connection with the Executive's
performance hereunder that results in material harm to the Company or MST;
(ii) the failure by the Executive to substantially perform (other than
by reason of disability) his duties hereunder that results in material
harm to the Company or MST; or
(iii) the conviction for, or plea of nolo contendere to, a charge
of commission of a felony.
(b) Termination for Good Reason. The Executive shall have the right at
any time to terminate his employment with the Company and MST at any time and
for any good reason. For purposes of this Agreement and subject to the
Company's opportunity to cure as provided
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in Section 4 (c) hereof, the Executive shall have "good reason" to terminate his
employment hereunder if such termination shall be the result of:
(i) a material diminution during the Employment Period in the
Executive's duties or responsibilities as set forth in Section 2 hereof;
(ii) a breach by the Company or MST of the compensation and benefits
provisions set forth in Section 3 hereof, which breach shall not have been
cured within five business days of written notice thereof having been
provided to the Company or MST by the Executive;
(iii) a notice of termination by the Executive under Section 4 (c)
hereof within 12 months following the occurrence of a Change in Control
(as defined in Section 4 (e) hereof);
(iv) the Executive shall not be elected or continue as a member of the
Board of Directors of MST or the Company; or
(v) a material breach by the Company of any other term of this
Agreement.
(c) Notice and Opportunity to Cure. Notwithstanding the foregoing, it
shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach"); (2) if the Company is asserting that it
has "cause" to terminate the Executive, the Company shall provide to the
Executive an opportunity to appear before the Board to answer such grounds for
termination; and (3) if such breach is susceptible of cure or remedy, a period
of 30 days from and after the giving of such notice shall have elapsed without
the breaching party having effectively cured or remedied such breach during such
30-day period, unless such breach cannot be cured or remedied within 30 days, in
which case the period for remedy or cure shall be extended for a reasonable time
(not to exceed an additional 30 days), provided the breaching party has made and
continues to make a diligent effort to effect such remedy or cure.
(d) Termination Upon Death or Permanent and Total Disability. The
Employment Period shall be terminated by the death of the Executive. The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing his duties to the Company by reason of a
"disability," defined as either (i) any medically determined physical or mental
impairment that can be expected to result in death or that can be expected to
last for a period of six or more consecutive months from the first date of the
Executive's absence, or (ii) due to a total and permanent "disability" that can
be expected to last for a period of six or more consecutive months from the
first date of the Executive's absence, as such term is defined in the Company's
long term disability insurance policy or contract as may be in effect from time
to time for the benefit of employees of the
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Company (either, a "Disability"). If the Employment Period is terminated by
reason of a Disability of the Executive, the Company shall give 30 days'
advance written notice to that effect to the Executive. If the existence of
a Disability hereunder is in dispute, it shall be resolved by two physicians,
one appointed by the Executive and one appointed by the Company. If the two
physicians so selected cannot agree as to whether or not the Executive has a
Disability, the two physicians so selected shall designate a third physician
and a majority of the three physicians so selected shall determine whether or
not the Executive has a Disability.
(e) Definition of Change in Control. A "Change in Control" shall be
deemed to have taken place if:
(i) there shall be consummated (x) any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's capital stock are converted
into cash, securities or other property other than a consolidation or
merger of the Company in which the holders of the Company's voting stock
immediately prior to the consolidation or merger shall, upon consummation
of the consolidation or merger, own at least 50% of the voting stock of the
surviving corporation, or (y) any sale, lease, exchange or other transfer
(in one transaction or a series of transactions contemplated or arranged by
any party as a single plan) of all or substantially all of the assets of
the Company; or
(ii) any person (as such term is used in Sections 13(d) and 14 (d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
shall after the date hereof become the beneficial owner (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of
securities of the Company representing 35% or more of the voting power of
all then outstanding securities of the Company having the right under
ordinary circumstances to vote in an election of the Board (including,
without limitation, any securities of the Company that any such person has
the right to acquire pursuant to any agreement, or upon exercise of
conversion rights, warrants or options, or otherwise, which shall be deemed
beneficially owned by such person); or
(iii) individuals who at the date hereof constitute the entire
Board and any new directors whose election by the Board, or whose
nomination for election by the Company's stockholders, shall have been
approved by a vote of at least a majority of the directors then in office
who either were directors at the date hereof or whose election or
nomination for election shall have been so approved (the "Continuing
Directors") shall cease for any reason to constitute a majority of the
members of the Board; or
(iv) the sale by the Company of the majority of the capital stock of
MST or all or substantially all of the assets of MST, or the liquidation or
dissolution of MST.
5. CONSEQUENCES OF TERMINATION.
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(a) Termination Without Cause or for Good Reason. In the event of
termination of the Executive's employment or service in any capacity (including
but not limited to service as Vice Chairman of the Company or as a director of
MST or the Company) hereunder by the Company without "cause" (other than upon
death or Disability) or by the Executive for "good reason" (each as defined in
Section 4 hereof), the Executive shall be entitled to the following severance
pay and benefits:
(i) Severance Pay - severance payments in the form of continuation of
the Executive's base salary as in effect immediately prior to such
termination over the longer of: (A) the then-remaining Term hereof;
or (B) 12 months (the "Severance Period").
(ii) Benefits Continuation - continuation for the Severance Period of
coverage under the group medical care, disability and life insurance
benefit plans or arrangements in which the Executive is participating at
the time of termination; provided, however, that the Company's obligation
to provide such coverages shall be terminated if the Executive obtains
comparable substitute coverage from another employer at any time during the
Severance Period. The Executive shall be entitled, at the expiration of
the Severance Period, to elect continued medical coverage in accordance
with section 4980B of the Internal Revenue Code of 1986, as amended (or any
successor provision thereto); and
(iii) Stock Options - all options to purchase shares of the
Company's Common Stock held by the Executive immediately prior to
termination of employment shall become immediately vested and exercisable
and, subject to the terms of the Company's 1997 Long-Term Incentive Plan,
shall remain exercisable for the duration of the Severance Period.
(b) Other Terminations. In the event of termination of the Executive's
employment hereunder for any reason other than those specified in Section 5(a)
hereof, the Executive shall not be entitled to any severance pay, benefits
continuation or stock option rights contemplated by the foregoing, except as may
otherwise be provided under the applicable benefit plans or award agreements
relating to the Executive.
6. CONFIDENTIALITY.
The Executive agrees that he will not at any time during the Term hereof or at
any time thereafter for any reason, in any fashion, form or manner, either
directly or indirectly, divulge, disclose or communicate to any person, firm,
corporation or other business entity, in any manner whatsoever, any confidential
information or trade secrets concerning the business of the Company, including,
without limiting the generality of the foregoing, the techniques, methods or
systems of its operation or management, any information regarding its financial
matters, or any other material information concerning the business of the
Company, its manner
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of operation, its plans or other material data. The provisions of this Section
6 shall not apply to (i) information that is public knowledge other than as a
result of disclosure by the Executive in breach of this Section 6; (ii)
information disseminated by the Company to third parties in the ordinary course
of business; (iii) information lawfully received by the Executive from a third
party who, based upon inquiry by the Executive, is not bound by a confidential
relationship to the Company; or (iv) information disclosed under a requirement
of law or as directed by applicable legal authority having jurisdiction over the
Executive.
7. INVENTIONS.
The Executive is hereby retained in a capacity such that the Executive's
responsibilities include the making of technical and managerial contributions of
value to Company. The Executive hereby assigns to the Company all right, title
and interest in such contributions and inventions made or conceived by the
Executive alone or jointly with others during the Employment Period that relate
to the business of the Company. This assignment shall include (a) the right to
file and prosecute patent applications on such inventions in any and all
countries, (b) the patent applications filed and patents issuing thereon, and
(c) the right to obtain copyright, trademark or trade name protection for any
such work product. The Executive shall promptly and fully disclose all such
contributions and inventions to the Company and assist the Company in obtaining
and protecting the rights therein (including patents thereon) in any and all
countries; provided, however, that said contributions and inventions will be the
property of the Company, whether or not patented or registered for copyright,
trademark or trade name protection, as the case may be. The Executive hereby
agrees to execute any documentation requested by the Company to be so executed
if such request is made in order to carry out the purpose and terms of this
paragraph. Inventions conceived by the Executive that are not related to the
business of the Company will remain the property of the Executive.
8. NON-COMPETITION.
(a) Subject to the limitations set forth in Sections 8(b) and 8(d), the
Executive will not, for a period of four (4) years following the Closing Date,
for any reason whatsoever, directly or indirectly, for himself or on behalf of
or in conjunction with any other person, company, partnership, corporation or
business of whatever nature;
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any business selling any products or services in direct
competition with the Company or any of the subsidiaries thereof, within 100
miles of where MST or any of the Other Founding Companies (as defined in
the Merger Agreement) conducted business prior to the effectiveness of the
merger (the "Territory");
(ii) call upon any person who is, at that time, within the Territory,
an
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employee of the Company (including the subsidiaries thereof) in a sales
representative or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of the Company
(including the subsidiaries thereof), provided that the Executive shall be
permitted to call upon and hire any member of his or her immediate family;
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to the Closing Date, a customer
of the Company (including the subsidiaries thereof), of MST or of any of
the Other Founding Companies within the Territory for the purpose of
soliciting or selling products or services in direct competition with the
Company within the Territory;
(iv) call upon any prospective acquisition candidate, on the
Executive's own behalf or on behalf of any competitor in similar or
incidental businesses or activities described in the Registration Statement
(as defined in the Merger Agreement), which candidate, to the actual
knowledge of the Executive after due inquiry, was called upon by the
Company (including the subsidiaries thereof) or for which, to the actual
knowledge of the Executive after due inquiry, the Company (or any
subsidiary thereof) made an acquisition analysis, for the purpose of
acquiring such entity; or
(v) disclose customers, whether in existence or proposed, of MST to
any person, firm, partnership, corporation or business for any reason or
purpose whatsoever except to the extent that MST has in the past disclosed
such information to the public for valid business reasons or disclosure is
specifically required by law; provided, however, in the event disclosure is
required by law, the Executive shall provide the Company with prompt notice
of such requirement prior to making any disclosure so that the Company may
seek a protective order.
(b) Investments in Competing Businesses. Notwithstanding anything to
the contrary in Section 8(a), the foregoing covenant shall not be deemed to
prohibit the Executive from acquiring as an investment not more than one percent
(1%) of the capital stock of a competing business whose stock is traded on a
national securities exchange or over-the-counter so long as the Executive does
not consult with or is not employed by such competitor.
(c) Reasonable Restraint. It is agreed by the parties hereto that the
covenant set forth in Section 8(a) imposes a reasonable restraint on the
Executive in light of the activities and business of the Company (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of the Company; but it is also the intent of the Company and the
Executive that such covenants be construed and enforced in accordance with the
changing activities and business of the Company (including the subsidiaries
thereof) throughout the term of this covenant.
(d) (i) If prior to the fourth anniversary of the date hereof the
employment of the Executive is terminated by the Company other than pursuant to
Section 4(a) or the
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Executive terminates his employment pursuant to Section 4(b), this Section 8
shall be void and cease to be binding on the Executive; provided, however, that
if in such event the Company continues to pay to the Executive the Executive's
base salary pursuant to Section 3(a) at its then-existing level in accordance
with its normal payroll practices through the fourth anniversary of the date
hereof, then this Section 8 shall remain in full force and effect through such
date.
(ii) If the Employment Period is extended beyond the fourth anniversary of
the execution hereof, this Section 8 shall remain in full force and effect so
long as the Executive is employed by the Company and MST in compliance with this
Agreement, and shall cease to be binding on the Executive immediately upon the
termination of the Executive's employment for any reason whatsoever.
(d) Damages. Because of the difficulty of measuring economic losses to
the Company as a result of a breach of the covenant set forth in Section 8(a),
and because of the immediate and irreparable damage that could be caused to the
Company for with it would have no other adequate remedy, the Executive agrees
that, in the event of a breach by the Executive, the covenant set forth in
Section 8(a) may be enforced by the Company by injunctions and restraining
orders.
9. BREACH OF RESTRICTIVE COVENANTS.
The parties agree that a breach or violation of Section 6, 7 or 8 hereof will
result in immediate and irreparable injury and harm to the innocent party, which
party shall have, in addition to any and all remedies of law and other
consequences under this Agreement, the right to an injunction, specific
performance or other equitable relief to prevent the violation of the obligation
hereunder.
10. NOTICES.
For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
(a) If to the Company, to:
CONDOR TECHNOLOGY SOLUTIONS, INC.
1650 Tysons Boulevard
Suite 600
McLean, Virginia 22102
(b) If to the Executive, to:
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C. LAWRENCE MEADOR
3 Windy Hill Lane
Wayland, MA 01778
or to such other address as a party hereto shall designate to the other party by
like notice, provided that notice of a change of address shall be effective only
upon receipt thereof.
11. ARBITRATION: LEGAL FEES.
Except as provided in Section 9 hereof, any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by arbitration
in The Commonwealth of Massachusetts in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. The Company shall
reimburse the Executive for all reasonable legal fees and costs and other fees
and expenses that the Executive may incur in respect of any dispute or
controversy arising against the Company under or in connection with this
Agreement; provided, however, that the Company shall not reimburse any such
fees, costs and expenses if the fact finder determines that an action brought by
the Executive was substantially without merit or the Executive is otherwise
unsuccessful in such an action.
12. WAIVER OF BREACH.
Any waiver of any breach of the Agreement shall not be construed to be a
continuing waiver or consent to any subsequent breach on the part of either the
Executive or of the Company.
13. NON-ASSIGNMENT: SUCCESSORS.
Neither party hereto may assign his or its rights or delegate his or its duties
under this Agreement without the prior written consent of the other party;
provided, however, that (i) subject to the rights of the Executive under
Section 4(b) hereof, this Agreement shall inure to the benefit of and be binding
upon the successors and assigns of the Company upon any sale of all or
substantially all of the Company's assets, or upon any merger, consolidation or
reorganization of the Company with or into any other corporation, all as though
such successors and assigns of the Company and their respective successors and
assigns were the Company; and (ii) this Agreement shall inure to the benefit of
and be binding upon the heirs, assigns or designees of the Executive to the
extent of any payments due to the Executive hereunder. As used in this
Agreement, the term "Company" shall be deemed to refer to any such successor or
assign or the Company referred to in the preceding sentence.
14. WITHHOLDING OF TAXES.
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any, relating
to tax, and other payroll deductions as the Company may reasonably determine it
should withhold pursuant to any
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applicable law or regulation.
15. SEVERABILITY.
To the extent any provision of this Agreement or portion thereof shall be
invalid or unenforceable, it shall be considered deleted therefrom and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect.
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same instrument.
17. GOVERNING LAW.
This Agreement shall be construed, interpreted and enforced in accordance with
the laws of The Commonwealth of Massachusetts, without giving effect to the
conflict of law principles thereof.
18. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement by the Company and the Executive
with respect to the subject matter hereof and supersedes any and all prior
agreements or understandings between the Executive and the Company with respect
to the subject matter hereof, whether written or oral. This Agreement may be
amended or modified only by a written instrument executed by the Executive and
the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
____________, 1997.
CONDOR TECHNOLOGY SOLUTIONS, INC.
By:
-----------------------------------
Name:
Title:
THE EXECUTIVE
--------------------------------------
C. Lawrence Meador
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 27th day of October, 1997, between
Condor Technology Solutions, Inc., a Delaware corporation (the "Company"),
and Daniel J. Roche (the "Executive").
WHEREAS, the parties hereto wish to enter into an employment agreement to
employ the Executive as the Chief Operating Officer of the Company and to set
forth certain additional agreements between the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and representations
contained herein, the parties hereto agree as follows:
1. TERM.
The Company will employ the Executive, and the Executive will serve the
company, under the terms of this Agreement for an initial term of three (3)
years, commencing on the date hereof. Effective as of the expiration of such
initial three-year term and as of each anniversary date thereof, the term of
this Agreement shall be extended for an additional 12-month period unless,
not later than two months prior to each such respective date, either party
shall have given notice to the other party that the term shall not be so
extended. Notwithstanding the foregoing, the Executive's employment hereunder
may be earlier terminated, as provided in Section 4 hereof. The term of this
Agreement, as in effect from time to time in accordance with the foregoing,
shall be referred to herein as the "Term." The period of time between the
commencement and the termination of the Executive's employment hereunder
shall be referred to herein as the "Employment Period."
2. EMPLOYMENT.
(a) Position and Reporting. The Company hereby employs the Executive for
the Employment Period as Chief Operating Officer of the Company on the terms
and conditions set forth in this Agreement. Effective on the closing date of
the Company's initial public offering of Common Stock, the Executive will be
employed hereunder as the President and Chief Operating Officer.
(b) Authority and Duties. The Executive shall exercise such authority,
perform such executive duties and functions and discharge such
responsibilities as are reasonably associated with the Executive's position,
commensurate with the authority vested in the Executive's position, pursuant
to this Agreement and consistent with the By-Laws of the Company. Without
limiting the generality of the foregoing, the Executive shall report directly
and be responsible to the Chief Executive Officer of the Company. During the
Employment Period, the Executive shall devote his full business time, skill
and efforts to the business of the Company. Notwithstanding the foregoing,
the Executive may (i) make and manage passive personal business investments
of his choice (in the case of publicly-held corporations, not to exceed five
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percent (5%) of the outstanding voting stock) and serve in any capacity with
any civic, educational or charitable organization, or any trade association,
without seeking or obtaining approval by the Board of Directors of the
Company (the "Board"), provided such activities and service do not materially
interfere or conflict with the performance of his duties hereunder and (ii)
with the approval of the Board, which shall not be unreasonably withheld,
serve on the boards of directors of other corporations.
3. COMPENSATION AND BENEFITS.
(a) Salary. During the Employment Period, the Company shall pay to the
Executive, as compensation for the performance of his duties and obligations
under this Agreement, a base salary at the rate of $220,000 per annum,
payable in arrears not less frequently than monthly in accordance with the
normal payroll practices of the Company. Such base salary shall be subject to
review each year for possible increase by the Board, but shall in no event be
decreased from its then-existing level during the Employment Period.
(b) Annual Bonus. During the Employment Period, the Executive shall have
the opportunity to earn an annual bonus in accordance with a Company annual
bonus program to be established by the Board for senior executives of the
company and its subsidiaries. The payment of any annual bonus under any such
program shall be contingent upon the achievement of certain corporate and/or
individual performance goals established by the Board in its discretion.
(c) Stock Options. The Company has established a 1997 Long-Term Incentive
Plan (the "Plan") in the form attached hereto as Exhibit A that will be in
effect upon the completion of the initial public offering of the Company's
Common Stock. The Plan provides, among other things, for the issuance from
time to time to certain officers, directors and other employees of the
Company of options to purchase shares of the Company's Common Stock. On the
date of the commencement of the initial public offering (the "IPO Date")
under the Securities Act of 1933, as amended (the "Securities Act"), the
Company shall grant to the Executive options to purchase 75,000 shares of the
Company's Common Stock (the "Initial Grant"), exercisable at the initial
public offering price, that shall vest and become exercisable in three equal
annual installments on each of the first, second and third anniversaries of
the closing date of the Company's initial public offering of Common Stock.
(d) Founder's Shares. The Company has sold to the Executive 800,000
shares of the Company's Common Stock before giving effect to a
reverse stock split to be made in connection with the Company's initial
public offering (the "Founder's Shares") in consideration of consulting,
financial advisory and related services provided to the Company by the
Executive.
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(e) Other Benefits. During the Employment Period, the Executive shall be
entitled to participate in all of the employee benefit plans, programs and
arrangements in effect during the Employment Period that are generally
available to senior executives of the Company, subject to and on a basis
consistent with the terms, conditions and overall administration of such
plans, programs and arrangements. In addition, during the Employment Period,
the Executive shall be entitled to fringe benefits and perquisites comparable
to those of other senior executives of the Company.
(f) Business Expenses. During the Employment Period, the Company shall
reimburse the Executive for all documented reasonable business expenses
incurred by the Executive in the performance of his duties under this
Agreement, in accordance with the Company's policies.
(g) Indemnification. During the Employment Period and thereafter, the
Company shall indemnify the Executive to the fullest extent permitted by
applicable law, and the Executive shall be entitled to the protection of any
insurance policies the Company may elect to maintain generally for the
benefit of the directors and officers of the Company, with respect to all
costs, charges and expenses, including attorneys' fees, whatsoever incurred
or sustained by the Executive in connection with any action, suit or
proceeding (other than any action, suit or proceeding brought by or in the
name of the Company against the Executive) to which he may be made party by
reason of being or having been a director, officer or employee of the Company
or his serving or having served any other enterprise as a director, officer
or employee at the request of the Company. In addition, the Company shall
indemnify the Executive in the event the Executive has to pay liquidated
damages of up to $100,000 to the Executive's former employer, Medaphis
Corporation ("Medaphis"), under the terms of the Severance Agreement and
General Release, dated September 30, 1997, by and between Medaphis and the
Executive.
