<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
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>
ANNAPOLIS OFFICE PLAZA
170 JENNIFER ROAD, SUITE 325
ANNAPOLIS, MARYLAND 21401
(410) 266-8700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
KENNARD F. HILL
CHIEF EXECUTIVE OFFICER
CONDOR TECHNOLOGY SOLUTIONS, INC.
ANNAPOLIS OFFICE PLAZA
170 JENNIFER ROAD, SUITE 325
ANNAPOLIS, MARYLAND 21401
(410) 266-8700
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------
COPY TO:
CHRISTOPHER T. JENSEN, ESQ.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
(212) 309-6000
--------------------------
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. /X/
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. / /
CALCULATION OF REGISTRATION FEE CHART
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (1) OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.................. 5,000,000 shares $14.3125 $71,562,500 $21,110.94
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the average of the high and the low prices of Common
Stock on the Nasdaq National Market on May 28, 1998.
--------------------------
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>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-37179
SUBJECT TO COMPLETION
JUNE 1, 1998
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>
5,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
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.
This Prospectus covers 5,000,000 shares of common stock, $.01 par value (the
"Common Stock"), which may be offered and issued by Condor Technology Solutions,
Inc. (the "Company") from time to time in connection with the merger with or
acquisition by the Company of other businesses or assets. It is expected that
the terms of acquisitions involving the issuance of securities covered by this
Prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be merged with or acquired by
the Company, and that the shares of Common Stock issued will be valued at prices
reasonably related to market prices current either at the time a merger or
acquisition are agreed upon or at or about the time of delivery of shares. No
underwriting discounts or commissions will be paid, although finder's fees may
be paid from time to time with respect to specific mergers or acquisitions. Any
person receiving any such fees may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
The Company currently has 10,981,422 shares of its Common Stock outstanding,
of which 6,785,000 are registered and available for unrestricted trading in the
public markets unless owned by affiliates of the Company. Application will be
made to list the shares of Common Stock offered hereby on the Nasdaq National
Market. On May 28, 1998, the closing price of the Common Stock on the Nasdaq
National Market was $14.625 per share as published in THE WALL STREET JOURNAL on
May 29, 1998.
All expenses of this offering will be paid by the Company. The Company is a
Delaware corporation and all references herein to the Company refer to the
Company and its subsidiaries. The executive offices of the Company are located
at Annapolis Office Plaza, 170 Jennifer Road, Suite 325, Annapolis, Maryland
21401.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS AND TO MAKE AVAILABLE TO ITS STOCKHOLDERS QUARTERLY REPORTS
CONTAINING UNAUDITED SUMMARY FINANCIAL INFORMATION FOR EACH OF THE FIRST THREE
QUARTERS OF EACH FISCAL YEAR.
------------------------
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 ITS INITIAL PUBLIC OFFERING OF COMMON STOCK ON
FEBRUARY 10, 1998 (THE "OFFERING"), CONDOR TECHNOLOGY SOLUTIONS, INC. ACQUIRED,
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 HAS BEEN ADJUSTED TO GIVE EFFECT TO THE MERGERS AND
SUBSEQUENT ISSUANCES OF UNREGISTERED SHARES.
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 a wide range of IT
services and solutions to companies with revenues ranging from $50 million to $1
billion, divisions of larger companies and governmental entities (collectively,
'middle market organizations'). In order to become a single-source provider of
IT services and solutions to middle market organizations, Condor entered into
agreements (the "Merger Agreements") to acquire, simultaneously with and as a
condition to the closing of the Offering in February 1998, eight established IT
service providers. In February, 1998 the Company closed its offering of
6,785,000 shares of Common Stock (including 885,000 shares issued pursuant to
the exercise of the underwriters' over-allotment option) at $13.00 per share and
received net proceeds of $73.1 million. On February 10, 1998 simultaneous with
the closing of the Offering the Company purchased the Founding Companies for
total consideration of $78.4 million, including $47.1 million of cash, $1.3
million of debt assumed and 2,307,693 shares of Common Stock. 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 single source for 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 Founding Companies, on a pro forma combined basis, had revenues of
approximately $144.3 million for the year ended December 31, 1997 and $40.7
million for the three months ended March 31, 1998.
The Company will focus on marketing its wide range of IT offerings to middle
market organizations, which the Company believes typically spend from $2 million
to $30 million annually on their IT needs. The IT service industry is highly
fragmented 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
3
<PAGE>
providers typically address the IT needs of large organizations with substantial
requirements for a wide range of IT services, whereas smaller IT service firms
provide specialized services of limited scope. Consequently, due to their size
and budgets, middle market organizations most often rely on multiple,
specialized IT service providers to help implement and manage their systems. The
Company believes that a single-source IT service provider will enable middle
market organizations to reduce cost and management complexity of purchasing IT
services while increasing the quality and compatibility of IT solutions.
The Company will seek to deliver its 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 industry groups have been underserved by large IT vendors which, due to
their 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 developed by the Company.
The Company also believes it should be able to increase its revenues from
existing clients by cross-selling its services and securing full-service
contracts with a larger group of potential clients which, in the past,
contracted for IT services from a number of smaller vendors. In addition, by
focusing on recruiting, training and retaining highly skilled IT professionals,
the Company believes that it can effectively respond to the shortage of and
significant competition for such professionals.