4. TERMINATION OF EMPLOYMENT.
(a) Termination for Cause. The Company may terminate the Executive's
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4 (c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder
if such termination shall be the result of:
(i) willful fraud or dishonesty in connection with the Executive's
performance hereunder that results in material harm to the Company;
(ii) the failure by the Executive to substantially perform his
duties hereunder that results in material harm to the Company; or
(iii) the conviction for, or plea of nolo contendere to, a charge of
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commission of a felony.
(b) Termination for Good Reason. The Executive shall have the right at
any time to terminate his employment with the Company at any time and for any
good reason. For purposes of this Agreement and subject to the Company's
opportunity to cure as provided in Section 4 (c) hereof, the Executive shall
have "good reason" to terminate his employment hereunder if such termination
shall be the result of:
(i) a material diminution during the Employment Period in the
Executive's duties or responsibilities as set forth in Section 2 hereof;
(ii) a material breach by the Company of the compensation and
benefits provisions set forth in Section 3 hereof;
(iii) a notice of termination by the Executive under Section 4 (c)
hereof within 12 months following the occurrence of a Change in Control (as
defined in Section 4 (e) hereof); or
(iv) a material breach by the Company of any other term of this
Agreement.
(c) Notice and Opportunity to Cure. Notwithstanding the foregoing, it
shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach"); (2) if the Executive is terminated for
"cause," the Company provides the Executive an opportunity to appear before
the Board to answer such grounds for termination; and (3) if such breach is
susceptible of cure or remedy, a period of 30 days from and after the giving
of such notice shall have elapsed without the breaching party having
effectively cured or remedied such breach during such 30-day period, unless
such breach cannot be cured or remedied within 30 days, in which case the
period for remedy or cure shall be extended for a reasonable time (not to
exceed an additional 30 days), provided the breaching party has made and
continues to make a diligent effort to effect such remedy or cure.
(d) Termination Upon Death or Permanent and Total Disability. The
Employment Period shall be terminated by the death of the Executive. The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing his duties to the Company by reason of a
"disability," defined as either (i) any medically determined physical or
mental impairment that can be expected to result in death or that can be
expected to last for a period of six or more consecutive months from the
first date of the Executive's absence, or (ii) due to a total and permanent
"disability" that can be expected to last for a period of six or more
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consecutive months from the first date of the Executive's absence, as such
term is defined in the Company's long term disability insurance policy or
contract as may be in effect from time to time for the benefit of employees
of the Company (either, a "Disability"). If the Employment Period is
terminated by reason of a Disability of the Executive, the Company shall give
30 days' advance written notice to that effect to the Executive. If the
existence of a Disability hereunder is in dispute, it shall be resolved by
two physicians, one appointed by the Executive and one appointed by the
Company. If the two physicians so selected cannot agree as to whether or not
the Executive has a Disability, the two physicians so selected shall
designate a third physician and a majority of the three physicians so
selected shall determine whether or not the Executive has a Disability.
(e) Definition of Change in Control. A "Change in Control" shall be
deemed to have taken place if:
(i) there shall be consummated any consolidation or merger of
the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's capital stock are
converted into cash, securities or other property other than a
consolidation or merger of the Company in which the holders of the
Company's voting stock immediately prior to the consolidation or merger
shall, upon consummation of the consolidation or merger, own at least 50%
of the voting stock of the surviving corporation, or any sale, lease,
exchange or other transfer (in one transaction or a series of transactions
contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of the Company; or
(ii) any person (as such term is used in Sections 13(d) and 14
(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) shall after the date hereof become the beneficial owner (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly,
of securities of the Company representing 35% or more of the voting power
of all then outstanding securities of the Company having the right under
ordinary circumstances to vote in an election of the Board (including,
without limitation, any securities of the Company that any such person has
the right to acquire pursuant to any agreement, or upon exercise of
conversion rights, warrants or options, or otherwise, which shall be deemed
beneficially owned by such person); or
(iii) individuals who at the date hereof constitute the entire Board
and any new directors whose election by the Board, or whose nomination for
election by the Company's stockholders, shall have been approved by a vote
of at least a majority of the directors then in office who either were
directors at the date hereof or whose election or nomination for election
shall have been so approved (the "Continuing Directors") shall cease for
any reason to constitute a majority of the members of the Board;
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5. CONSEQUENCES OF TERMINATION
(a) Termination Without Cause or for Good Reason. In the event of
termination of the Executive's employment hereunder by the Company without
"cause" (other than upon death or Disability) or by the Executive for
"good reason" (each as defined in Section 4 hereof), the Executive shall
be entitled to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of continuation
of the Executive's base salary as in effect immediately prior to such
termination over the longer of: (A) the then-remaining Term hereof; or (B)
12 months (the "Severance Period").
(ii) Benefits Continuation - continuation for the Severance
Period of coverage under the group medical care, disability and life
insurance benefit plans or arrangements in which the Executive is
participating at the time of termination; provided, however, that the
Company's obligation to provide or cause to be provided such coverages
shall be terminated if the Executive obtains comparable substitute
coverage from another employer at any time during the Severance Period.
The Executive shall be entitled, at the expiration of the Severance
Period, to elect continued medical coverage in accordance with
section 4980B of the Internal Revenue Code of 1986, as amended (or
any successor provision thereto); and
(iii) Stock Options - all options to purchase shares of the Company's
Common Stock held by the Executive immediately prior to termination of
employment shall become immediately vested and exercisable and, subject
to the terms of the Company's 1997 Long-Term Incentive Plan, shall
remain exercisable for the duration of the Severance Period.
(b) Other Terminations. In the event of termination of the
Executive's employment hereunder for any reason other than those
specified in Section 5(a) hereof, the Executive shall not be entitled
to any severance pay, benefits continuation or stock option rights
contemplated by the foregoing, except as may otherwise be provided under
the applicable benefit plans or award agreements relating to the
Executive.
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(c) Accrued Rights. Notwithstanding the foregoing provisions of
this Section 5, in the event of termination of the Executive's
employment hereunder for any reason, the Executive shall be entitled to
payment of any unpaid portion of his base salary through the effective
date of termination, and payment of any accrued but unpaid rights solely
in accordance with the terms of any incentive bonus, stock option or
employee benefit plan or program of the Company.
6. CONFIDENTIALITY
The Executive agrees that he will not at any time during the Term hereof or
at any time thereafter for any reason, in any fashion, form or manner, either
directly or indirectly, divulge, disclose or communicate to any person, firm,
corporation or other business entity, in any manner whatsoever, any
confidential information or trade secrets concerning the business of the
Company and its subsidiaries, including, without limiting the generality of
the foregoing, the techniques, methods or systems of its operation or
management, any information regarding its financial matters, or any other
material information concerning the business of the Company and its
subsidiaries, their manner of operation, their plans or other material data.
The provisions of this Section 6 shall not apply to (i) information
that is public knowledge other than as a result of disclosure by the
Executive in breach of this Section 6; (ii) information disseminated
by the Company or any of its subsidiaries to third parties in the ordinary
course of business; (iii) information lawfully received by the Executive
from a third party who, based upon inquiry by the Executive, is not bound by
a confidential relationship to the Company or any of its subsidiaries; or
(iv) information disclosed under a requirement of law or as directed by
applicable legal authority having jurisdiction over the Executive.
7. INVENTIONS.
The Executive is hereby retained in a capacity such that the Executive's
responsibilities include the making of technical and managerial contributions
of value to the Company and its subsidiaries. The Executive hereby assigns
to the Company all right, title and interest in such contributions and
inventions made or conceived by the Executive alone or jointly with others
during the Employment Period that relate to the business of the Company or
any of its subsidiaries. This assignment shall include (a) the right to
file and prosecute patent applications on such inventions in any and all
countries, (b) the patent applications filed and patents issuing thereon,
and (c) the right to obtain copyright, trademark or trade name protection
for any such work product. The Executive shall promptly and fully disclose
all such contributions and inventions to the Company and assist the Company
in obtaining and protecting the rights therein (including patents thereon) in
any and all countries; provided, however, that said contributions and
inventions will be the property of the Company, whether or not patented or
registered for copyright, trademark or trade name protection, as the case may
be. The Executive hereby agrees to execute any documentation requested by
the Company to be so executed if such request is made in order to carry out
the purpose and terms of this paragraph. Inventions conceived by the
Executive that are not related
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to the business of the Company or any of its subsidiaries will remain the
property of the Executive.
8. NON-COMPETITION
The Executive agrees that he shall not during the Employment Period and, if
applicable, the Severance Period, without the approval of the Board, directly
or indirectly, alone or as partner, joint venturer, officer, director,
employee, consultant, agent, independent contractor or stockholder (other
than as provided below) of any company or business, engage in any
"Competitive Business" within the United States. For purposes of the
foregoing, the term "Competitive Business" shall mean any business involved
in providing information technology solutions, including, but not limited to,
desktop services, software development, systems design and integration, large
scale survey research, recruiting and comprehensive marketing and sales,
which is in direct competition with the Company or any of its subsidiaries in
any community in which the Company or any of its subsidiaries is doing
business. Notwithstanding the foregoing, the Executive shall not be
prohibited during the non-competition period applicable above from acting as
a passive investor where he owns not more than five percent (5%) of the issued
and outstanding capital stock of any publicly-held company. During the
period that the above non-competition restriction applies, the Executive
shall not, without the written consent of the Company, solicit or encourage
any employee of the Company or any current or future subsidiary or affiliate
thereof to terminate his or her employment.
9. BREACH OF RESTRICTIVE COVENANTS.
The parties agree that a breach or violation of Section 6, 7 or 8 hereof
will result in immediate and irreparable injury and harm to the innocent
party, which party shall have, in addition to any and all remedies of law and
other consequences under this Agreement, the right to an injunction, specific
performance or other equitable relief to prevent the violation of the
obligation hereunder.
10. NOTICES.
For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return
receipt requested, postage prepaid, addressed as follows:
(a) If to the Company, to:
CONDOR TECHNOLOGY SOLUTIONS, INC.
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1650 Tysons Boulevard
Suite 600
McLean, VA 22102
(b) If to the Executive, to:
Daniel J. Roche
c/o CONDOR TECHNOLOGY SOLUTIONS, INC.
1650 Tysons Boulevard
Suite 600
McLean, VA 22102
or to such other address as a party hereto shall designate to the other party
by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
11. ARBITRATION: LEGAL FEES.
Except as provided in Section 9 hereof, any dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in McLean, Virginia in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. The Company shall
reimburse the Executive for all reasonable legal fees and costs and other
fees and expenses that the Executive may incur in respect of any dispute or
controversy arising against the Company under or in connection with this
Agreement; provide, however, that the Company shall not reimburse any such
fees, costs and expenses if the fact finder determines that an action brought
by the Executive was substantially without merit or the Executive is
otherwise unsuccessful in such an action.
12. WAIVER OF BREACH.
Any waiver of any breach of the Agreement shall not be construed to be a
continuing waiver or consent to any subsequent breach on the part of either
the Executive or of the Company.
13. NON-ASSIGNMENT: SUCCESSORS.
Neither part hereto may assign his or its rights or delegate his or its
duties under this Agreement without prior written consent of the other party;
provided, however, that (i) subject to the rights of the Executive under
Section 4(b) hereof, this Agreement shall inure to the benefit of and be
binding upon the successors and assigns of the Company upon any sale of all
or substantially all of the Company's assets, or upon any merger,
consolidation or reorganization of the Company with or into any other
corporation, all as
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though such successors and assigns of the Company and their respective
successors and assigns were the Company; and (ii) this Agreement shall
inure to the benefit of and be binding upon the heirs, assigns or designees
of the Executive to the extent of any payments due to the Executive
hereunder. As used in this Agreement, the term "Company" shall be deemed
to refer to any such successor or assign or the Company referred to in the
preceding sentence.
14. WITHHOLDING OF TAXES.
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any,
relating to tax, and other payroll deductions as the Company may reasonably
determine it should withhold pursuant to any applicable law or regulation.
15. SEVERABILITY.
To the extent any provision of this Agreement or portion thereof shall be
invalid or unenforceable, it shall be considered deleted therefrom and the
remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute
one and the same instrument.
17. GOVERNING LAW.
This Agreement shall be construed, interpreted and enforced in accordance
with the laws of the State of Virginia.
18. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement by the Company and the
Executive with respect to the subject matter hereof and supersedes any and
all prior agreements or understandings between the Executive and the Company
with respect to the subject matter hereof, whether written or oral. This
Agreement may be amended or modified only by a written instrument executed by
the Executive and the Company.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of
____________, 1997.
CONDOR TECHNOLOGY SOLUTIONS, INC.
By: /s/ Kennard F. Hill
___________________
Name: Kennard F. Hill
Title: Chief Executive Officer
By: /s/ J. Marshall Coleman
_______________________
Name: J. Marshall Coleman
Title: Chairman of the Board
THE EXECUTIVE
/s/ Daniel J. Roche
___________________
Name: Daniel J. Roche
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Exhibit 10.6
THE CORPORATE OFFICE CENTRE
AT TYSONS II
OFFICE LEASE AGREEMENT
by and between
TYSONS II DEVELOPMENT CO. LIMITED PARTNERSHIP
and
CONDOR TECHNOLOGY GROUP, INC.
TABLE OF CONTENTS
1. Definitions, Terms and Conditions
2. Rent; Operating Expenses
3. Services and Utilities
4. Maintenance and Repairs
5. Use of Premises
6. Insurance
7. Fire and Casualty
8. Condemnation
9. Assignment and Subletting
10. Default
11. Bankruptcy
12. Tenant's Obligations
13. Security Deposit
14. Subordination; Attornment
15. Quiet Enjoyment
16. Right of Access
17. Limit on Liability
18. Certificates
19. Surrender
20. Holdover
21. Commissions
22. General Provisions
<PAGE>
THE CORPORATE OFFICE CENTRE AT
TYSONS II
OFFICE LEASE AGREEMENT
This OFFICE LEASE AGREEMENT (hereinafter, this "Lease") dated as of the 1st
day of August, 1997, is by and between TYSONS II DEVELOPMENT CO.
LIMITED PARTNERSHIP, a Virginia limited partnership (hereinafter,
"Landlord"), and CONDOR TECHNOLOGY GROUP, INC., a Delaware corporation
(hereinafter, "Tenant").
WITNESS, subject to the terms of this Lease, Landlord hereby leases to
Tenant, and Tenant hereby leases from Landlord, the Leased Premises (as
defined below), for the Term (as defined below).
1. Definitions, Terms, and Conditions.
(a) Special Definitions, Terms, and Conditions. Throughout this
Lease, the following words and phrases shall have the meanings indicated and
obligate the parties as stated:
(1) Advance Deposit. $20,968.88. Such Advance Deposit
shall be paid by Tenant to Landlord upon Tenant's execution hereof and held
by Landlord as temporary security for the performance of Tenant's obligations
hereunder. Such Advance Deposit shall be applied by Landlord toward Basic
Rent as due under this Lease.
(2) (A) Basic Rent. $251,626.50 per annum ($28.50 per
square foot) during the first (1st) year of the Initial Term, as defined
below in Section 1(a)(3). On each anniversary of the Lease Commencement Date
thereafter during the Initial Term, the Basic Rent shall be an amount equal
to the Basic Rent in effect during the immediately preceding year increased
by three percent (3%), as follows:
Year 1 $28.50 per square foot $251,626.50 per year
Year 2 $29.36 per square foot $259,219.44 per year
Year 3 $30.24 per square foot $266,988.96 per year
Year 4 $31.14 per square foot $274,935.06 per year
Year 5 $32.08 per square foot $283,234.32 per year
Year 6 $33.04 per square foot $291,710.16 per year
Year 7 $34.03 per square foot $300,450.87 per year
Year 8 $35.05 per square foot $309,456.45 per year
Year 9 $36.10 per square foot $318,726.90 per year
Year 10 $37.19 per square foot $328,350.51 per year
(B) Parking Rent. $50.00 per month, per permit for the first (1st) year
of the Initial Term, for each of 3.3 permits per 1,000 rentable square feet
of the Leased Premises which number of permits Tenant hereby commits to for
the entire Initial Term
[plus, up to an additional .7 permits per 1,000 rentable square feet of the
Leased Premises can be made available to Tenant at the then escalated Parking
Rent rate]. On each anniversary of the Lease Commencement Date thereafter
during the Initial Term, the per permit Parking Rent rate shall be an amount
equal to the Parking Rent rate in effect during the immediately preceding
year increased by three percent (3%). Two (2) spaces in the Building garage
shall be marked as reserved for Tenant's sole use, in a location designated
by Landlord. Signage for such reserved spaces shall be Tenant's sole cost,
reimbursable to Landlord prior to installation. If and as additional office
space in the Building is leased by Tenant, additional parking at the ratio of
3.3 permits per 1,000 rentable square feet leased shall be made available and
shall be committed to by Tenant, at the rates in effect hereunder.
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(3) Initial Term. The period commencing on the Lease Commencement Date
and ending ten (10) years thereafter.
(B) Renewal Term. In addition to the foregoing, provided Tenant is
not in default of this Lease and provided Tenant notifies Landlord in writing
at least twelve (12) months prior to the expiration of the Initial Term,
Tenant shall have the right to renew this Lease for a period of five (5)
additional years on the same terms and conditions of this Lease, except that
the Basic Rent during such Renewal Term shall be equivalent to ninety-five
percent (95%) of the then fair market rental rate for comparable space in
comparable buildings within Tysons Corner, Virginia which are comparable to
the Building, as determined below.
For purposes of this provision, the term "fair market rental rate" shall
mean the fair market rental rate per square foot of rentable area, on a
full-service basis, taking into account that there shall be no renewal
concessions such as design fees, tenant improvement allowances, moving
allowances and rent abatement, such that the fair market rental rate shall be
reduced by the economic equivalent of such concessions; however,
notwithstanding the foregoing, even after accounting for the absence of
concessions as aforesaid, it is understood and agreed that under no event
shall the rate of Basic Rent during the Renewal Term be less than the rate of
Basic Rent then scheduled to take effect under Section 1(a)(2) above
including the scheduled Basic Rent increase of three percent (3%) per year
during such Renewal Term.
Upon receipt of Tenant's notice to renew, within thirty (30) days
thereafter, Landlord shall make a determination of the "market" Basic Rent
and Landlord shall send written notice to Tenant thereof and shall advise
Tenant of any adjustment to the Basic Rent based on Landlord's determination
of ninety five percent (95%) of "fair market rental" and the basis therefor.
In the event Tenant disagrees with Landlord's determination of "market",
Tenant may, but only within thirty (30) days after receipt of Landlord's
notice, require by written notice to Landlord that the determination of the
fair "market" rental be made by brokers. In such event, each party shall
select a qualified commercial real estate broker with at least ten (10) years
experience in the city or submarket in which the Leased Premises are located
(in this case, Tysons Corner, Virginia). The two (2) brokers shall give
their opinion of the fair market rental within thirty (30) days of their
retention. In the event the opinions of the two (2) brokers differ and,
after good faith efforts over the succeeding twenty (20) day period, they
cannot mutually agree, the brokers shall immediately and jointly appoint a
third broker with the qualifications specified above. Such third (3rd)
broker, within twenty (20) days of his/her appointment, shall make a
determination of the fair market rental rate and, of the three (3)
determinations, average the two (2) closest determinations, and such average
as determined by this third (3rd) broker shall be final and binding on
Landlord and Tenant. Each party shall pay its own costs for its real estate
broker. The parties shall equally share the costs of any third broker. The
parties shall immediately confirm the "market" Basic Rent so determined, in
writing.
(4) (A) Leased Premises. The space located on the sixth (6th) floor
of the Building (a separate suite number for each entryway into the sixth
(6th) floor premises shall be designated by Landlord), as outlined on the
floor plan attached hereto as Exhibit A (exclusive of any Building
mechanical, electrical, telephone or similar rooms, janitor closets,
elevator, pipe and other vertical shafts, ducts and stairwells); the agreed
upon rentable square footage of the Leased Premises, including core space,
utilizing the WDCAR method of measurement, shall be 8,829 rentable square
feet.
(5) (A) Lease Commencement Date. The earlier of substantial completion
of the entire Leased Premises or the date which is sixty (60) days after the
date Landlord has given access to the entire Leased Premises to Tenant.
Access shall be deemed given hereunder whenever any portion of the Leased
Premises is vacated and unoccupied (other than by Tenant).
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(B) Rent Commencement Date. Portions of the Leased Premises may become
available at different times, therefore, the parties intend for rent
obligations to commence hereunder as any portion or portions of Leased
Premises deliver. Accordingly, as used herein, the term "Rent Commencement
Date" shall refer to the date which is sixty (60) days after the date
Landlord has given access to any portion or portions of the Leased Premises
to Tenant (including access retroactively prior to full execution of this
Lease in the event Tenant occupies any portion of the Leased Premises
pursuant to a license granted by Landlord). Landlord shall determine the
area of any occupied or accessible space in good faith. Notwithstanding the
fact that a Rent Commencement Date may occur prior to the commencement of the
Initial Term, any such occupancy of any portion or portions of the Leased
Premises prior to the Lease Commencement Date shall be subject to all
applicable terms and conditions of this Lease, including but not limited to
the liability, insurance and indemnification, and default provisions hereof,
the same shall apply to Tenant's occupancy of any portion or portions of the
Leased Premises, and prorata Basic Rent and Parking Rent shall be payable as
provided in Sections 1(a)(2) above from and after any Rent Commencement Date.
(6) Proportionate Share. The percentage that the rentable square
footage of the Leased Premises bears to the total square footage of all
rentable office space in the Building (363,674 rentable square feet), except
as provided in Section 1(b)(9) hereof.
(7) Operating Expense Increases. Tenant agrees to pay its Proportionate
Share of Operating Expenses (as defined below) in excess of 1998 actual
Operating Expenses, adjusted to reflect ninety-five percent (95%) occupancy,
payable as more fully provided in Section 2.
(8) (A) Security Deposit. $20,968.88 (an amount equal to one (1)
month's Basic Rent for the Leased Premises) in cash, due upon Tenant's
execution hereof, to be held by Landlord subject to Section 13 hereof.
(B) Additional Security. Also upon its execution hereof, Tenant
shall also be required to post a surety bond in the amount of $251,626.50 (an
amount equal to one (1) year's Basic Rent for the Leased Premises), to be
held as an additional Security Deposit pursuant to the terms of Section 13 of
the Lease. Such additional Security Deposit shall in the form of a Lease Bond
such as the one shown in attached Exhibit D, and issued by Reliance Insurance
Company (or a comparable surety approved by Landlord) for the benefit of
Landlord. Such Lease Bond shall be for periods of one (1) year and, subject
to the provisions below allowing for the release of such Lease Bond, Tenant
shall be responsible for renewing such Lease Bond on an annual basis and
maintaining such Lease Bond for the benefit of Landlord throughout the Term.
In addition to Landlord's rights under said Section 13, in the event of an
Event of Default, Landlord may claim and collect the amount in default from
such Lease Bond. Tenant's failure to timely replace any expiring Lease Bond
shall not be an Event of Default. However, upon Tenant's failure to replace
any expiring or unrenewed Lease Bond, the amount of such Lease Bond not so
replaced or renewed shall be added to the amount up to which the guarantor
under the attached Lease Guaranty is to be liable for, at least until such
required Lease Bond is replaced or renewed, as more specifically set forth
under such attached Lease Guaranty. The parties acknowledge that any such
Lease Bond is designed to function as if it were a cash security deposit. It
is specifically agreed that Tenant will not seek injunctive or any other
relief preventing Landlord from drawing on the Lease Bond, but, rather, if
Tenant believes Landlord has improperly drawn on the Lease Bond, it will
pursue an action in damages or other remedies. It is specifically agreed
that Tenant has an adequate remedy at law and that injunctive or other relief
preventing Landlord from drawing on the Lease Bond is unnecessary.
Notwithstanding the foregoing, such additional Security Deposit shall be
returned to Tenant and no longer required by Landlord if, anytime after
October 1, 1997, Tenant provides Landlord with
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audited financial statements, prepared by certified public accountants,
confirming that the tangible net worth of Tenant exceeds $50 million. In the
event of such certification, Tenant may request in writing and Landlord shall
return the aforesaid Lease Bond to Tenant within five (5) business days of
such request and at the same time verify in writing that such Lease Bond is
no longer required.
(9) Tenant's Notice Address. Before the Lease Commencement
Date, to:
Condor Technology Group, Inc.
1921 Gallows Road, Suite 730
Vienna, Virginia 22182
Attn: Mr. James J. Martell, President
and, after the Lease Commencement Date to:
Condor Technology Group, Inc.
1650 Tysons Boulevard, Suite 600
McLean, Virginia 22102
Attn: Mr. James J. Martell, President
(10) Leasing Brokers. Diamond Property Company and Julien J. Studley,
Inc.
(b) General Definitions, Terms, and Conditions. As used in this Lease,
the following words and phrases shall have the meanings indicated and
obligate the parties as stated:
(1) Additional Charges. All amounts payable by Tenant to Landlord
under this Lease other than the Basic Rent. All Additional Charges shall be
deemed to be additional rent and all remedies applicable to non-payment of
Basic Rent shall be applicable thereto. Basic Rent and Additional Charges may
be referred to in combination as "Rent."
(2) Building. The existing office building located at 1650 Tysons
Boulevard, McLean, Virginia 22102, including the underlying lot, the Common
Areas (as defined below), along with portions of the adjacent parking
structure allocated to the Building by Landlord, except that Landlord
reserves and Tenant shall have no right in and to (i) the ownership and use
of the exterior faces of all perimeter walls of the Building, (ii) the
ownership and use of the roof of the Building, or (iii) the ownership and use
of the air space above the Building.
(3) Common Areas. All areas and facilities of the Building
for the common use and/or benefit of tenants of the Building as allocated by
Landlord, including the exterior of the Building and areas and facilities
shared with buildings adjacent to the Building. Except as provided herein,
throughout the Term, Tenant, its agents, employees and business invitees
shall have the non-exclusive right, in common with others, to use the public
lobbies, elevators, corridors, stairways, toilet rooms or other Common Areas
of the Building. Landlord shall have the right at any time, without Tenant's
consent, to change the arrangement or location of entrances, passageways,
doors, doorways, corridors, stairs, toilet rooms or other Common Areas of the
Building, provided Tenant's use of and access to the Leased Premises is not
materially adversely affected, or to change the name, number or designation
by which the Building is known. Landlord reserves unto itself the full and
complete ownership of all tangible personal property installed by Landlord in
the Building. To the best of its knowledge, Landlord has complied with all
achievable "ADA" requirements in the Common Areas.
(4) Event of Default. Any of the events set forth in Section 10
hereof, or any default at law, inclusive of any "cure" periods allowed
hereunder or at law, the same sometimes herein being referred to as a
"default" by Tenant.
(5) Landlord's Building Standard Work. N/A.
(6) Landlord's Notice Address.
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Tysons II Development Co. Limited Partnership
c/o Lerner Corporation
11501 Huff Court
North Bethesda, Maryland 20895-1094
Attention: General Counsel.
All rental payments shall be forwarded to:
Tysons II Development Co. Limited Partnership
c/o Lerner Corporation
11501 Huff Court
North Bethesda, Maryland 20895-1094
Attention: Accounts Receivable.
(7) Lease Year. The period commencing on the Lease Commencement Date
and ending on the last day of the calendar year in which said Lease
Commencement Date occurs shall constitute the first "Lease Year" as such term
is used herein. Each successive full calendar year during the Term
thereafter shall constitute a "Lease Year" and any portion of the Term
remaining after the last full calendar year shall constitute the last "Lease
Year" for the purposes of this Lease.
(8) Mortgage. Any mortgage or
deed of trust which affects any interest in the Building or Landlord, and the
word "mortgagee" shall mean the holder of any such mortgage or the beneficiary
of any such deed of trust.
(9) Operating Expenses. All costs and expenses paid,
incurred or accrued each Lease Year by Landlord in connection with the
management, operation, servicing and maintenance of the Building including,
but not limited to, any costs incurred in keeping the Building in compliance
with code; repairs, maintenance, additions, replacements and improvements to
the Building (excluding capital improvements unless amortized over their
useful life); building, janitorial and cleaning supplies; uniforms and dry
cleaning services; window cleaning services; service contracts for the
maintenance and operation of elevators, boilers, HVAC, mechanical equipment
and exercise equipment; employees' wages, salaries and fringe benefits;
payroll taxes; business and franchise taxes; Real Estate Taxes; electricity,
gas, oil and other fuels and utility charges; sewer and water charges;
premiums for fire and casualty, liability, workmen's compensation and other
insurance; telephone and facsimile services and other communications costs;
common transportation services; any property owners association dues; any
parking management fee; administrative costs and overhead expenses;
miscellaneous management-related expenses; and management fees
[which, notwithstanding anything herein to the contrary, may equal but shall not
exceed four percent (4%) of base rentals]. For purposes of determining
Tenant's share of Operating Expenses which are not fixed and which vary
depending upon Building occupancy levels, such as char services, electricity,
and management fees based upon rental, the Proportionate Share of such
expenses shall be adjusted utilizing as the numerator the square footage of
the Leased Premises and as the denominator the square footage of office
tenants in occupancy of the Building each Lease Year. For purposes of
determining Tenant's share of Operating Expenses which in certain instances
have been contracted for separately by other tenants of the Building, such as
electricity and janitorial services, the Proportionate Share of such expenses
shall be adjusted utilizing as the numerator the square footage of the Leased
Premises and as the denominator the square footage of all remaining office
tenants of the Building which do not contract separately for such services.
Notwithstanding the foregoing, Operating Expenses shall specifically
exclude all expenses for: (i) capital improvements made to the Building,
unless the same are intended to reduce Operating Expenses and the same are
included in annual Operating Expenses amortized over their useful life; (ii)
painting, redecorating or other work which Landlord performs (or allowances
it provides) for any other tenant or
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prospective tenant in the Building; (iii) expenses for repairs and other
work occasioned by fire, windstorm or other insured casualty, (iv)
construction defects in the Building, (v) leasing commissions, legal fees
and advertising expenses in connection with leasing and procuring new tenants
for the Building; (vi) accounting fees and legal expenses incurred in
enforcing the terms of any Lease of space in the Building; (vii) interest
or amortization payments on any mortgage or mortgages which are liens on the
land or Building or on any ground Lease; (viii) rental payable by Landlord
with respect to the land and/or Building; (ix) the cost of performing any
services for other tenants in excess of the services required to be provided
to Tenant by Landlord under this Lease; (x) the cost of providing after hours
HVAC to any tenant; (xi) the costs of providing electricity to portions of
the Building other than the common areas if such costs are either reimbursed
by other tenants or such electricity is separately metered and billed
directly by the electric authority to other tenants; (xii) costs incurred
by Landlord as a result of the negligence or willful acts or omissions of
Landlord, its agents, employees or contractors; (xiii) salaries, expenses,
fringe benefits and other compensation for executives or other personnel
above the grade of building manager; (xiv) costs of contracts with related
companies of Landlord if such contracts are not at rates competitive with the
rates of other local contractors providing such services (although it is
understood and agreed that the management fee may be and currently is 4% of
rentals); (xv) cost of repairs or replacements or improvements incurred by
reason of fire or other casualty or caused by the exercise of the right of
eminent domain whether or not insurance proceeds or condemnation awards are
recovered or adequate for such purposes; (xvi) costs related to any employee
if such employee performs work or services for other than the Building,
except for any bookkeeper or accountant [or other employee]of Landlord to the
extent of the pay relating to time spent serving the Building; (xvii) costs
for services that are reimbursed under any warranty or guarantee of any
equipment; and (xviii) costs incurred in connection with the sale, financing,
refinancing or change in ownership of the Building, including without
limitation brokerage commissions, attorneys' fees, accountants' fees, title
insurance premiums, prepayment penalties, transfer taxes and interest
charges. All operating expenses shall be determined in accordance with
generally accepted accounting principles (GAAP).
(10) Person. A natural person, partnership, corporation or any other
form of business or legal association or entity.
(11) Prime Rate. The prime rate of interest charged from time to time by
NationsBank or its successor to its most favored customers on commercial
loans having a 90-day duration.
(12) Real Estate Taxes. All taxes, assessments, water and sewer rents,
if any, and other charges, if any, general, special or otherwise, including
all assessments for schools, public betterments and general or local
improvements, levied or assessed upon or with respect to the ownership of
and/or all other taxable interests in the Building imposed by any public or
quasi-public authority having jurisdiction. Except for taxes, fees, charges
and impositions described in the next succeeding sentence, Real Estate Taxes
shall not include any income inheritance, estate, succession, transfer,
gift, profit tax or capital levy. If at any time during the Term the methods
of taxation shall be altered so that in addition to or in lieu of or as a
substitute for the whole or any part of any Real Estate Taxes levied,
assessed or imposed there shall be levied, assessed or imposed (i) a tax,
license fee, excise or other charge on the rents received by Landlord, or
(ii) any other type of tax or other imposition in lieu of, or as a substitute
for, or in addition to, the whole or any portion of any Real Estate Taxes,
then the same shall be included as Real Estate Taxes. A tax bill or true
copy thereof, together with any explanatory or detailed statement of the area
or property covered thereby, submitted by Landlord to Tenant shall be prima
facie evidence of the amount of taxes assessed or levied, as well as of the
items taxed. In the event any building or land adjacent to the Building in
which Landlord has an interest is not separately assessed and taxed, Landlord
shall have the right to reasonably allocate a proportionate share to each
such building and Landlord's reasonable determination thereof shall be
binding on the parties hereto. If any real property tax or assessment levied
against the land, buildings or improvements covered hereby or the rents
reserved therefrom, shall
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be evidenced by improvement or other bonds, or in other form, which may be
paid in annual installments, only the amount paid or accrued in any Lease
Year shall be included as Real Estates Taxes for such Lease Year. Landlord
represents that it will not collect more than one hundred (100%) percent of
the total Real Estate Taxes for a given tax year from the tenants of the
Building.
(13) Requirements. All laws, statutes, ordinances, codes, orders, rules,
regulations, requirements and safety recommendations of all federal, state
and municipal governments, and the appropriate agencies, offices,
departments, boards and commissions thereof, Landlord's insurer(s), the board
of fire underwriters and/or the fire insurance rating organization or similar
organization performing the same or similar functions, whether now or
hereafter in force, applicable to the Building or any part thereof and/or the
Leased Premises, and notices from Landlord's mortgagee, as to the manner of
use or occupancy or the maintenance, repair or condition of the Leased
Premises and/or the Building, and the requirements of the carriers of all
fire insurance policies maintained by Landlord on or with regard to the
Building.
(14) Term. The Initial Term and the extended term(s), if any, as to
which Tenant shall have effectively exercised any right to extend, but in any
event the Term shall end on any date when this Lease is sooner terminated in
accordance with the provisions hereof.
2. Rent and Additional Charges; Computation
of Operating Expense Increases.
(a) Payment of Rent and Additional Charges. Tenant shall pay the Basic
Rent and Parking Rent in equal monthly installments in advance on the first
day of each month during the Term commencing on the Lease Commencement Date;
provided, however, if the Lease Commencement Date is not the first day of a
month, Basic Rent for the period commencing on the Lease Commencement Date
and ending on the last day of the month in which the Lease Commencement Date
occurs shall be pro-rated for each day at the rate of one-thirtieth (1/30) of
the full monthly installment of Basic Rent and paid on the Lease Commencement
Date. If any due and owing Basic Rent is underpaid as a result of failure to
make any required adjustment thereto or other cause, after such required
adjustment thereto or other cause, Tenant shall pay such deficiency in its
entirety along with the next monthly payment of Basic Rent. Commencing as of
January 1, 1999, Tenant shall also pay its Proportionate Share of Operating
Expense Increases as provided in Sections 1(a)(7) and 2(b) hereof. The Basic
Rent and all Additional Charges shall be paid promptly when due, in lawful
money of the United States, without (except as otherwise provided in this
Lease, at law or in equity) notice or demand and without deduction,
diminution, abatement, counterclaim or set-off of any amount or for any
reason whatsoever, to Landlord at Landlord's Notice Address or at such other
address or to such other person as Landlord may from time to time designate.
If Tenant makes any payment to Landlord by check, the same shall be by check
of Tenant only, and Landlord shall not be required to accept the check of any
other person, and any check received by Landlord shall be deemed received
subject to collection. If any check is mailed by Tenant, it should mailed to
Landlord's Notice Address and Tenant shall post such check in sufficient time
prior to the date when payment is due so that such check will be received by
Landlord on or before the date when payment is due. Tenant shall assume the
risk of lateness or failure of delivery of the mails. All bank service
charges resulting from any bad checks shall be borne by Tenant. The Rent
reserved under this Lease shall be the total of all Basic Rent and Additional
Charges, increased and adjusted as elsewhere herein provided, payable during
the entire Term.
(b) Computation of Operating Expense.
(1) Following the expiration of each Lease Year (commencing with the
1999 Lease Year), Landlord shall submit to Tenant a statement setting forth
in reasonable detail the Operating Expenses for the preceding Lease Year and
the amount, if any, due to Landlord from Tenant for such Lease Year on
account of such Operating
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Expenses. Such statement shall constitute a final determination between the
parties for the period represented thereby, subject only to proper
adjustments subsequently made by Landlord and subject to Tenant's timely
exercise of its audit rights hereunder. Prior to the rendition of any such
statement, Tenant shall pay to Landlord, on the first day of each month,
1/12th of Landlord's estimate of the Operating Expenses to be due from Tenant
for the current Lease Year. If any such statement shows any Operating
Expenses due from Tenant with respect to such preceding Lease Year, then
Tenant shall make payment of any unpaid portion thereof within thirty (30)
days after receipt of such statement, and any overpayment shall be credited
against Rent next due hereunder. Tenant shall also pay to Landlord as
additional rent, commencing as of the first day of the month immediately
following the rendition of such statement and on the first day of each month
thereafter until a new statement is rendered, 1/12th of Landlord's estimate
of the Operating Expenses to be due from Tenant for the current Lease Year;
and, Tenant shall also pay to Landlord, as additional rent, within thirty
(30) days after receipt of such statement, an amount equal to the difference
between (a) the product obtained by multiplying the estimated Operating
Expenses for the current Lease Year by a fraction, the denominator of which
shall be 12 and the numerator of which shall be the number of months of the
current Lease Year which shall have elapsed prior to the first day of the
month immediately following the rendition of such statement, and (b) the sum
of all previous Operating Expense payments (if any) made by Tenant with
respect to such prior months in the current Lease Year. Payments based on
the estimated Operating Expenses for the 1999 Lease Year shall be credited
toward the actual Operating Expenses due from Tenant for the 1999 Lease Year,
subject to adjustment as and when the statement for such 1999 Lease Year is
rendered by Landlord.
(2) If the initial anniversary of the Lease Commencement Date is not the
first day of a Lease Year, then the Operating Expenses due hereunder for such
Lease Year shall be a pro-rated share of said Operating Expenses for the
entire Lease Year, said prorated share to be based upon the length of time
that the Term was in existence during such Lease Year. Upon the date of
expiration or termination of this Lease, whether the same be the date
hereinabove set forth for the expiration of the Term, or any prior or
subsequent date, a prorated share of said Operating Expenses for the Lease
Year during which such expiration or termination occurs shall immediately
become due and payable by Tenant to Landlord, if it was not theretofore
already billed and paid. The said prorated share shall be based upon the
length of time that the Term shall have been in existence during such Lease
Year. Landlord shall, as soon as reasonably practicable, cause statements of
the Operating Expenses for that Lease Year to be prepared and furnished to
Tenant. Landlord and Tenant shall thereupon make appropriate adjustments of
amounts then owing. Landlord's and Tenant's obligation to make the
adjustments referred to in subparagraphs (1) and (2) of this Section 2(b)
shall survive any expiration or termination of this Lease. Any delay or
failure of Landlord in billing any Operating Expenses hereinabove provided
shall not constitute a waiver of or in any way impair the continuing
obligation of Tenant to pay such Operating Expenses.
(3) Within six (6) months after receipt of the operating statement from
Landlord, Tenant shall have the right, at its expense, and at reasonable
times, to initiate an audit of Landlord's books and records relating to the
additional rental due under this Section, subject to the following. Before
conducting any audit, Tenant must pay the full amount of Operating Expenses
billed (under protest, if Tenant desires) and there must not be an uncured
monetary or otherwise material Event of Default that is continuing. Tenant
may review only those records of Landlord that are specifically related to
Operating Expenses costs. Without limiting the foregoing, Tenant may not
review any other leases or Landlord's tax returns or financial statements, in
conducting an audit, but otherwise Tenant shall be provided all reasonably
necessary documentation to conduct an accurate audit (including, subject to
the foregoing limitation, sufficient documentation to allow Tenant to verify
proper capitalization of costs that are properly amortized hereunder). Tenant
must utilize an individual or firm experienced in auditing commercial office
building records. The audit shall be conducted in Landlord's main office.
Upon receipt thereof, Tenant will deliver to Landlord a copy of the audit
report
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and all accompanying data. Tenant will not disclose the results of any
audits conducted hereunder to other tenants. Notwithstanding the foregoing,
Tenant shall be permitted to furnish the foregoing information to its
attorneys, accountants and auditors to the extent necessary to perform their
respective services for Tenant. The audit shall be conducted in accordance
with generally accepted auditing standards. Tenant may not conduct an audit
more often than once each Lease Year. Tenant may audit records with respect
to each lease year only one time. Finally, any audit shall not cover a
period of time in excess of the two (2) calendar years immediately preceding
the audit. The amount of any mistakes uncovered in any such audit shall be
reconciled and credited to Tenant within thirty (30) days of completion of
such audit.
(c) Interest. If Tenant fails to pay any Basic Rent or Additional
Charges within ten (10) days after due and payable
[or 10 days after written notice if required in Section 10(a)(1) below],
interest shall, at Landlord's option, accrue from the date due on the unpaid
portion thereof at the rate of one percent (1%) above the Prime Rate in
effect on such due date, but in no event at a rate higher than the maximum
rate allowed by law. Such interest shall be deemed additional rent hereunder
and shall be collectible as such.
(d) Accord and Satisfaction. No payment by Tenant or receipt by
Landlord of any lesser amount than the amount stipulated to be paid hereunder
shall be deemed other than on account of the earliest stipulated Basic Rent
or Additional Charges; nor shall any endorsement or statement on any check or
letter be deemed an accord and satisfaction, and Landlord may accept any
check or payment without prejudice to Landlord's right to recover the balance
due or to pursue any other remedy available to Landlord.
(e) Late Payment Charge. If Tenant fails to pay any Basic Rent or
Additional Charges within 10 days after the same become due and payable
[or 10 days after written notice if required in Section 10(a)(1) below],
Tenant shall also pay to Landlord a late payment service charge (to cover
Landlord's administrative and overhead expenses of processing late payments)
equal to the greater of $300.00 or 3% of such unpaid sum. Such payment shall
be deemed liquidated damages and not a penalty, but shall not excuse the
timely payment of Rent.
3. Services and Utilities.
(a) Types. Throughout the Term, Landlord agrees that, without
additional charge except as set forth below, it will furnish to Tenant, in a
first-class manner comparable to such services as provided at office
buildings in Tysons Corner, Virginia, the following services:
(1) Electricity, on a 24-hour per day, year-round basis, for normal
lighting purposes and the operation of ordinary office equipment, subject also
to Section 5(b) hereof;
(2) Adequate supplies for toilet rooms;
(3) Normal and usual cleaning and char services after business
hours each day except on Saturdays, Sundays and legal holidays recognized by
the United States Government;
(4) Hot and cold running water in the bathrooms, on a 24-hour
per day, year-round basis;
(5) Air cooling/heating, when required, between the hours of
7:00 A.M. and 7:00 P.M. Mondays through Fridays and between 8:00 A.M. and
2:00 P.M. on Saturdays, except on legal holidays recognized by the United
States Government. Landlord reserves the right to establish and collect a
charge for air cooling/heating utilized by Tenant during hours and/or days
other than those set forth above (which charge shall be $15.00 per hour, per
zone, increased each Lease Year by the annual increase in utility rates), but
Landlord's failure to establish and/or collect such charge shall not be
deemed a waiver of Landlord's right to include all costs for air cooling in
the in the computation of Operating Expenses for purposes of Section 1(b)(9)
hereof;
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(6) Building access control and automatically operated
elevator service on a 24-hour per day, year-round basis;
(7) All electric bulbs, ballasts and fluorescent tubes in
standard light fixtures in the Leased Premises and the Common Areas;
(8) Facilities for parking on an unassigned basis
[unassigned, except as provided in Section 1(a) above]; and,
(9) Two (2) keys to each entryway to the Leased Premises at
no cost to Tenant, all additional keys at the cost of Tenant; and
(10) A fitness center for common use of tenants of the Building.
In connection with the foregoing, in the event that any service or services to
the Leased Premises are interrupted for a period in excess of five (5)
consecutive business days as a result of the negligent acts or omissions of
Landlord, its agents, contractors or employees, rendering the Leased Premises
untenantable and in fact unused, there shall be an equitable abatement of Basic
Rent during the period of such interruption.
(b) Access. Landlord shall have access to and reserves the right to
inspect, erect, use, connect to, maintain and repair pipes, ducts, conduits,
cables, plumbing, vents and wires, and other facilities in, to and through
the Leased Premises as and to the extent that Landlord may now or hereafter
deem to be necessary or appropriate for the proper operation and maintenance
of the Building (including the servicing of other occupants of the Building)
and the right at all times to transmit water, heat, air conditioning and
electric current through such pipes, conduits, cables, plumbing, vents and
wires and the right to interrupt the same in suspected emergencies without
eviction of Tenant or abatement of Rent.
4. (a) Maintenance and Repairs. Subject to the provisions hereof of
Section 7 below, Landlord agrees to maintain the structural portions of the
Building and central Building mechanical, electrical and plumbing systems,
the Common Areas, and building standard items in the Leased Premises but only
those behind walls or at or above finished ceilings, in good order and repair
throughout the Term, consistent with the standards of first-class office
buildings in Tysons Corner, Virginia. Tenant, and not Landlord, shall be
responsible for (i) maintaining all other improvements to the Leased Premises
including building standard items which are not behind walls or at or above
finished ceilings and any non-standard items in the Leased Premises, and (ii)
reimbursing Landlord for the full cost of any repairs to the Leased Premises
or to any part of the Building caused by the negligence or willful act of
Tenant or its agent or employees, such reimbursement to be collectible as
Additional Charges hereunder 90 days following written demand from Landlord.
Any contractors performing repairs which are the responsibility of Tenant
hereunder must receive the prior written approval of Landlord.
(b) Hazardous Waste. Landlord represents and warrants that, to the
best of Landlord's knowledge, there is no hazardous material on the land or
in the Building, including its interior, systems or structure, and Landlord
represents and warrants that, to the best of Landlord's knowledge, it is in
compliance and will comply throughout the Term with all Requirements relating
to the use, storage, disposal or transportation of hazardous material.
"Hazardous material" or "hazardous substance" shall mean (1) asbestos or
asbestos containing material, (ii) polychlorinated biphenyls in
concentrations greater than 50 parts per million, oil and petroleum products
and their derivatives, (iii) explosive substances, and radioactive,
corrosive, contaminating or polluting materials and (iv) any other material
or substance, whether solid, gaseous, or liquid, which may pose a present or
potential hazard to human health or the environment when improperly disposed
of, treated, stored, transported, or otherwise managed, including (a)
hazardous wasted identified in accordance with Section 3001 of the Federal
Resource Conservation and Recovery Act of 1976, as amended, and (b) hazardous
waste or material identified by regulation of any governmental authority
regulating environmental or health matters. Landlord represents and
warrants, to the best of Landlord's knowledge, it has not received any notice
of violation of any hazardous substance laws in connection with the Building.
In the event that any such
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hazardous material is present in the Leased Premises or the Building,
Landlord shall, in accordance with applicable laws and regulations, promptly
and diligently remove such hazardous material and restore the Leased Premises
to its condition prior to Landlord's removal of the hazardous material.
There shall be an equitable abatement or adjustment of Basic Rent for any
period that Tenant is prevented from using all or a material part of the
Leased Premises as a result of the presence of hazardous material therein or
as a result of remedial measures in respect thereto taken by Landlord, unless
caused by Tenant, its agents, or employees.
5. Use of Leased Premises.
(a) General Offices. Tenant shall use and occupy the Leased
Premises solely for general office purposes, and shall not use or permit or
suffer the use of the Leased Premises for any other purpose whatsoever.
Also, in any announcement of this Lease or other advertising of Tenant making
reference to this Lease or the Leased Premises, Tenant shall also make
reference to "The Corporate Office Centre at Tysons II".
(b) Covenants. Throughout the Term, Tenant covenants and
agrees to: (i) keep the Leased Premises in a neat and clean condition; (ii)
pay before delinquency any and all taxes, assessments and public charges
levied, assessed or imposed upon Tenant's business, upon the leasehold estate
created by this Lease or upon Tenant's fixtures, furnishings or equipment in
the Leased Premises; (iii) not use or permit or suffer the use of any portion
of the Leased Premises for any immoral or unlawful purpose, for any purpose
which would injure the reputation of the Building, or in any manner which
might be hazardous or might jeopardize Landlord's insurance coverage or
increase Landlord's insurance premium; (iv) not use the plumbing facilities
for any purpose other than that for which they were constructed, or dispose
of any foreign substances therein; (v) not place a load on any floor
exceeding the floor load per square foot which such floor was designed to
carry in accordance with the plans and specifications of the Building, and
not install, operate or maintain in the Leased Premises any heavy item of
equipment except in such manner as to achieve a proper distribution of
weight; (vi) not to strip, overload, damage or deface the Leased Premises,
the floors, or the hallways, stairways, elevators, parking facilities or
other Common Areas of the Building, or the fixtures therein or used
therewith, nor to permit any hole to be made in any of the same; (vii) not to
move any furniture or equipment into or out of the Leased Premises except at
such times and in such manner as Landlord may from time to time designate;
(viii) omitted ; (ix) not to install or operate in the Leased Premises any
electrical, heating and cooling, or refrigeration equipment, computer
equipment, electronic data processing equipment, punch card machines or other
equipment using electric current in excess of 5 watts per rentable square
foot on a fully-connected load basis distributed through one breaker per 400
square feet of the Leased Premises, or requiring non-standard electrical
wiring outlets, circuits or panels (other than ordinary office equipment such
as electric typewriters, adding machines, television sets, radios, clocks and
lamps), without first obtaining the written consent of Landlord, who may
condition such consent upon Tenant's agreement to make direct payment to the
local utility company or the payment by Tenant of an Additional Charge to
Landlord, for Tenant's excessive consumption of electricity and for the cost
of additional wiring or metering which may be required for the operation of
such equipment and machinery; (x) not to install any other equipment of any
kind or nature which will or may overheat, exceed the capacity, or otherwise
necessitate any repairs, changes, replacements or additions to, or in the use
of, the water system, heating system, plumbing system, air conditioning
system or electrical system of the Leased Premises or the Building, without
first obtaining the written consent of Landlord; and (xi) at all times to
comply with the Requirements.
(c) Compliance. Tenant will not use or occupy the Leased Premises
in violation of any Requirement. If any governmental authority, after the
commencement of the Term, shall contend or declare that the Leased Premises
are being used for a purpose other than general office use which is in
violation of any Requirement, then Tenant shall, immediately upon demand from
Landlord, discontinue such use of the Leased Premises. If
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thereafter the governmental authority asserting such violation threatens,
commences or continues criminal or civil proceedings against Landlord for
Tenant's failure to discontinue such use other than general office use, in
addition to any and all rights, privileges and remedies given to Landlord
under this Lease for default therein, Landlord shall have the right to
terminate this Lease forthwith. Tenant shall indemnify and hold Landlord
harmless of and from any and all liability for any such violation or
violations, unless caused by Landlord's own negligence, or that of its
agents, employees or contractors.
(d) Rules and Regulations. Tenant and its agents and employees shall
comply with and observe all rules and regulations concerning the use,
management, operation, safety and good order of the Leased Premises and the
Building which may from time to time hereafter be promulgated by Landlord.
Initial rules and regulations, which shall be effective until amended by
Landlord, are attached hereto as Exhibit C. Tenant shall be deemed to have
received notice of any amendment to the rules and regulations when a copy of
such amendment has been delivered to Tenant at the Leased Premises or has
been mailed to Tenant in the manner prescribed for the giving of notices.
Tenant shall comply with all fire protective rules and regulations
promulgated by the Landlord for the safety of the Building and its occupants,
including rules prescribing certain types of materials and prohibiting other
types of materials in the Building. Landlord shall not be responsible to
Tenant for any violation of the rules and regulations, or the covenants or
agreements contained in any other lease, by any other tenant of the Building,
or its agents or employees, and Landlord may waive any or all of the rules or
regulations in respect of any one or more tenants for good cause.
6. Insurance.
(a) Types; Limits. Tenant, at Tenant's sole cost and expense,
shall obtain and maintain in effect at all times during the Term, a policy of
comprehensive general public liability insurance with broad form property
damage endorsement, naming Landlord, Tysons II Development Co. Limited
Partnership, Lerner Enterprises Limited Partnership, Lerner Corporation, and
(at Landlord's request) any mortgagee of the Building, any ground landlord
and any other agent as additional named insured(s), protecting such parties
against any liability for bodily injury, death or property damage occurring
upon, in or about any part of the Building, the Leased Premises or any
appurtenances thereto, with such policies to afford protection to the limit
of not less than $2,000,000 with respect to bodily injury or death to any one
person, to the limit of not less than $2,000,000 with respect to bodily
injury or death to any number or persons in any one accident, and to the
limit of not less than $2,000,000 with respect to damage to the property of
any one owner, and with a deductible no greater than $1,000.00 for any single
occurrence.
(b) Policies. The insurance policy required to be obtained by
Tenant under this Lease (i) shall be issued by an insurance company of
recognized responsibility licensed to do business in the jurisdiction in
which the Building is located, and (ii) shall be written as primary policy
coverage and not contributing with or in excess of any coverage which
Landlord may carry. Neither the issuance of any insurance policy required
under this Lease, nor the minimum limits specified herein with respect to
Tenant's insurance coverage, shall be deemed to limit or restrict in any way
Tenant's liability arising under or out of this Lease. With respect to each
insurance policy required to be obtained by Tenant under this Section, on or
before the Lease Commencement Date, and at least 30 days before the
expiration of any expiring policy or certificate previously furnished, Tenant
shall deliver to Landlord a certificate of insurance therefor, together with
evidence of payment of all applicable premiums. Each insurance policy
required to be carried hereunder by or on behalf of Tenant shall provide
(and any certificate evidencing the existence of each such insurance policy
shall certify) that such insurance policy shall not be canceled unless
Landlord shall have received 30 days' prior written notice of such
cancellation.
(c) Prohibitions. Tenant shall not do, permit or suffer to be
done any act,
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matter, thing or failure to act in respect of the Leased Premises and/or the
Building that is inconsistent with general office use and will invalidate or
be in conflict with insurance policies covering the Building or any part
thereof, and shall not do, or permit anything to be done, in or upon the
Leased Premises and/or the Building, or bring or keep anything therein, which
shall increase the rate of insurance on or related to the Building or on any
property located therein. If, by reason of the failure of Tenant to comply
with the provisions of this subsection, the insurance rate shall at any time
be higher than it otherwise would be, then Tenant shall reimburse Landlord on
demand, for that part of all premiums for any insurance coverage that shall
have been charged because of such violation by Tenant and which Landlord
shall have paid on account of an increase in the rate or rates in its own
policies of insurance.
(d) Hold Harmless; Indemnification. Tenant hereby agrees to
indemnify and hold harmless Landlord, Tysons II Development Co. Limited
Partnership, Lerner Enterprises Limited Partnership, Lerner Corporation and
any mortgagee from and against any and all claims, losses, actions, damages,
liabilities and expenses (including attorneys' fees) that (i) arise from or
are in connection with Tenant's possession, use, occupation, management,
repair, maintenance or control of the Leased Premises or the Building, or any
portion thereof, or (ii) arise from or are in connection with any act or
omission of Tenant or Tenant's agents, employees or invitees at the Building
or within the Leased Premises, or (iii) result from any default, breach,
violation or non-performance of this Lease or any provision herein by Tenant,
or (iv) result from injury or death to persons or damage to property
sustained in or about the Leased Premises. Tenant shall, at its own cost and
expense, defend any and all actions, suits and proceedings which may be
brought against the aforesaid parties with respect to the foregoing or in
which the aforesaid parties may be impleaded. Tenant shall pay, satisfy and
discharge any and all judgments, orders and decrees which may be recovered
against the aforesaid parties in connection with the foregoing. The
aforesaid parties shall not be liable or responsible for, and Tenant hereby
releases the aforesaid parties from all liability or responsibility to Tenant
or any person claiming by, through or under Tenant, by way of subrogation or
otherwise, any injury, loss or damage to any property in or around the Leased
Premises or to Tenant's business irrespective of the cause of such injury,
loss or damage, and Tenant shall require its insurer(s) to include in all of
Tenant's insurance policies which could give rise to a right of subrogation
against the aforesaid parties a clause or endorsement whereby the insurer(s)
shall waive any rights of subrogation against the aforesaid parties as well
as other tenants or occupants of the Building. Subject to subsection (f)
below, Tenant hereby makes such waiver on behalf of its insurer, which
insurer, by insuring Tenant as contemplated under this Lease, shall be deemed
to have acknowledged the provisions hereof.
(e) Landlord Indemnity. Except to the extent covered by insurance or
due to the negligence or willful act of Tenant, its employees, servants or
agents, and notwithstanding any other provision of this Lease, Tenant shall
not be liable for and, except to the extent Tenant is entitled to
reimbursement from insurance proceeds, Landlord will indemnify and save
harmless Tenant of and from (a) all fines, suits, demands, losses and actions
(including reasonable attorney's fees) for any injury to person or damage to
or loss of property arising from (i) the negligence or willful misconduct or
willful mismanagement of the Building by Landlord or its agents, employees,
servants or contractors, or (ii) any work, act or omission, or any condition
created in or about the Leased Premises during the term of this Lease by
Landlord or its agents, employees, servants or contractors, and (b) all
costs, expenses and liabilities incurred in or in connection with any fine,
suit, demand, loss or action relating to Landlord's operation of the Building.
7. Damage by Fire or Other Casualty.
Tenant shall give prompt notice to Landlord in case of any fire or other
damage to the Leased Premises. If the Leased Premises or the Building are
damaged by fire or other casualty not caused by the act or negligence of Tenant
or its agents or employees, Landlord
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shall diligently and as soon as practicable after such damage occurs (taking
into account the time necessary to effectuate a satisfactory settlement with
Landlord's insurance company) repair such damage at its own expense, and
until such repairs have been completed the Basic Rent and Additional Charges
shall be abated in proportion to the part of the Leased Premises which is
rendered untenantable (in no event shall damage to any parking areas be
deemed to render the Leased Premises untenantable). However, if available
insurance proceeds are insufficient or if the Leased Premises or the Building
are damaged by fire or other casualty to such an extent that the damage, in
Landlord's opinion, cannot be fully repaired within 180 days from the date
such damage occurs, Landlord (and, in the final two (2) years of the then
Term, Tenant) shall have the right to, exercised by giving written notice
within such 180-day period, terminate this Lease effective as of the date of
such damage. Notwithstanding the foregoing, if the fire or other casualty
shall be caused by the carelessness, negligence or improper conduct of Tenant
or its agents or employees, Tenant shall remain liable for the full amount of
the Basic Rent and Additional Charges during the period of restoration or
until termination of this Lease, and all required repairs shall be made at
Tenant's expense.
8. Condemnation.
If a majority of the Leased Premises, or all or substantially all of the
Building (or the use or possession thereof), shall be taken in condemnation
proceedings or by exercise of any right of eminent domain, or by a private
purchase in lieu thereof, then this Lease shall terminate and expire on the
date of such taking or purchase and Tenant shall, in all other respects,
keep, observe and perform all the other terms, covenants and conditions of
this Lease up to the date of such taking. The net proceeds of any award or
other compensation payable in connection with such taking or purchase shall
be paid to Landlord, and Tenant hereby assigns to Landlord all of its right,
title and interest in and to such award or other compensation. Tenant shall
have no claim against Landlord for the value (if any) of personal property in
the Leased Premises or the unexpired Term.
9. Assignment and Subletting.
(a) Prohibition. Except as otherwise provided herein, neither Tenant
nor its successors or assigns shall transfer, assign, mortgage or encumber
this Lease, by operation of law or otherwise, or sublet or permit the Leased
Premises, or any part thereof, to be used by others, without the prior
written consent of Landlord which, subject to Landlord's rights hereunder,
shall not be unreasonably withheld or delayed. If Tenant is a corporation,
any transfer of any of Tenant's issued and outstanding capital stock or any
issuance of additional capital stock, as a result of which the majority of
the issued and outstanding capital stock of Tenant is held by a corporation,
firm, or person or persons who do not hold a majority of the issued and
outstanding capital stock of Tenant on the date hereof, shall be deemed an
assignment under this Section 9. Notwithstanding the foregoing, without
Landlord's consent, following written notice to Landlord, Tenant may enter
into an assignment of this Lease or sublet of all or a portion of the Leased
Premises to any subsidiary, affiliate, controlled corporation, or related
entity (including Shadow Entertainment, Inc., and SCM, LLC d/b/a The
Commonwealth Group, sublet notice for which is hereby given), or to any
corporation into which Tenant may be converted or to with which it may merge,
or to a purchaser of all or substantially all of Tenant's assets, or to any
subsidiary or affiliated or parent company of Tenant (or of the above-listed
Tenant-affiliated entities), so long as such successor uses the premises only
for uses permitted under this Lease [and, in the case of a purchase of all or
substantially all of Tenant's assets or in the case of a transfer to a
subsidiary or affiliated or parent company of Tenant (or of the above-listed
Tenant-affiliated entities), so long as such successor possesses at least
substantially equivalent net worth to that of Tenant at the time of entering
into this Lease]. Any attempted transfer, assignment, subletting,
mortgaging or encumbering of this Lease in violation of the foregoing shall
be voidable and confer no rights upon any third person. No assignment or
subletting shall relieve Tenant of any of its obligations under this Lease.
In any event, all assignees, transferees or sublessees shall be obligated to
assume in writing "Tenant's" obligations under this Lease. Notwithstanding
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the foregoing, in lieu of its consent when required hereunder
in connection with an assignment of this Lease or a sublease of all or part
of the Leased Premises to a non-affiliated entity for a term expiring within
the last twelve (12) months of the then Term, Landlord shall have the right,
exercisable within ten (10) days of Tenant's request, to recapture the Leased
Premises to be assigned, or portion to be sublet from Tenant and, in such
event, Tenant shall be released from liability proportionately; however, in
the event of such a recapture prior to the 84th full month of the Initial
Term, provided that Tenant verifies in writing that it has expended sums in
excess of the Landlord Allowance referenced in Exhibit B in connection with
construction of permanent improvement to the Leased Premises, Landlord shall
reimburse Tenant, up to one dollar ($1.00) per square foot of the Leased
Premises for each remaining full lease year, the annualized unamortized
amount of such sums expended by Tenant in excess of the Landlord Allowance
referenced in Exhibit B in connection with construction of permanent
improvement to the Leased Premises, or part thereof recaptured, prorated for
the area recaptured and prorated for each full Lease Year remaining in the
Initial Term, payable at the end of each such full Lease Year. For example,
if Tenant proposes to sublease the entire Leased Premises immediately
following the 60th full month of the Initial Term and Landlord elects to
recapture, and if Tenant has expended nine dollars ($9.00) per square foot
above the Landlord Allowance, Landlord shall reimburse Tenant ninety cents
(904) per square foot of the entire Leased Premises in each full Lease Year
remaining of the Initial Term.
(b) Rent. If, without complying with the provisions of subsection (a)
above, this Lease is transferred or assigned by Tenant, or if the Leased
Premises, or any part thereof, are sublet or occupied by anybody other than
Tenant, whether as a result of any act or omission by Tenant, or by operation
of law or otherwise, Landlord, whether before or after the occurrence of an
Event of Default, may, in addition to, and not in diminution of or
substitution for, any other rights and remedies under this Lease or pursuant
to law to which Landlord may be entitled as a result thereof, collect rent
from the transferee, assignee, subtenant or occupant and apply the net amount
collected to the Basic Rent and Additional Charges herein reserved, but no
such transfer, assignment, subletting, occupancy or collection shall be
deemed a waiver of the provisions of this Section or the acceptance of the
transferee, assignee, subtenant, or occupant as Tenant, or a release of
Tenant from the further performance by Tenant of its obligations under this
Lease. Neither the consent by Landlord to any transfer, assignment or
subletting nor the references in any provision of this Lease or in any rules
and regulations to concessionaires and licensees shall in anywise be
construed to relieve Tenant from obtaining, in each instance, the express
consent in writing of Landlord to any further transfer, assignment or
subletting or to the granting of any concession or license for the use of any
part of the Leased Premises. Notwithstanding the foregoing, net profits from
any subleasing shall be shared equally by Landlord and Tenant. For purposes
hereof, "net" profit shall be calculated after deducting any renovation or
transaction costs, free rent and commissions incurred by Tenant in connection
with such subleasing, as well as deducting the unamortized cost, verified in
writing, expended by Tenant in excess of the Landlord Allowance referenced
in Exhibit B in connection with construction of permanent improvements to the
Leased Premises, amortized on a straight-line basis over the Initial Term
(prorated in the case of the subletting of a portion of the Leased Premises).
Accordingly, at such time as the aforesaid costs are recouped by Tenant
from the profits of such subletting (prorated in the case of the subletting
of a portion of the Leased Premises); thereafter, the profits from rent
charged for such subletting shall be shared equally between Landlord and
Tenant, payable monthly.
10. Default Provisions.
(a) Events of Default. Each of the following events shall be deemed
to be a default under this Lease, and is referred to in this Lease as an
"Event of Default":
(1) A default by Tenant in the due and punctual payment of any
Basic Rent or Additional Charges which continues for more than five (5) days
after such
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Basic Rent or Additional Charges shall be due and payable
[except Tenant shall be entitled to three (3) written notices of monetary
default per each twelve (12) month period allowing ten (10) additional days
to cure]; or
(2) The neglect or failure of Tenant to perform or observe any of the
terms, covenants or conditions contained in this Lease on Tenant's part to be
performed or observed [other than those referred to above in subsection (1)]
which is not remedied by Tenant within thirty (30) days after Landlord shall
have given to Tenant written notice
specifying such neglect or failure [or a reasonable time after written notice
if such failure is incapable of cure within thirty (30) days, so long as
Tenant pursues the cure with due diligence]; or
(3) The assignment, transfer, mortgaging or encumbering of this Lease or
the subletting of the Leased Premises in a manner not permitted by Section 9
hereof; or
(4) The taking of this Lease or the Leased Premises, or any part
thereof, upon execution or by other process of law directed against Tenant,
or upon or subject to any attachment at the insistence of any creditor of or
claimant against Tenant, which execution or attachment shall not be
discharged or disposed of within 30 days after the levy thereof, or the
occurrence of any of the events listed in Section 11 hereof.
(b) Remedies. Upon the occurrence of an Event of Default,
Landlord shall have the right, at its election, then or at any time
thereafter while such Event of Default shall continue, either:
(1) To give Tenant written notice that this Lease will
terminate on a date to be specified in such notice, which date shall not be
less than three (3) days after such notice, and on the date specified in such
notice Tenant's right to possession of the Leased Premises shall cease and
this Lease shall thereupon be terminated, but Tenant shall remain liable as
provided below in subsection (c); or,
(2) Upon notice, to re-enter and take possession of the
Leased Premises, or any part thereof, and repossess the same as of Landlord's
former estate and expel Tenant and those claiming through or under Tenant and
remove its or their effects, either by summary proceedings or by action at
law or in equity, without being deemed guilty of any manner of trespass and
without prejudice to any remedies for arrears of rent or preceding breach of
covenant. If Landlord elects to re-enter under this subsection (2), Landlord
may terminate this Lease, or, from time to time, without terminating this
Lease but terminating Tenant's right to occupy the Leased Premises, may relet
the Leased Premises, or any part thereof, as agent for Tenant for such term
or terms and at such rental or rentals and upon such other terms and
conditions as Landlord may deem advisable, with the right to make alterations
and repairs to the Leased Premises. No such re-entry or taking of possession
of the Leased Premises by Landlord shall be construed as an election on
Landlord's part to terminate this Lease unless a written notice of such
intention is given to Tenant under above subsection (1) or unless the
termination thereof be decreed by a court of competent jurisdiction.
(c) Damages. If Landlord terminates this Lease or Tenant's right to
occupy the Leased Premises pursuant to above subsection (b), Tenant shall
remain liable (in addition to accrued liabilities) to the extent legally
permissible for (i) (A) all Basic Rent and Additional Charges provided for in
this Lease until the date this Lease would have expired had such termination
not occurred, plus the amount of credit against Basic Rent provided under
Section 1(a)(2)(B) hereof, discounted to present value at the Prime Rate at
the time of such termination plus one percent (1%), all accelerated to the
date of any such
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termination, and (B) any and all reasonable expenses incurred by Landlord in
re-entering the Leased Premises, repossessing the same, making good any
default of Tenant, remodeling, altering or dividing the Leased Premises,
combining the same with any adjacent space for any new tenants, putting the
same in proper repair, establishing signage for, reletting the same
(including any and all reasonable attorneys fees and disbursements and
reasonable brokerage fees incurred in so doing), and any and all reasonable
expenses which Landlord may incur in reletting the Leased Premises; less (ii)
the net proceeds of any reletting. Tenant agrees to pay to Landlord the
difference between items (i) and (ii) above, immediately upon any
termination or subletting, in full or, at Landlord's option, with respect to
each month during the Term, at the end of such month. Any suit brought by
Landlord to enforce collection of such difference for any one month shall not
prejudice Landlord's right to enforce the collection of any difference for
any other month. In addition to the foregoing, Tenant shall pay to Landlord
such sums as the court which has jurisdiction thereover may adjudge
reasonable as attorneys fees with respect to any successful law suit or
action instituted by Landlord to enforce the provisions of this Lease.
Landlord shall have the right, at its sole option, to relet the whole or any
part of the Leased Premises for the whole of the unexpired Term, or longer,
or from time to time for shorter periods, for any rental then obtainable,
giving such concessions of rent and making such special repairs, alterations,
decorations and painting for any new tenant as Landlord, in its sole and
absolute discretion, may deem advisable. Landlord's liability as aforesaid
shall survive the institution of summary proceedings and the issuance of any
warrant thereunder.
11. Bankruptcy Termination Provision.
This Lease shall, at Landlord's option, terminate and expire, without
the performance of any act or the giving of any notice by Landlord, upon the
occurrence of any of the following events: (1) [Intentionally Omitted] (2)
the commencement by Tenant of a voluntary case under the federal bankruptcy
laws, as now constituted or hereafter amended, or any other applicable
federal or state bankruptcy, insolvency or other similar law, or (3) the
entry of a decree or order for relief by a court having jurisdiction in the
premises in respect of Tenant in an involuntary case under the federal
bankruptcy laws, as now constituted or hereafter amended, or any other
applicable federal or state bankruptcy, insolvency or other similar law, and
the continuance of any such decree or order unstayed and in effect for a
period of 30 consecutive days, or (4) Tenant's making an assignment of all or
a substantial part of its property for the benefit of its creditors, or (5)
Tenant's seeking or consenting to or acquiescing in the appointment of, or
the taking of possession by, a receiver, trustee or custodian for all or a
substantial part of its property, or (6) the entry of a court order without
Tenant's consent, which order shall not be vacated, set aside or stayed
within 30 days from the date of entry, appointing a receiver, trustee or
custodian for all or a substantial part of its property, (7) the sale of all
or substantially all of Tenant's assets, or (8) any of the foregoing events
by or as against any Guarantor. In the event of termination of the Lease as
a result of any of the foregoing events, Landlord shall be entitled to
damages as set forth in Section 10(c) hereof. The provisions of this Section
11 shall be construed with due recognition for the provisions of the federal
bankruptcy laws, where applicable, but shall be interpreted in a manner which
results in a termination of this Lease in each and every instance, and to the
fullest extent and at the earliest moment, that such termination is permitted
under the federal bankruptcy laws, it being of prime importance to the
Landlord to deal only with Tenants who have, and continue to have, a strong
degree of financial strength and financial stability.
12. Landlord May Perform Tenant's Obligations.
If Tenant shall fail to keep or perform any of its obligations as
provided in this Lease in respect to (a) maintenance of insurance, (b)
repairs and maintenance of the Leased Premises, (c) compliance with the
Requirements, or (d) the making of any other payment or performance of any
other obligation, then Landlord may (but shall not be obligated to do so)
upon the continuance of such failure on Tenant's part for thirty (30) days
after written
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notice to Tenant (or after such additional period, if any, as Tenant may
reasonably require to cure such failure if of a nature which cannot be cured
within said thirty (30) day period) and without waiving or releasing Tenant
from any obligation, and as an additional but not exclusive remedy, make any
such payment or perform any such obligation, and all sums so paid by Landlord
and all necessary incidental costs and expenses, including attorneys fees,
incurred by Landlord in making such payment or performing such obligation,
together with interest thereon at the rate specified in Section 2(c) hereof
from the date of payment, shall be deemed an Additional Charge and shall be
paid to Landlord on demand, or at Landlord's option may be added to any
installment of rent thereafter falling due, and if not so paid by Tenant,
Landlord shall have the same rights and remedies as in the case of a default
by Tenant in the payment of Rent.
13. Security Deposit. Tenant shall deposit with Landlord the
Security Deposit, as security for the prompt, full and faithful performance
by Tenant of each and every provision of this Lease and of all obligations of
Tenant hereunder. If an Event of Default occurs, Landlord may use, apply or
retain the whole or any part of the Security Deposit (or draw down the entire
amount of any Letter of Credit) for the payment of (i) any Basic Rent or
Additional Charges which Tenant shall not have paid or which may become due
after the occurrence of such Event of Default, (ii) any sum expended by
Landlord on Tenant's behalf in accordance with the provisions of this Lease
or (iii) any sum which Landlord may expend or be required to expend by reason
of Tenant's default, including Tenant's default, including damages or
deficiency in the reletting of the Leased Premises as provided in Section 10
hereof. The use, application or retention of the Security Deposit, or any
portion thereof, by Landlord shall not prevent Landlord from exercising any
other right or remedy provided by this Lease or by law and shall not operate
as a limitation on any recovery to which Landlord may otherwise be entitled.
If any portion of the Security Deposit is used, applied or retained by
Landlord for the purposes set forth above, Tenant agrees, within 10 days
after a written demand therefor is made by Landlord, to deposit cash with
Landlord in an amount sufficient to restore the Security Deposit to its
original amount. Provided no Event of Default then exists, the Security
Deposit, or any balance thereof, shall be returned to Tenant within thirty
(30) days after the expiration of the Term, without interest. In the absence
of evidence satisfactory to Landlord of any permitted assignment of the right
to receive the Security Deposit, or the remaining balance thereof, Landlord
may return the same to Tenant, regardless of one or more assignments of
Tenant's interest in this Lease or the Security Deposit. In such event, upon
the return of the Security Deposit (or balance thereof) to Tenant, Landlord
shall be completely relieved of liability under this Section 13. In the
event of a transfer of Landlord's interest in the Leased Premises, Landlord
shall have the right to transfer the Security Deposit to the transferee
thereof. In such event, upon the delivery by Landlord to Tenant of such
transferee's written acknowledgement of its receipt of such Security Deposit,
Landlord shall be deemed to have been released by Tenant from all liability
or obligation for the return of such Security Deposit, and Tenant agrees to
look solely to such transferee for the return of the Security Deposit and the
transferee shall be bound by all provisions of this Lease relating to the
return of the Security Deposit. The Security Deposit shall not be mortgaged,
assigned or encumbered in any manner whatsoever by Tenant without the prior
written consent of Landlord.
14. Subordination; Attornment.
(a) Subordination. This Lease and Tenant's interest hereunder
shall be subject and subordinate to each and every ground or underlying
lease now existing or hereafter made of the Building and/or underlying land
and to all renewals, modifications, replacements and extensions thereof, and
to the lien of any mortgage now or hereafter placed upon the Building, and to
all renewals, modifications, replacements, consolidations and extensions
thereof and to any and all advances made thereunder and the interest thereon.
Tenant agrees that within fifteen (15) days after written request therefor
from Landlord, it will, from time to time, execute and deliver any
instrument or other document required by any such landlord or mortgagee to
subordinate this Lease and its interest in the Leased Premises to such lease
or the lien of any such mortgage. Tenant will also upon
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request submit current financial statements and financial statements covering
the three (3) immediately preceding years, and Tenant will upon request
record this Lease or a short form thereof if required by Landlord's mortgagee
or other lending institution (at Landlord's cost) but, otherwise, Tenant
shall not record this Lease or a short form thereof.
(b) Modifications. In the event that any bank, insurance company,
university, pension or welfare fund, savings and loan association, real
estate investment trust, business trust, or other financial institution
providing financing for the Building requires, as a condition of such
financing, that modifications to this Lease be obtained, and provided that
such modifications (i) are reasonable, (ii) do not materially adversely
affect Tenant's use of the Leased Premises as herein permitted, and (iii) do
not in any amount increase the rentals and other sums required to be paid by
Tenant hereunder, Landlord shall submit such required modifications to
Tenant, and Tenant shall enter into and execute a written amendment hereto
incorporating such required modifications within ten (10) days after the same
have been submitted to Tenant by Landlord. If Tenant shall fail to so enter
into and execute such a written amendment, then Tenant hereby irrevocably
constitutes and appoints Landlord as Tenant's attorney-in-fact to execute,
acknowledge and deliver any and all such instruments for and on behalf of
Tenant and Tenant's compliance therewith shall thereafter be required.
(c) Attornment. In the event of (a) a transfer of Landlord's interest in
the Leased Premises, (b) the termination of any ground or underlying lease of
the Building and/or underlying land, or (c) the purchase of the Building or
Landlord's interest therein at a foreclosure sale or by deed in lieu of
foreclosure under any mortgage or pursuant to a power of sale contained in
any mortgage, then in any of such events, Tenant shall, at Landlord's
request, attorn to and recognize the transferee or purchaser of Landlord's
interest or the landlord under the terminated ground or underlying lease, as
the case may be, as landlord under this Lease for the balance then remaining
of the Term, and thereafter this Lease shall continue as a direct lease
between such person, as "Landlord", and Tenant, as "Tenant", but such
landlord, transferee or purchaser, unless an express assumption is made in
which case Landlord shall be released from liability, shall not be liable for
any act or omission of Landlord prior to such lease termination or prior to
such person's succession to title, nor be subject to any offset, defense or
counterclaim accruing prior to such lease termination or prior to such
person's succession to title, nor be bound by any payment of Basic Rent or
Additional Charges prior to such lease termination or prior to such person's
succession to title for more than one month in advance. Tenant agrees that,
within 15 days after written request therefor from Landlord, it will, from
time to time, execute and deliver any instrument or other document required
by any mortgagee, transferee, purchaser or other interested person to confirm
such attornment and/or such obligation to attorn. Tenant hereby irrevocably
constitutes and appoints Landlord as Tenant's attorney-in-fact to execute,
acknowledge and deliver any and all such instruments for and on behalf of
Tenant.
(d) Notwithstanding the foregoing, at Tenant's cost, upon Tenant's
written request, Landlord shall use reasonable efforts to obtain from the
existing and any future Mortgagee a Non-Disturbance Agreement, on such
Mortgagee's form, providing in effect that, in the event of termination of
this Lease or foreclosure of any such Mortgage, the Landlord under this Lease
or the holder of any such Mortgagee will not attempt to terminate this Lease,
make Tenant a party defendant to any such foreclosure or, in any other way,
foreclose or otherwise extinguish or interfere with the rights of Tenant
under this Lease, so long as Tenant is not in default.
15. Quiet Enjoyment.
Landlord covenants that Tenant, upon paying the Basic Rent and the
Additional Charges provided for in this Lease, and upon performing and
observing all of the terms, covenants, conditions and provisions of this
Lease on Tenant's part to be kept, observed and performed, shall quietly
hold, occupy and enjoy the Leased Premises during the Term without hindrance,
ejection or molestation by Landlord or any party lawfully claiming
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through or under Landlord, subject to the terms of this Lease.
16. Landlord's Right of Access.
Landlord may, during any reasonable time or times (unless a suspected
emergency), before and after the Lease Commencement Date, enter upon the
Leased Premises, any portion thereof and any appurtenance thereto (with
laborers and materials, if required) for the purpose of: (i) inspecting the
same; (ii) making such repairs, replacements or alterations which it may be
required to perform under the provisions of this Lease or which it may deem
desirable for the Leased Premises or the Building, including but not limited
to repairs and improvements to space above, below and/or on the same floor as
the Leased Premises; and (iii) showing the Leased Premises to prospective
purchasers or tenants. Landlord agrees to give notice prior to any such
entry except that Landlord may enter without notice in the case of a
suspected emergency. In making such an entry, Landlord agrees to use
reasonable efforts to avoid interfering with the regular and usual conduct of
the Tenant's business and, except in emergencies, to provide Tenant with
advance notice of the need for such access. If Tenant shall carpet over the
floor of the Leased Premises, Landlord shall have the right to cut such
carpeting in order to make or install any necessary electrical or telephone
equipment or wiring to service other parts of the Building, without being
held liable therefor, provided Landlord shall have the carpeting restored in
a workmanlike manner.
17. Limitation on Landlord's Liability.
(a) Limitation. Except for Landlord's own negligence, or that of
its agents, employees or contractors, Landlord, its affiliates and their
agents and employees shall not be liable to Tenant, its employees, agents,
business invitees, licensees, customers, guests or trespassers for any damage
or loss to the property of Tenant or others located on the Leased Premises or
for any accident or injury to persons in the Leased Premises or the Building
resulting from: the necessity of repairing any portion of the Building; the
use or operation (by Tenant or any other person or persons whatsoever) of any
elevators, or heating, cooling, electrical or plumbing equipment or
apparatus; the termination of this Lease by reason of the destruction of the
Building or the Leased Premises; any fire, robbery, theft and/or any other
casualty; any leaking in any part or portion of the Leased Premises or the
Building; any water, wind, rain or snow that may leak into, or flow from, any
part of the Leased Premises or the Building; any acts or omissions of any
occupant of any space adjacent to or adjoining all or any part of the Leased
Premises; any water, gas, steam, fire, explosion, electricity or falling
plaster; the bursting, stoppage or leakage of any pipes, sewer pipes, drains,
conduits, ducts, appliances or plumbing works; the functioning or
malfunctioning of the fire sprinkler system; the functioning or
malfunctioning of any security system installed in the Building or any part
thereof.
(b) Force Majeure. Landlord and Tenant shall not be required to
perform any of its obligations under this Lease, nor be liable for loss or
damage for failure to do so, nor shall either party be released from any of
its obligations under this Lease because of the Landlord's failure to
perform, where such failure arises from or through acts of God, strikes,
lockouts, labor difficulties, explosions, sabotage, accidents, riots, civil
commotions, acts of war, results of any warfare or warlike conditions in this
or any foreign country, fire and casualty, Requirements or other causes
beyond the reasonable control of Landlord. If either party is so delayed or
prevented from performing any of its obligations during the Term, the period
of such delay or such prevention shall be deemed added to the time herein
provided for the performance of any such obligation. The foregoing shall
not, however, excuse the non-timely payment of Rent by Tenant.
18. Certificates.
Tenant shall, without charge
therefor, at any time and from time to time, within 15 days after request
therefor by Landlord, execute, acknowledge and deliver to Landlord a
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written estoppel certificate certifying to Landlord, any mortgagee, assignee
of a mortgagee, or any purchaser of the Building, or any other person
designated by Landlord, as of the date of such estoppel certificate, to the
extent true and to the best of Tenant's knowledge, (i) that Tenant is in
possession of the Leased Premises,(ii) that this Lease is unmodified and in
full force and effect (or if there have been modifications, that the Lease is
in full force and effect as modified and setting forth such modification);
(iii) whether or not there are then existing any set-offs or defenses against
the enforcement of any right or remedy of Landlord, or any duty or obligation
of Tenant hereunder (and, if so, specifying the same in detail); (iv) the
dates through which Basic Rent and Additional Charges have been paid; (v)
that Tenant having made due investigation has no knowledge of any then
uncured defaults on the part of Landlord under this Lease (or if Tenant has
knowledge of any such uncured defaults, specifying the same in detail); (vi)
that Tenant having made due investigation has no knowledge of any event
having occurred that authorizes the termination of this Lease by Tenant (or
if Tenant has such knowledge, specifying the same in detail); (vii) the
amount of any Security Deposit held by Landlord; and (viii) other matters
reasonably requested by Landlord.
19. Surrender of Leased Premises.
Tenant shall, on or before the last day of the Term, or upon earlier
termination hereof or of Tenant's right to occupy the Leased Premises in
accordance with the terms hereof, (i) peaceably and quietly leave, surrender
and yield up to Landlord the Leased Premises, free of subtenancies, broom
clean and, subject to the provisions of Section 12 hereof, in good order and
condition except for reasonable wear and tear, and (ii) at its expense,
remove from the Leased Premises all movable trade fixtures, furniture,
equipment, and other personal property, provided that Tenant shall promptly
repair any damage caused by such removal. Any of such property not so
removed may, at Landlord's election and without limiting Landlord's right to
compel removal thereof, be deemed abandoned and either may be retained by
Landlord as its property or be disposed of, without accountability, in such
manner as Landlord may see fit. All affixed installations, alterations,
additions, betterments and improvements to the Leased Premises made by either
Landlord or Tenant, whether at Landlord's or Tenant's expense, including,
without limitation, all wiring, paneling, partitions, floor coverings,
lighting fixtures, built-in cabinets, bookshelves affixed to walls, and the
like shall become the property of Landlord when installed (unless Landlord
specifically agrees otherwise in writing upon installation) and shall remain
with the Leased Premises at the expiration or sooner termination of the Term.
The provisions of this Section shall survive any expiration or termination
of this Lease.
20. Holding Over.
If Tenant shall remain in possession of the Leased Premises after the end
of the Term, or earlier termination hereof or Tenant's right to occupy the
Leased Premises, at Landlord's option, Tenant shall be deemed to be occupying
the Leased Premises as a tenant from month-to-month, at 150% of the Basic
Rent in effect during the last month of the Term and, subject to all the
other conditions, provisions and obligations of this Lease insofar as the
same are applicable to a month-to-month tenancy.
21. Leasing Commission.
Each party represents and warrants that, except for the Leasing Brokers,
if any, it has not employed or had contact with any broker relative to this
Lease. Each party shall indemnify and hold harmless the other party from and
against any other claim or claims, except as agreed in writing by Landlord,
for brokerage or other fees or commissions arising from or out of any breach
of the foregoing representation and warranty.
22. General Provisions.
(a) Binding Effect. The covenants, conditions, agreements, terms
and provisions of this Lease shall be binding upon and shall inure to the
benefit of the parties
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hereof and, subject to the provisions of Section 9 hereof, each of their
respective personal representatives, successors and assigns.
(b) Laws. It is the intention of the parties hereto that this Lease
(and the terms and provisions hereof) shall be construed and enforced in
accordance with the laws of the Commonwealth of Virginia.
(c) Waiver. No failure by either party to insist upon the strict
performance of any term, covenant, agreement, provision, condition or
limitation of this Lease or to exercise any right or remedy consequent upon a
breach thereof, and no acceptance by the Landlord of full or partial rent
during the continuance of any such breach, shall constitute a waiver of any
such breach or of any such term, covenant, agreement, provision, condition or
limitation. No term, covenant, agreement, provision, condition or limitation
of this Lease to be kept, observed or performed by Landlord or by Tenant, and
no breach thereof, shall be waived, altered or modified except by a written
instrument executed by Landlord or by Tenant, as the case may be. No waiver
of any breach shall affect or alter this Lease, but each and every term,
covenant, agreement, provision, condition and limitation of this Lease shall
continue in full force and effect with respect to any other existing or
subsequent breach thereof. No failure by Landlord to insist upon the strict
performance of any term, covenant, agreement, provision, condition or
limitation of a lease with any other tenant or to exercise any right or
remedy consequent thereof shall constitute a waiver of any similar term,
covenant, agreement, provision, condition or limitation contained in this
Lease unless the same be incorporated in a written instrument signed by
Landlord and making specific reference to this Lease and to the Tenant's
obligations hereunder.
(d) Notices. No notice, request, consent, approval, waiver or other
communication which may be or is required or permitted to be given under this
Lease shall be effective unless the same is in writing and is delivered in
person or sent by registered or certified mail, return receipt requested,
first-class postage prepaid, (1) if to Landlord, at Landlord's Notice
Address, or (2) if to Tenant, at Tenant's Notice Address, or at any new
address that may be given by one party to the other by notice pursuant to
this subsection. Such notices, if sent by registered or certified mail,
shall be deemed to have been given when mailed.
(e) Entirety. It is understood and agreed by and between the parties
hereto that this Lease contains the final and entire agreement between said
parties relative to the subject matter hereof, and that they shall not be
bound by any terms, statements, conditions or representations relative to the
subject matter hereof, oral or written, express or implied, not herein
contained. It is understood and agreed, however, that, subject to the terms
of Section 14(b) hereof, the terms hereof shall be modified, if so required,
for the purpose of complying with or fulfilling the requirements of any
mortgagee secured by a mortgage that may now be or hereafter become a lien on
the Building, provided, however, that such modification shall not be in
substantial derogation or diminution of any of the rights of the parties
hereunder, nor increase any of the obligations or liabilities of the parties
hereunder.
(f) Waiver of Jury. Landlord and Tenant each hereby waives all right
to trial by jury in any claim, action, proceeding or counterclaim by either
Landlord or Tenant relating to this Lease and/or Tenant's use or occupancy of
the Leased Premises.
(g) Waiver of Venue. Tenant hereby waives any objection to the venue
of any action filed by Landlord against Tenant in any state or federal court
of the jurisdiction in which the Building is located, and Tenant further
waives any right, claim or power, under the doctrine of forum non conveniens
or otherwise, to transfer any such action filed by Landlord to any other
court.
(h) Tenant Entity. If Tenant is a corporation, it shall, concurrently
with the signing of this Lease, furnish to Landlord certified copies of the
resolutions of its Board of Directors (or of the executive committee of its
Board of Directors) authorizing Tenant to
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enter into this Lease; and it shall, if applicable, furnish to Landlord
certified copies of the resolutions of the Board of Directors (or of the
executive committee of such Board of Directors) of any corporate guarantor,
authorizing such corporation to guarantee the obligations of Tenant under
this Lease; and it shall furnish to Landlord evidence (reasonably
satisfactory to Landlord and its counsel) that Tenant is a duly organized
corporation under the laws of the state of its incorporation, is qualified to
do business in the jurisdiction in which the Building is located, is in good
standing under the laws of the state of its incorporation and has the power
and authority to enter into this Lease, and that all corporate action
requisite to authorize Tenant to enter into this Lease has been duly taken.
If Tenant is a partnership, the person executing this Lease on behalf of such
partnership hereby represents and warrants on behalf of such person and the
partners of Tenant that such person is authorized by Tenant to enter into
this Lease.
(i) Time of Essence. Time is of the essence in the performance of all
of Landlord's and Tenant's obligations under this Lease.
(j) Words and Phrases. Wherever appropriate herein, the singular
includes the plural and the plural includes the singular and neuter gender
references shall refer to the gender of the particular party.
(k) Limit on Landlord's Liability. Notwithstanding any provision to the
contrary, Tenant shall look solely to the estate and property of Landlord in
and to the Building (or the proceeds received by Landlord on a sale of such
estate and property but not the proceeds of any financing or refinancing
thereof) in the event of any claim against Landlord arising out of or in
connection with this Lease, the relationship of Landlord and Tenant, or
Tenant's use of the Leased Premises, and Tenant agrees that the liability of
Landlord and the other parties referenced in Section 6(d) hereof arising out
of or in connection with this Lease, the relationship of Landlord and
Tenant, or Tenant's use of the Leased Premises, shall be limited to such
estate and property of Landlord (or sale proceeds). No other properties or
assets of Landlord shall be subject to levy, execution or other enforcement
procedures for the satisfaction of any judgment (or other judicial process)
or for the satisfaction of any other remedy of Tenant arising out of or in
connection with this Lease, the relationship of Landlord and Tenant or
Tenant's use of the Leased Premises, and if Tenant shall acquire a lien on or
interest in any other properties or assets by judgment or otherwise, Tenant
shall promptly release such lien on or interest in such other properties and
assets by executing, acknowledging and delivering to Landlord an instrument
to that effect prepared by Tenant's attorneys. No partnership relation shall
be deemed created hereunder between Landlord and Tenant. The foregoing
provisions of this subsection shall run to the benefit of Landlord, its
successors, assigns, mortgagees and ground lessors.
(l) Counterparts. This Lease maybe executed in several counterparts,
but all such counterparts shall constitute one and the same instrument.
(m) Exhibits and Addendum. Exhibits A (Floor Plan of Leased Premises),
B (Workletter), C (Rules and Regulations), D (Lease Bond) and Addendum, if
any, attached hereto, are hereby incorporated herein.
IN WITNESS WHEREOF, Landlord and Tenant has caused this Lease, including the
attached Addendum, if any, to be signed and attested in its corporate name by
its proper corporate officers and its corporate seal to be affixed as of the
day and year first above written or in its partnership name, as the case may
be.
LANDLORD:
WITNESS: TYSONS II DEVELOPMENT CO. LIMITED
PARTNERSHIP
/s/ Robert Fowler By:/s/ Theodore N. Lerner
- ----------------- ----------------------
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Theodore N. Lerner
General Partner
TENANT:
ATTEST: CONDOR TECHNOLOGY GROUP, INC.
- ----------------------- By:/s/ Edward J. Doyle
-------------------
Name: Edward J. Doyle
----------------
Title: Executive V.P.
----------------
Date: 6/30/97
----------------
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Lease Guaranty
- -------------------------------------------------------------------------------
FOR VALUE RECEIVED. and in consideration for, and as an inducement to,
Landlord's entering into the foregoing lease, including attached Exhibits and
Addendum, if any, or even date herewith, Tysons II Development Co. Limited
Partnership, a Virginia limited partnership (the "Landlord") and Condor
Technology Group, Inc. (the "Tenant"), covering certain premises in 1650
Tysons Boulevard, McLean, Virginia (the "Lease"), the undersigned does hereby
on behalf of itself, its successors, assigns, heirs, administrators, and
personal representatives, as the case may be, covenant and agree with
landlord, its legal representatives, successors and assigns as follows:
(a) that the undersigned will unconditionally guarantee to the Landlord
the prompt and punctual payment of all Rent and other amounts that
may be or become due to Landlord from time to time under the Lease
and will perform all of the covenants in the Lease to be performed
by Tenant thereunder and, in addition, will pay all damages that
may arise in consequence of an Event of Default under the Lease and
all reasonable attorney's fees and other reasonable costs that may
be incurred by Landlord in enforcing Tenant's covenants and
agreements set forth in the Lease, or in enforcing the covenants
and agreements of the undersigned herein, all with required notice
from Landlord of any such Event of Default (however,
notwithstanding the foregoing, the aforesaid guarantee shall be
limited in monetary amount as set forth below in paragraph (j) of
this Lease Guaranty, however, in the Event of Default, Landlord may
claim and collect only the amount then in default from the
undersigned guarantor);
(b) that, at the option of Landlord, the undersigned may be joined in
any action or proceedings commenced by landlord against Tenant in
connection with or based upon the Lease or any provision thereof,
and that recovery may be had against the undersigned in any such
action of proceeding, or in any independent action or proceeding
against the undersigned, without any requirement that Landlord or
its respective successors or assigned first assert, prosecute or
exhaust any remedy or claim against Tenant, its successors or
assigns all to the effect that the liability of the undersigned
hereunder shall be deemed primary;
(c) that, in the event of any bankruptcy reorganization, winding-up, or
similar proceeding with respect to tenant, no limitation on Tenant's
liability under the Lease which may now or hereafter be imposed by
any federal, state or other statute, law or regulation applicable to
such proceedings shall in any way limit the undersigned's obligation
hereunder, which obligation is coextensive with Tenant's liability
as set forth in the Lease, without regard to any such statutory
limitation;
(d) that this Lease guaranty shall be absolute, present and
unconditional and shall remain in full force and effect and extend
to any renewal, extension, indulgence, modification or amendment of
the Lease, and as to assignment, subletting or other transfer of
Tenant's interest under the Lease, whether or not the undersigned
shall have had notice thereof;
(e) that the validity of the Lease Guaranty and the obligations of the
undersigned hereunder shall in no way be terminated, limited,
diminished, affected or impaired by reason of any action which
Landlord might take or be forced to take against Tenant, or by
reason of any waiver of or failure to enforce of the rights or
remedies reserved to Landlord in the Lease or otherwise;
(f) that the obligations of the undersigned, if more than one party,
shall be joint and several and shall be fully valid and binding as
against each signatory hereto individually whether or not any other
party or parties hereto have executed this Lease Guaranty (but, in
total monetary amount, shall not
<PAGE>
exceed the amount referenced below);
(g) that the interest of Landlord under this Lease Guaranty may be
assigned by it, by way of security or otherwise, with or without
notice to the undersigned; and
(h) that the Lease provisions regarding jury waiver, venue and
applicable law shall apply to this Lease Guaranty.
(i) The use of the singular herein shall include the plural. Each term
used in this Lease Guaranty, unless otherwise defined herein, shall have the
same meaning as when used in the Lease. This Lease Guaranty shall be
governed by and construed in accordance with the laws of the State of
Virginia.
(j) Notwithstanding anything herein to the contrary, Guarantor's
liability as a result of Tenant's default under the Lease shall not exceed
the total amount of $251,626.50, subject only to the following. However,
upon Tenant's failure to replace any expiring or unrenewed Lease Bond, as
required by Section 1(a)(8)(B) of the attached Lease, the amount of such
Lease Bond not so replaced or renewed (i.e., an additional $251,626.50) shall
be added to the aforesaid limitation on liability, at least until such
required Lease Bond is replaced or renewed. Further, notwithstanding the
foregoing, this Lease Guaranty shall no longer required by Landlord if,
anytime after October 1, 1997, Tenant provides Landlord with audited
financial statements, prepared by certified public accountants, confirming
that the tangible net worth of Tenant exceeds $50 million. In the event of
such certification, this Lease Guaranty shall automatically, without further
action by the parties, become null and void and no further force or effect.
And, in such event, upon written request from guarantor, Landlord shall
provide written verification of such release from this Lease Guaranty.
Finally, notwithstanding anything herein to the contrary, the undersigned
guarantor shall be entitled to written notice of Event of Default notices
sent to Tenant.
IN WITNESS WHEREOF, the undersigned has caused this Lease Guaranty to be
executed as of even date with the Lease.
Witness:
/s/ Valerie D. Couser /s/ Charles F. Smith
- ------------------------------- ------------------------------
Charles F. Smith
1338 Ballantree Lane
McLean, Virginia 22107
<PAGE>
EXHIBIT B
T Y S O N S I I
WORKLETTER
1. Building Standard Items. N/A.
2. Completion of Leased Premises; Term.
(a) Layout. Tenant agrees to furnish Landlord with its initial space
plans, which space plans are subject to approval by Landlord, within fifteen
(15) days after the date of its execution of this Lease.
(b) Plans. Tenant shall prepare all space plans and all final
architectural and engineering plans, contracting directly with D.B.I. Architects
(or other architect approved by Landlord), completing the construction drawings
for the Leased Premises within forty five (45) days of its execution of this
Lease. All such final plans must be approved in writing by Landlord.
Furthermore, any and all changes of the plans shall require Landlord's approval
and shall be at the sole cost of Tenant. Landlord shall provide its approval
and/or comments, as the case may be, within five (5) business days of submission
of any such plans (any delay in Landlord's approval and/or comments, as
aforesaid, shall result in a corresponding delay in the applicable Rent
Commencement Date or the Lease Commencement Date).
(c) Construction. Landlord shall provide an allowance for completion of
all planning services, permits and construction of the approved plans for the
Leased Premises of ten dollars ($10.00) per rentable square foot of the Leased
Premises (i.e., $88,290.00) (the "Landlord Allowance"). Tenant shall contract
directly with D.B.I. Architects (or other architect approved by Landlord) for
all planning services. Tenant shall perform its own construction of the Leased
Premises, subject to Landlord's prior written approval of all contractors and
subcontractors (Rand Construction, Dietze Construction, HITT, Leapley, and
Fox-Seko Construction are deemed approved general contractors by Landlord). No
construction management fee shall apply. All of Landlord's standard
construction rules and regulations and contractor insurance requirements shall
apply and must be met. The Landlord Allowance shall be payable to Tenant within
thirty (30) days of submission of invoicing for completed work. All costs in
excess of Landlord Allowance shall be Tenant's sole responsibility.
(d) Dates. For purposes hereof, the date the Leased Premises is
"substantially complete" shall be deemed to refer to the date which the required
work was or will be substantially completed as certified by Landlord's architect
which certification shall be made with due regard for the delays set forth below
in subsection (e). For this purpose, too, the date that the Leased Premises
"would have been substantially completed if not for delays occasioned by the
Tenant's failures to act promptly" shall be certified to by Landlord's
contractor which certification shall be made with due regard for all of the
obligations imposed upon the parties pursuant to above subsections (a) and (b).
The assumption of possession of the Leased Premises by Tenant shall constitute
an acknowledgement by Tenant that the Leased Premises are in good condition and
the work done by Landlord therein is satisfactory and accepted in their then "as
is" condition. Within 30 days after the Lease Commencement Date, Landlord and
Tenant shall, at the request of either of them, execute a written instrument
setting forth the Rent Commencement Date and the Lease Commencement Date and
date of expiration of the Term.
(e) Delay. Tenant acknowledges that any delays on its part in submitting
requirements and reviewing and approving plans or prices and any change requests
made by Tenant plans may affect the timely completion of the Leased Premises.
In the event that Tenant's partition and layout requirements or other
requirements are not timely furnished as set forth above in subsection (a),
and/or Tenant fails to timely complete the architectural and engineering plans
as set forth above in subsection (b), and/or changes are required by Tenant in
the final architectural and engineering plans, as set forth above in subsection
(b), and/or Tenant fails to timely pay for amount in excess of the total
allowance or for non-standard items, and/or delivery of non-standard items is
delayed without the fault of Landlord, any resulting delay in the completion of
construction of the Leased Premises shall be at Tenant's sole cost and expense,
and such delay shall in no way affect any Rent
<PAGE>
Commencement Date or the Lease Commencement Date and Tenant's liability for
the payment of Basic Rent and Additional Charges from those dates. Punchlist
items shall likewise not affect any Rent Commencement Date or the Lease
Commencement Date. If, however, Landlord is unable to deliver actual
possession of the Leased Premises to Tenant by reason of the holding over or
retention of possession by any tenant or occupant, the Lease Commencement
Date shall be extended for such period of time as may be reasonably necessary
to enable Landlord to evict such tenant or occupant and to deliver such
possession of the Leased Premises to Tenant, and Landlord's failure to
deliver possession shall not affect the validity of this Lease or Tenant's
obligations hereunder. Landlord shall use its best efforts to remove any
holdover tenant of any portion of the Leased Premises, including efforts to
seek possession judicially.
3. Signs. Tenant shall not inscribe, paint, affix, or otherwise display
any sign, advertisement or notice on any part of the outside or inside of the
Building. Landlord shall provide at no cost to Tenant a standard suite
identification sign to be affixed by Landlord at the exterior entrance to the
Leased Premises in the standard size, color and style selected by Landlord for
the Building. Landlord shall also prepare and install at no cost to Tenant a
reasonable quantity of standard name plates as designated by Tenant on written
notice to Landlord for the lobby directory of the Building, but not more than
one (1) plate per 3,000 square feet of the Leased Premises. If any other
signs advertisements or notices are painted, affixed, or otherwise displayed
without the prior approval of Landlord, Landlord shall have the right to remove
the same, and Tenant shall be liable for any and all costs and expenses incurred
by Landlord in such removal.
4. Alterations. Tenant will not make or permit anyone to make any
alterations, additions or improvements, structural or otherwise in or to the
Leased Premises or the Building, without first obtaining the written consent of
Landlord which consent may be granted or withheld in Landlord's sole and
absolute discretion (other than minor cosmetic changes which do not exceed
$15,000 in cost on each such occasion which Tenant may install without
Landlord's consent following written notice to Landlord). In the event Landlord
consents to any such alterations, etc., if required as aforesaid, the same shall
be performed in accordance with plans and specifications approved in writing by
Landlord, which approval shall not be deemed to assure compliance with code or
other Requirements. In the event Landlord grants such consent and permits
Tenant to contract out such work, such alterations shall be performed by
adequately insured contractors approved by Landlord and in a good and
workmanlike manner in accordance with all applicable Requirements. Landlord may
inspect such work, in progress. In any event, Tenant shall indemnify and hold
harmless Landlord from and against any and all costs, expenses, claims, liens
and damages to person or property resulting from the making of any such
alterations, decorations, additions or improvements in or to the Leased Premises
or the Building requested by Tenant. Tenant shall not permit a mechanic's lien
or liens to be placed upon the Leased Premises or the Building as a result of
any alterations or improvements made by it and agrees, if any such lien be filed
on account of the acts of Tenant, promptly to pay the same. In the event Tenant
fails to pay any such lien, it may be paid by Landlord without releasing Tenant
and the cost charged to Tenant as additional rent under this Lease. If any such
alterations, decorations, additions or improvements are made without the prior
written consent of Landlord, Landlord may correct or remove the same and Tenant
shall be liable for any and all costs and expenses incurred by Landlord in such
removal.
<PAGE>
EXHIBIT C
TYSONS II
RULES AND REGULATIONS
The following rules and regulations have been formulated for the safety and
well-being of all tenants of the Building and are incorporated into and made
part of the attached Lease (hereinafter, the "Lease"). Adherence to these rules
and regulations insures that each and every tenant will enjoy a safe and
un-annoyed occupancy in the Building.
Landlord shall have the continuing right to amend or eliminate any of these
rules and regulations, and also to adopt additional rules and regulations of
like force and effect. Any such change shall be effective at the earlier of
actual notice or five (5) days after delivery of written notice thereof to the
Leased Premises by Landlord.
Landlord may, upon request by any tenant, for good cause, waive the
compliance by such tenant of any of the following rules and regulations,
provided that (a) no waiver shall be effective unless signed by Landlord or
Landlord's authorized agent, (b) any such waiver shall not relieve the tenant
from the obligation to comply with such rule or regulation in the future unless
expressly consented to by Landlord, and (c) no waiver of a rule or regulation
granted to any tenant shall relieve any other tenant from the obligation of
complying with the rule or regulation unless such other tenant has received a
similar waiver in writing from Landlord.
1. The sidewalks, entrances, passages, and the parking, loading, and
service areas, Common Areas, or other parts of the Building not occupied by any
tenant shall not be obstructed or encumbered by any tenant or used for any
purpose other than ingress and egress to and from the tenant's premises.
Landlord shall have the exclusive right to control and operate the Common Areas,
and the facilities furnished for the common use of the tenants of the Building,
in such manner as Landlord deems best for the benefit of the tenants generally.
No tenant shall permit the visit to its premises of persons in such numbers or
under such conditions as to interfere with the use and enjoyment by other
tenants of the Common Areas. Landlord shall in any cases retain the right to
control or prevent access by any person whose presence, in Landlord's judgment,
would be prejudicial or harmful to the safety, peace, character or reputation of
the Building or of any tenant of the Building.
2. No awnings or other projections shall be attached to the outside walls
of the Building without the prior written consent of Landlord. No drapes,
blinds, shades, or screens shall be attached to or hung in, or used in
connection with, any window or door of a tenant's premises, without the prior
written consent of Landlord, except the blinds specified as building standard in
Exhibit B of the Lease. If Landlord has installed or hereafter installs any
shade, blind or curtain in any premises, no tenant shall remove it without first
obtaining Landlord's written consent thereto. Approved blinds must be kept in
the down position at all times but may be pivoted open or closed as chosen by
each tenant. Any other awnings, projections, curtains, blinds, screens or other
fixtures must be of a quality, type, design and color, and attached in the
manner approved by Landlord.
3. No sign, advertisement, notice or other lettering shall be exhibited,
installed, inscribed, painted or affixed by any tenant on any part of the
outside or inside of the tenant's premises or any window thereof, or any part of
the Building, including the rear entrance and loading areas, without the prior
written consent of Landlord. In the event of the violation of the foregoing by
any tenant, Landlord may remove same without any liability, and may charge the
expense incurred by such removal to the tenant or tenants violating this rule.
All signs, including interior signs on the doors and directory tablet shall be
designed and installed by Landlord, and shall only identify each tenant and be
of a size, color and style acceptable to Landlord. Approved vending machines
must be placed so as to not be visible from outside of the Building.
<PAGE>
4. No fixtures, plumbing, electrical equipment, show cases or other items
not shown on approved plans shall be installed or affixed to any part of any
tenant premises or the exterior of the Building, nor placed in the Common Areas,
without the prior written consent of Landlord.
5. The toilet rooms, water and wash closets, and other plumbing fixtures
shall not be used for any purposes other than those for which they were
constructed, and no sweepings, rubbish, rags, or other substances shall be
thrown therein. All damages resulting from any misuse of the fixtures shall be
borne by the tenant who, or whose employees, agents, visitors or licensees,
shall have caused the same.
6. There shall be no marking, painting, drilling into or other form of
defacing or damage of any part of a tenant's premises or the Building. No
boring, cutting or stringing of wires shall be done without the consent of
Landlord. If any tenant desires to install signaling, telegraphic, telephonic,
protective alarm or other wires, apparatus or devices within its premises,
Landlord shall direct where and how they are to be installed and, except as so
directed, no installation, boring or cutting shall be permitted. Landlord shall
have the right (a) to prevent or interrupt the transmission of excessive,
dangerous or annoying current of electricity or otherwise into or through the
Building or the premises, (b) to require the changing of wiring connections or
layout at such tenant's expense, to the extent that Landlord may deem necessary,
(c) to require compliance with such reasonable rules as Landlord may establish
relating thereto, and (d) in the event of noncompliance with such requirements
or rules, immediately to cut wiring or do whatever else it considers necessary
to remove the danger, annoyance or electrical interference with apparatus in any
part of the Building. Each wire installed by any tenant must be clearly tagged
at each distributing board and junction box and elsewhere where required by
Landlord, with the number of the office to which such wire leads and the purpose
for which it is used, together with the name of such tenant or other concern, if
any, operating or using it. No tenant shall construct, maintain, use or operate
within its premises or elsewhere within or on the outside of the Building, any
electrical device, wiring or apparatus in connection with a loud speaker system
or other sound system.
7. No tenant shall make, or permit to be made, any disturbing noises or
disturb or interfere with occupants of the Building or neighboring buildings or
premises or those having business with them, whether by the use of any musical
instrument, radio, tape recorder, whistling, singing, or any other way. No
tenant shall throw anything out of the doors or windows or down the corridors or
stairs.
8. No bicycles, vehicles or animals, birds or pets of any kinds shall be
brought into or kept in or about a tenant's premises. Except in the kitchen
and/or lounge facility shown on approved plans, no cooking shall be done or
permitted by any tenant on its premises and no tenant may install and/or operate
any additional lounge or coffee room or stove, sink and refrigerator, or the
like. No tenant shall cause or permit any unusual or objectionable odors to
originate from its premises. All approved kitchen facilities must be adequately
exhausted by Tenant.
9. No space in or about the Building shall be used for the sale of
merchandise, goods or property of any kind or for sleeping purposes.
10. No flammable, combustible or explosive fluid, chemical or substance
shall be brought or kept upon any tenant's premises, unless approved by the
appropriate local government authority. In any event, each tenant shall hold
harmless Landlord from any damage caused by the same.
11. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any tenant, nor shall any changes be made in existing
locks or the mechanism thereof. The doors leading to the corridors or main
halls shall be kept closed during business hours except as they may be used for
ingress and egress. Each tenant
<PAGE>
shall, upon the termination of its tenancy, return to Landlord all keys used
in connection with its premises, including any keys to the premises, to rooms
and offices within the premises, to storage rooms and closets, to cabinets
and other built-in furniture, and to toilet rooms, whether or not such keys
were furnished by Landlord or procured by tenant, and in the event of the
loss of any such keys, such tenant shall pay to Landlord the cost of
replacing the locks. On termination of a tenant's lease, the tenant shall
disclose to Landlord the combination of all locks for safes, safe cabinets,
and vault doors, if any, remaining in the premises.
12. All removals, or the carrying in or out of any safes, freight,
furniture or bulky matter of any description, must take place in such manner and
during such hours as Landlord may require. Landlord reserves the right to
inspect all freight to be brought into the Building and to exclude from the
Building all freight which violates any of these rules and regulations or the
Lease.
13. Any person employed by any tenant to do janitorial work within the
tenant's premises must obtain Landlord's consent prior to commencing such work,
and such person shall, while in the Building and outside of said premises,
comply with all instructions issued by the superintendent of the Building and
must be properly identified.
14. No tenant shall purchase spring water, ice, coffee, soft drinks,
towels, or other like merchandise or service from any company or person whose
repeated violations of Building regulations have caused, in Landlord's opinion,
a hazard or nuisance to the Building and/or its occupants.
15. Landlord shall have the right to prohibit any advertising by any
tenant which, in Landlord's opinion, tends to impair the reputation of the
Building or its desirability as a place for offices, and upon written notice
from Landlord, such tenant shall refrain from or discontinue such advertising.
16. Landlord reserves the right to exclude from the Building at all times
any person who is not known or does not properly identify himself to the
Building management or its agents. Landlord may, at its option, require all
persons admitted to or leaving the Building to register. Each tenant shall be
responsible for all persons for whom it authorizes entry into the Building, and
shall be liable to Landlord for all acts of such persons. Landlord shall also
have the right to install an electronic access control system for the Building
requiring the use of pass cards, identifications cards, passwords, confidential
codes or the like as a prerequisite to admission of any person into the
Building, and tenant agrees to faithfully abide by the rules of any such system.
If cards or the like are used in any such system, each tenant shall be issued
3.3 cards per 1,000 rentable square feet of the Leased Premises without charge,
but each additional or replacement card requested shall be issued only upon
payment of a standard service fee per card.
17. Each tenant, before closing and leaving its premises at any time, even
though the Lease may be net of utilities, should use its best efforts to see
that all lights, electrical appliances and mechanical equipment are turned off.
18. The requirements of tenants will be attended to only upon application
at the management office for the Building. Building employees shall not perform
any work or do anything outside of their regular duties, unless under special
instructions from the management of the Building.
19. Canvassing, soliciting and peddling in the public Building is
prohibited and each tenant shall cooperate to prevent the same, including
notifying Landlord when and if such activity occurs.
20. There shall not be used in any space, or in any public halls of the
Building, either by a tenant or by jobbers or others, in the delivery or receipt
of merchandise, any hand trucks, except those equipped with rubber tires and
side guards.
<PAGE>
21. Access plates to under-floor conduits shall be left exposed. Where
carpet is installed, carpet shall be cut around access plates.
22. Mats, trash or other objects shall not be placed in the public
corridors.
23. Drapes which are visible from the exterior of the Building must be
cleaned by each tenant at least once a year, without notice, at such tenant's
own expense.
24. All office equipment of any electrical of mechanical nature shall be
placed by any tenant in its premises in approved settings to absorb or prevent
any vibration, noise or annoyance.
25. Tenant shall not permit or cause to be used in any premises any device
or instrument such as a sound reproduction system, or excessively bright,
changing, flashing, flickering, moving lights or lighting devices or any similar
devices, the effect of which shall be audible or visible beyond the confines of
the demised premises, nor shall tenant permit any act or thing upon the demised
premises distributing to normal sensibilities of other tenants.
26. All moving of safes, freight, furniture or bulky matter of any
description, to or from any premises shall only take place during the hours
designated by the Landlord. Hand trucks may be used only if they are equipped
with rubber tires and side guards, and only in designated delivery areas.
Damages caused thereby shall be borne by Tenant.
27. Tenant shall not use the premises as headquarters for large scale
employment of workers for other locations.
28. The premises shall never at any time be used for any immoral or
illegal purposes.
29. Landlord shall have the right, from time to time, to designate
specific parking spaces in the parking areas for the Building as being reserved
for specific tenants or for members of the general public, or designated for
trucks only, and each tenant agrees to honor such reservations and to permit
parking for officers and employees only in those parking spaces available for
such purposes. Violators can be towed at their own expense. Landlord shall
have the further right, during holiday seasons or at other times when parking
spaces may be in short supply, to temporarily change or restrict established
parking areas in order to provide additional public parking, and tenant agrees
to honor such temporary changes and restrictions. Trucks of any tenant's
vendors are not to be left at the Building. Landlord makes no warranty as to
the availability of parking spaces for any tenant unless specific spaces have
been reserved as set forth above.
30. Any utilities meters approved by Landlord shall be placed in the name
of such tenant immediately upon occupancy and, at that time, each tenant shall
provide verification of the meters being in its name to Landlord.
31. Landlord does not maintain suite finishes which are non-standard such
as kitchens, bathrooms, wallpaper, special lights, etc. However, should the
need for repairs arise, Landlord will arrange for the work to be done at
tenant's expense.
32. Nothing in these rules and regulations shall give any tenant any right
or claim against Landlord or any other person if Landlord does not enforce any
of them against any other tenant or person (whether or not Landlord has the
right to enforce them against such tenant or person), and no such
non-enforcement with respect to any tenant shall constitute a waiver of the
right to enforce them as to such tenant or any other tenant person thereafter.
33. Each tenant and its employees, agents and invitees, shall observe and
<PAGE>
comply with the driving and parking signs and markers on the premises
surrounding the Building. And, Landlord shall have the right to rescind,
suspend or modify the rules and regulations and to promulgate such other rules
or regulations as, in Landlord's reasonable judgment, are from time to time
needed for the safety, care, maintenance, operation and cleanliness of the
Building, or for the preservation of good order therein. Upon any tenant's
having been given notice of the taking of any such action, the rules and
regulations, as so rescinded, suspended, modified or promulgated, shall have the
same force and effect as if in effect at the time at which such tenant's Lease
was entered into (except that nothing in these rules and regulations shall be
deemed in any way to alter or impair any provision of such Lease).
<PAGE>
FIRST AMENDMENT TO LEASE
This FIRST AMENDMENT TO LEASE (hereinafter, this "Amendment") dated as of
the day of , 1997, is by and between TYSONS II
DEVELOPMENT CO. LIMITED PARTNERSHIP, a Virginia limited partnership
(hereinafter, "Landlord") and CONDOR TECHNOLOGY GROUP, INC., a Delaware
corporation (hereinafter, "Tenant").
W I T N E S S E T H :
WHEREAS, Landlord and Tenant did previously enter into that certain Lease
August 1, 1997 (hereinafter, the "Lease") relating to the demise of 8,829 square
feet of office space on the sixth (6th) floor in the building known as 1650
Tysons Boulevard, McLean, Virginia (hereinafter, the "Leased Premises");
WHEREAS, Tenant desires to adjust the rentable area of the Leased Premises
and otherwise amend the Lease;
WHEREAS, Landlord is agreeable to amending the Lease, subject to the
following:
NOW, THEREFORE, in consideration of the sum of TEN DOLLARS ($10.00) and
other valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Lease is hereby amended as follows:
1. a. LEASED PREMISES: Modifying the provisions of Section 1(a)(4)(A)
and 1(a)(6) of the Lease, from and after full execution hereof, the Leased
Premises shall be modified to consist of the 4,121 rentable square feet shown
on Exhibit A attached hereto. Accordingly, the area of the Leased Premises
shall be reduced from 8,829 to 4,121 rentable square feet, all references
hereinafter and in the Lease to the "Leased Premises" shall refer to the
4,121 rentable square feet as shown in attached Exhibit A, Tenant's
"Proportionate Share" under Section 1(a)(6) of the Lease shall be modified
accordingly, and all affected terms of the Lease shall be adjusted to reflect
the newly defined rentable area of the Leased Premises, except the Advance
Deposit and the Security Deposit shall remain unmodified.
b. BASIC RENT: Modifying the provisions of Section 1(a)(2)(A)
of the Lease, the annual Basic Rent scheduled set forth therein shall be
modified to reflect the square footage of the Leased Premises, as newly
defined, as follows:
<TABLE>
<CAPTION>
<S> <C>
Year 1 $28.50 psf: $117,448.50 per year Year 6 $33.04 psf: $136,157.84 per year
Year 2 $29.36 psf: $120,992.56 per year Year 7 $34.03 psf: $140,237.63 per year
Year 3 $30.24 psf: $124,619.04 per year Year 8 $35.05 psf: $144,441.05 per year
Year 4 $31.14 psf: $128,327.94 per year Year 9 $36.10 psf: $148,768.10 per year
Year 5 $32.08 psf: $132,201.68 per year Year 10 $37.19 psf: $153,259.99 per year
</TABLE>
c. ALLOWANCE: Modifying the provisions of Section 2 of Exhibit B of the
Lease, to reflect the rentable area of the Leased Premises, as modified hereby,
the "Landlord Allowance" set forth therein shall be adjusted from $88,290.00 to
$41,210.00.
2. ASSIGNMENT: Modifying the provisions of Section 9 of the Lease, so
long as the voting stock of Tenant is listed on a "National Securities
Exchange", as defined in the Securities Exchange Act of 1934, or on the Nasdaq
National Market, no transfer of any of Tenant's issued and outstanding capital
stock nor any issuance of additional capital stock shall be deemed an assignment
under Section 9 of the Lease.
3. LEASE COMMENCEMENT DATE: Notwithstanding the provisions of Section
1(a)5(A) of the Lease, the Lease Commencement date shall be October 15, 1997.
4. SUCCESSORS AND ASSIGNS: The terms and provisions of this Amendment
shall be binding upon and inure to the benefit of the parties hereto, their
successors and assigns.
5. CONFIRMATION OF LEASE: Except as herein otherwise modified or
amended, all of the terms, covenants and conditions of the Lease are hereby
ratified and confirmed, and shall be and remain in full force and effect
until the Lease expires. Words and phrases not otherwise defined herein
shall have the meaning ascribed to them in the Lease.
WITNESS, the following signatures and seals are as of the day and year first
above written.
LANDLORD:
WITNESS: TYSONS II DEVELOPMENT CO. LIMITED PARTNERSHIP
__________________________ By:______________________________________
Theodore N. Lerner
General Partner
TENANT:
ATTEST: CONDOR TECHNOLOGY GROUP, INC.
By:_____________________________
Name:___________________________
Title:__________________________
_______________________ Date:___________________________
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 1st day of November, 1997, between Condor
Technology Solutions, Inc., a Delaware corporation (the "Company"), and William
J. Caragol, Jr. (the "Executive").
WHEREAS, the parties hereto wish to enter into an employment agreement to
employ the Executive as the Vice President-Finance of the Company and to set
forth certain additional agreements between the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and representations
contained herein, the parties hereto agree as follows:
1. TERM.
The Company will employ the Executive, and the Executive will serve the Company,
under the terms of this Agreement for an initial term of three (3) years,
commencing on the date hereof. Effective as of the expiration of such initial
three-year term and as of each anniversary date thereof, the term of this
Agreement shall be extended for an additional 12-month period unless, not later
than two months prior to each such respective date, either party shall have
given notice to the other party that the term shall not be so extended.
Notwithstanding the foregoing, the Executive's employment hereunder may be
earlier terminated, as provided in Section 4 hereof. The term of this
Agreement, as in effect from time to time in accordance with the foregoing,
shall be referred to herein as the "Term." The period of time between the
commencement and the termination of the Executive's employment hereunder shall
be referred to herein as the "Employment Period."
2. EMPLOYMENT.
(a) Position and Reporting. The Company hereby employs the Executive for
the Employment Period as Vice President-Finance of the Company on the terms and
conditions set forth in this Agreement.
(b) Authority and Duties. The Executive shall exercise such authority,
perform such executive duties and functions and discharge such responsibilities
as are reasonably associated with the Executive's position, commensurate with
the authority vested in the Executive's position, pursuant to this Agreement and
consistent with the By-Laws of the Company. Without limiting the generality of
the foregoing, the Executive shall report directly and be responsible to the
President and Chief Executive Officer of the Company . During the Employment
Period, the Executive shall devote his full business time, skill and efforts to
the business of the Company. Notwithstanding the foregoing, the Executive may
(i) make and manage passive personal business investments of his choice (in the
case of publicly-held corporations, not to exceed one percent (1%) of the
outstanding voting stock) and serve in any capacity with any civic, educational
or charitable organization, or any trade association, without seeking or
obtaining approval by the Board of Directors of the Company
<PAGE>
(the "Board"), provided such activities and service do not materially interfere
or conflict with the performance of his duties hereunder and (ii) with the
approval of the Board, which shall not be unreasonably withheld, serve on the
boards of directors of other corporations.
3. COMPENSATION AND BENEFITS.
(a) Salary. During the Employment Period, the Company shall pay to the
Executive, as compensation for the performance of his duties and obligations
under this Agreement, a base salary at the rate of $110,000 per annum, payable
in arrears not less frequently than monthly in accordance with the normal
payroll practices of the Company. Such base salary shall be subject to review
each year for possible increase by the Board, but shall in no event be decreased
from its then-existing level during the Employment Period.
(b) Annual Bonus. During the Employment Period, the Executive shall have
the opportunity to earn an annual bonus in accordance with a Company annual
bonus program to be established by the Board for senior executives of the
Company and its subsidiaries. The payment of any annual bonus under any such
program shall be contingent upon the achievement of certain corporate and/or
individual performance goals established by the Board in its discretion and
shall not exceed an amount equal to the Executive's base salary.
(c) Other Benefits. During the Employment Period, the Executive shall be
entitled to participate in all of the employee benefit plans, programs and
arrangements in effect during the Employment Period that are generally available
to senior executives of the Company, subject to and on a basis consistent with
the terms, conditions and overall administration of such plans, programs and
arrangements. In addition, during the Employment Period, the Executive shall
be entitled to fringe benefits and perquisites comparable to those of other
senior executives of the Company, including, but not limited to, four (4) weeks
of paid vacation per year.
(d) Business Expenses. During the Employment Period, the Company shall
reimburse the Executive for all documented reasonable business expenses
incurred by the Executive in the performance of his duties under this Agreement,
in accordance with the Company's policies.
(e) Indemnification. During the Employment Period and thereafter, the
Company shall indemnify the Executive to the fullest extent permitted by
applicable law, and the Executive shall be entitled to the protection of any
insurance policies the Company may elect to maintain generally for the benefit
of the directors and officers of the Company, with respect to all costs, charges
and expenses, including attorneys' fees, whatsoever incurred or sustained by
the Executive in connection with any action, suit or proceeding (other than any
action, suit or proceeding brought by or in the name of the Company against the
Executive) to which he may be made a party by reason of being or having been a
director, officer or employee of the Company or his serving or having served any
other enterprise as a director, officer or employee at the request of the
Company.
2
<PAGE>
4. TERMINATION OF EMPLOYMENT.
(a) Termination for Cause. The Company may terminate the Executive's
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4 (c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder if
such termination shall be the result of:
(i) willful fraud or dishonesty in connection with the Executive's
performance hereunder that results in material harm to the Company;
(ii) the failure by the Executive to substantially perform his duties
hereunder that results in material harm to the Company; or
(iii) the conviction for, or plea of nolo contendere to, a charge
of commission of a felony.
(b) Termination for Good Reason. The Executive shall have the right at
any time to terminate his employment with the Company at any time and for any
good reason. For purposes of this Agreement and subject to the Company's
opportunity to cure as provided in Section 4 ( c) hereof, the Executive shall
have "good reason" to terminate his employment hereunder if such termination
shall be the result of:
(i) a material diminution during the Employment Period in the
Executive's duties or responsibilities as set forth in Section 2 hereof;
(ii) a material breach by the Company of the compensation and
benefits provisions set forth in Section 3 hereof;
(iii) a notice of termination by the Executive under Section 4 (
c) hereof within 12 months following the occurrence of a Change in Control
(as defined in Section 4 (e) hereof); or
(iv) a material breach by the Company of any other term of this
Agreement.
(c) Notice and Opportunity to Cure. Notwithstanding the foregoing, it
shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach"); (2) if the Executive is terminated for
"cause," the Company provides the Executive an opportunity to appear before the
Board to answer such grounds for termination; and (3) if such breach is
susceptible of cure or remedy, a period of 30 days from and after the giving of
such notice shall have elapsed without the breaching party having effectively
cured or remedied such breach during such 30-day period, unless such breach
cannot be cured or remedied within 30
3
<PAGE>
days, in which case the period for remedy or cure shall be extended for a
reasonable time (not to exceed an additional 30 days), provided the breaching
party has made and continues to make a diligent effort to effect such remedy or
cure.
(d) Termination Upon Death or Permanent and Total Disability. The
Employment Period shall be terminated by the death of the Executive. The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing his duties to the Company by reason of a
"disability," defined as either (i) any medically determined physical or mental
impairment that can be expected to result in death or that can be expected to
last for a period of six or more consecutive months from the first date of the
Executive's absence, or (ii) due to a total and permanent "disability" that can
be expected to last for a period of six or more consecutive months from the
first date of the Executive's absence, as such term is defined in the Company's
long term disability insurance policy or contract as may be in effect from time
to time for the benefit of employees of the Company (either, a "Disability").
If the Employment Period is terminated by reason of a Disability of the
Executive, the Company shall give 30 days' advance written notice to that effect
to the Executive. If the existence of a Disability hereunder is in dispute, it
shall be resolved by two physicians, one appointed by the Executive and one
appointed by the Company. If the two physicians so selected cannot agree as to
whether or not the Executive has a Disability, the two physicians so selected
shall designate a third physician and a majority of the three physicians so
selected shall determine whether or not the Executive has a Disability.
(e) Definition of Change in Control. A "Change in Control" shall be
deemed to have taken place if:
(i) there shall be consummated any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's capital stock are converted
into cash, securities or other property other than a consolidation or
merger of the Company in which the holders of the Company's voting stock
immediately prior to the consolidation or merger shall, upon consummation
of the consolidation or merger, own at least 50% of the voting stock of the
surviving corporation, or any sale, lease, exchange or other transfer (in
one transaction or a series of transactions contemplated or arranged by any
party as a single plan) of all or substantially all of the assets of the
Company; or
(ii) any person (as such term is used in Sections 13(d) and 14
(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") ) shall after the date hereof become the beneficial owner (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly,
of securities of the Company representing 35% or more of the voting power
of all then outstanding securities of the Company having the right under
ordinary circumstances to vote in an election of the Board (including,
without limitation, any securities of the Company that any such person has
the right to acquire pursuant to any agreement, or upon exercise of
conversion rights, warrants or options, or otherwise, which shall be deemed
beneficially owned by such person); or
4
<PAGE>
(iii) individuals who at the date hereof constitute the entire
Board and any new directors whose election by the Board, or whose
nomination for election by the Company's stockholders, shall have been
approved by a vote of at least a majority of the directors then in office
who either were directors at the date hereof or whose election or
nomination for election shall have been so approved (the "Continuing
Directors") shall cease for any reason to constitute a majority of the
members of the Board;
5. CONSEQUENCES OF TERMINATION.
(a) Termination Without Cause or for Good Reason. In the event of
termination of the Executive's employment hereunder by the Company without
"cause" (other than upon death or Disability) or by the Executive for "good
reason" (each as defined in Section 4 hereof), the Executive shall be entitled
to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of continuation of
the Executive's base salary as in effect immediately prior to such
termination over the longer of: (A) the then-remaining Term hereof; or
(B) 12 months (the "Severance Period").
(ii) Benefits Continuation - continuation for the Severance
Period of coverage under the group medical care, disability and life
insurance benefit plans or arrangements in which the Executive is
participating at the time of termination; provided, however, that the
Company's obligation to provide or cause to be provided such coverages
shall be terminated if the Executive obtains comparable substitute coverage
from another employer at any time during the Severance Period. The
Executive shall be entitled, at the expiration of the Severance Period, to
elect continued medical coverage in accordance with section 4980B of the
Internal Revenue Code of 1986, as amended (or any successor provision
thereto); and
(iii) Stock Options - all options to purchase shares of the
Company's Common Stock held by the Executive immediately prior to
termination of employment shall become immediately vested and exercisable
and, subject to the terms of the Company's 1997 Long-Term Incentive Plan,
shall remain exercisable for the duration of the Severance Period.
(b) Other Terminations. In the event of termination of the Executive's
employment hereunder for any reason other than those specified in Section 5(a)
hereof, the Executive shall not be entitled to any severance pay, benefits
continuation or stock option rights contemplated by the foregoing, except as may
otherwise be provided under the applicable benefit plans or award agreements
relating to the Executive.
(c) Accrued Rights. Notwithstanding the foregoing provisions of this
Section 5, in the event of termination of the Executive's employment hereunder
for any reason, the Executive shall be entitled to payment of any unpaid portion
of his base salary through the effective date of termination, and payment of any
accrued but unpaid rights solely in accordance with the terms of any incentive
bonus, stock option or employee benefit plan or program of the Company.
5
<PAGE>
6. CONFIDENTIALITY.
The Executive agrees that he will not at any time during the Term hereof or at
any time thereafter for any reason, in any fashion, form or manner, either
directly or indirectly, divulge, disclose or communicate to any person, firm,
corporation or other business entity, in any manner whatsoever, any confidential
information or trade secrets concerning the business of the Company and its
subsidiaries, including, without limiting the generality of the foregoing, the
techniques, methods or systems of its operation or management, any information
regarding its financial matters, or any other material information concerning
the business of the Company and its subsidiaries, their manner of operation,
their plans or other material data. The provisions of this Section 6 shall not
apply to (i) information that is public knowledge other than as a result of
disclosure by the Executive in breach of this Section 6; (ii) information
disseminated by the Company or any of its subsidiaries to third parties in the
ordinary course of business; (iii) information lawfully received by the
Executive from a third party who, based upon inquiry by the Executive, is not
bound by a confidential relationship to the Company or any of its
subsidiaries;or (iv) information disclosed under a requirement of law or as
directed by applicable legal authority having jurisdiction over the Executive.
7. INVENTIONS.
The Executive is hereby retained in a capacity such that the Executive's
responsibilities include the making of technical and managerial contributions of
value to the Company and its subsidiaries. The Executive hereby assigns to the
Company all right, title and interest in such contributions and inventions made
or conceived by the Executive alone or jointly with others during the Employment
Period that relate to the business of the Company or any of its subsidiaries.
This assignment shall include (a) the right to file and prosecute patent
applications on such inventions in any and all countries, (b) the patent
applications filed and patents issuing thereon, and (c) the right to obtain
copyright, trademark or trade name protection for any such work product. The
Executive shall promptly and fully disclose all such contributions and
inventions to the Company and assist the Company in obtaining and protecting the
rights therein (including patents thereon) in any and all countries; provided,
however, that said contributions and inventions will be the property of the
Company, whether or not patented or registered for copyright, trademark or trade
name protection, as the case may be. The Executive hereby agrees to execute any
documentation requested by the Company to be so executed if such request is made
in order to carry out the purpose and terms of this paragraph. Inventions
conceived by the Executive that are not related to the business of the Company
or any of its subsidiaries will remain the property of the Executive.
8. NON-COMPETITION.
The Executive agrees that he shall not during the Employment Period and, if
applicable, the Severance Period, without the approval of the Board, directly
or indirectly, alone or as partner, joint venturer, officer, director, employee,
consultant, agent, independent contractor or stockholder (other than as provided
below) of any company or business, engage in any "Competitive Business" within
the United States. For purposes of the foregoing, the term "Competitive
Business" shall mean any
6
<PAGE>
business involved in providing information technology solutions, including, but
not limited to, desktop services, software development, systems design and
integration, large scale survey research, recruiting and comprehensive marketing
and sales, which is in direct competition with the Company or any of its
subsidiaries in any community in which the Company or any of its subsidiaries is
doing business. Notwithstanding the foregoing, the Executive shall not be
prohibited during the non-competition period applicable above from acting as a
passive investor where he owns not more than one percent (1%) of the issued and
outstanding capital stock of any publicly-held company. During the period that
the above non-competition restriction applies, the Executive shall not, without
the written consent of the Company, solicit or encourage any employee of the
Company or any current or future subsidiary or affiliate thereof to terminate
his or her employment.
9. BREACH OF RESTRICTIVE COVENANTS.
The parties agree that a breach or violation of Section 6, 7 or 8 hereof will
result in immediate and irreparable injury and harm to the innocent party, which
party shall have, in addition to any and all remedies of law and other
consequences under this Agreement, the right to an injunction, specific
performance or other equitable relief to prevent the violation of the obligation
hereunder.
10. NOTICES.
For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
(a) If to the Company, to:
CONDOR TECHNOLOGY SOLUTIONS, INC.
1650 Tysons Boulevard
Suite 600
McLean, VA 22102
(b) If to the Executive, to:
William J. Caragol, Jr.
c/o CONDOR TECHNOLOGY SOLUTIONS, INC.
1650 Tysons Boulevard
Suite 600
McLean, VA 22102
or to such other address as a party hereto shall designate to the other party by
like notice, provided that notice of a change of address shall be effective only
upon receipt thereof.
7
<PAGE>
11. ARBITRATION: LEGAL FEES.
Except as provided in Section 9 hereof, any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by arbitration
in McLean, Virginia in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. The Company shall reimburse the Executive for
all reasonable legal fees and costs and other fees and expenses that the
Executive may incur in respect of any dispute or controversy arising against the
Company under or in connection with this Agreement; provided, however, that the
Company shall not reimburse any such fees, costs and expenses if the fact finder
determines that an action brought by the Executive was substantially without
merit or the Executive is otherwise unsuccessful in such an action..
12. WAIVER OF BREACH.
Any waiver of any breach of the Agreement shall not be construed to be a
continuing waiver or consent to any subsequent breach on the part of either the
Executive or of the Company.
13. NON-ASSIGNMENT: SUCCESSORS.
Neither party hereto may assign his or its rights or delegate his or its duties
under this Agreement without the prior written consent of the other party;
provided, however, that (i) subject to the rights of the Executive under Section
4(b) hereof, this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Company upon any sale of all or substantially
all of the Company's assets, or upon any merger, consolidation or reorganization
of the Company with or into any other corporation, all as though such successors
and assigns of the Company and their respective successors and assigns were the
Company; and (ii) this Agreement shall inure to the benefit of and be binding
upon the heirs, assigns or designees of the Executive to the extent of any
payments due to the Executive hereunder. As used in this Agreement, the term
"Company" shall be deemed to refer to any such successor or assign or the
Company referred to in the preceding sentence.
14. WITHHOLDING OF TAXES.
All payments required to be made by the Company to the Executive under this
Agreement shall be subject to the withholding of such amounts, if any, relating
to tax, and other payroll deductions as the Company may reasonably determine it
should withhold pursuant to any applicable law or regulation.
15. SEVERABILITY.
To the extent any provision of this Agreement or portion thereof shall be
invalid or unenforceable, it shall be considered deleted therefrom and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect.
8
<PAGE>
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same instrument.
17. GOVERNING LAW.
This Agreement shall be construed, interpreted and enforced in accordance with
the laws of the State of Virginia.
18. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement by the Company and the Executive
with respect to the subject matter hereof and supersedes any and all prior
agreements or understandings between the Executive and the Company with respect
to the subject matter hereof, whether written or oral. This Agreement may be
amended or modified only by a written instrument executed by the Executive and
the Company.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of November
1, 1997.
CONDOR TECHNOLOGY SOLUTIONS, INC.
By: /s/ J. Marshall Coleman
------------------------------
Name: J. Marshall Coleman
Title: Chairman of the Board
THE EXECUTIVE
/s/ William J. Caragol, Jr.
---------------------------------
Name: William J. Caragol, Jr.
10
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports as of the dates, and
related to the financial statements of the companies, listed below which
appear in such Prospectus:
Company Date
------- ----
Condor Technology Solutions, Inc. November 24, 1997
Computer Hardware Maintenance Company, Inc. October 31, 1997
Corporate Access, Inc. July 18, 1997
Interactive Software Systems Incorporated October 31, 1997
U.S. Communications, Inc. October 31, 1997
InVenture Group, Inc. July 15, 1997
MIS Technologies, Inc. October 31, 1997
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, PA
December 11, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
Condor Technology Solutions, Inc. of our report dated November 24, 1997, on
our audits of the consolidated financial statements of Federal Computer
Corporation and Subsidiaries as of October 31, 1995 and 1996 and July 31, 1997
and for each of the three years in the period ended October 31, 1996 and for
the nine months ended July 31, 1997. We also consent to the reference to our
firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Washington, D.C.
December 12, 1997
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-37179 of Condor Technology Solutions, Inc. on Form S-1 (the
"Registration Statement")of our report dated October 29, 1997 (relating to
the financial statements of Management Support Technology Corp., which report
expresses an unqualified opinion and includes an explanatory paragraph
relating to the chief exectuive officer/sole stockholder's compensation being
at his sole discretion), appearing in the Prospectus, which is part of such
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 10, 1997
<PAGE>
Exhibit 23.7
CONSENT TO BE NAMED AS A DIRECTOR
OF
CONDOR TECHNOLOGY SOLUTIONS, INC.
The undersigned hereby consents to be named as a director of Condor
Technology Solutions, Inc. (the "Company") in the Registration Statement on
Form S-1 (Registration No. 333-37179) and all amendments thereto, filed by
the Company with the Securities and Exchange Commission.
/s/ William M. Newport
_______________________
William M. Newport
<PAGE>
Exhibit 23.8
CONSENT TO BE NAMED AS A DIRECTOR
OF
CONDOR TECHNOLOGY SOLUTIONS, INC.
The undersigned hereby consents to be named as a director of Condor
Technology Solutions, Inc. (the "Company") in the Registration Statement on
Form S-1 (Registration No. 333-37179) and all amendments thereto, filed by
the Company with the Securities and Exchange Commission.
/s/ Peter T. Garahan
_______________________
Peter T. Garahan
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