Another key element of the Company's strategy is 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. To further accomplish its goal of
becoming a leading IT service firm, the Company also intends 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
will operate with a decentralized management structure to provide superior
client service and a motivating environment for its various subsidiaries.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
4
<PAGE>
SUMMARY FINANCIAL DATA
On February 10, 1998, the Company acquired the Founding Companies
concurrently with the consummation of the Offering. The following summary
financial data represent (i) the actual historical financial data for the
Company and (ii) pro forma combined statement of operations data for the Company
and the Founding Companies as if the Mergers and the Offering had occurred on
January 1, 1997. 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 of the Company and the Founding Companies included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL(1)
------------ PRO FORMA COMBINED(2)
------------------------------------
THREE MONTHS
ENDED MARCH YEAR ENDED THREE MONTHS
31, DECEMBER 31, ENDED MARCH 31,
------------ ------------ ----------------------
1998 1997 1997 1998
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 25,663 $ 144,277 $ 33,926 $ 40,704
Gross profit....................................... 7,226 35,337 7,421 10,588
Income (loss) from operations...................... (3,250) 9,654 2,126 2,674
Net income (loss).................................. $ (3,007) $ 6,011(3) $ 1,218(3) $ 1,625(3)
Basic and dilutive net income (loss) per share..... (0.42) $ 0.69 $ 0.14 $ 0.15
Shares used in computing net income (loss) per
share............................................ 7,117,349(4) 8,684,067(5) 8,402,922(6) 10,971,822(7)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------
<S> <C>
HISTORICAL BALANCE SHEET DATA (IN THOUSANDS)(1):
Cash and cash equivalents....................................................................... $ 11,686
Short-term investments.......................................................................... 23,028
Working capital................................................................................. 32,223
Total assets.................................................................................... 125,838
Long-term debt, net of current maturities....................................................... 593
Stockholders' equity............................................................................ 93,614
</TABLE>
- ------------------------
(1) Represents the historical statement of operations data for the three months
ended March 31, 1998 and the financial position as of March 31, 1998 for
Condor, which includes the Founding Companies subsequent to their
acquisition in February 1998. All pro forma transactions described in the
pro forma information elsewhere in this Prospectus were consummated during
the quarter ended March 31, 1998.
(2) The pro forma combined statement of operations data assume that the Mergers
and the Offering were consummated on January 1, 1997.
(3) Assumes all income is subject to an effective corporate income tax rate of
39% and the majority of the intangible amortization is not tax-deductible.
(4) Historical earnings per share have been calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share", which requires the Company to compute and present basic and diluted
earnings per share. Diluted securities are excluded from the computation in
periods which they have an anti-dilutive effect.
(5) Includes (i) 2,307,693 shares issued to the stockholders of the Founding
Companies; (ii) 1,892,307 shares issued to founders, consultants and
management of Condor; and (iii) 4,484,067 of the 6,785,000 shares sold in
the Offering necessary to pay the cash portion of the Merger consideration,
S Corporation distributions, underwriting discounts and commissions and
expenses of the Offering.
(6) Includes (i) 2,307,693 shares issued to the stockholders of the Founding
Companies; (ii) 1,611,162 shares issued to the founders, consultants and
management of Condor; and (iii) 4,484,067 of the 6,785,000 shares sold in
the Offering necessary to pay the cash portion of the Merger consideration,
S Corporation distributions, underwriting discounts and commissions and
expenses of the Offering.
(7) Includes (i) 2,307,693 shares issued to the stockholders of the Founding
Companies; (ii) 1,879,129 shares (excluding 13,178 shares repurchased by the
Company subsequent to the Mergers) issued to founders, consultants and
management of Condor; and (iii) 6,785,000 shares sold in the Offering.
5
<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. Prior to the closing
of the Offering, the Founding Companies had 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 position, cash flows 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 the
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 position, cash flows and business.
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 IT spending by clients; loss of a major
client; seasonality that may accompany private or governmental sector budget
cycles; the timing, size and mix of services and products offered; 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 services; 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.
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 position, cash
flows and business. Although the Company's principal method of billing a project
is on a time and materials basis, the Company also occasionally undertakes
6
<PAGE>
projects billed on a fixed-price basis. The cancellation of one or more
significant contracts or 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 position, cash flows and business.
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 position, cash flows and business.
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY. The Company
intends to grow in part 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 required to
acquire companies. 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 at all or 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.
Additionally, the Company must comply with various loan covenants in relation to
its credit facilities, including restrictions on the type, size and number of
acquisitions. If the Company fails to comply with these covenants, these
facilities may become unavailable to finance the Company's growth. 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 position, cash flows and
business.
RISKS ASSOCIATED WITH THE MANAGEMENT OF GROWTH. The Company has begun to
and expects to continue 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
position, cash flows and business could be materially and adversely affected.
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
or to do so 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
7
<PAGE>
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 be available on reasonable
terms or in sufficient amounts to cover one or more large claims, or that the
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 position, cash flows 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 integrators, "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. An
emerging group of service companies, including Cambridge Technology Partners,
Perot Systems Corporation, Renaissance--Registry and Technology Solutions Corp.,
is exploring opportunities in broader markets.
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 position, cash flows and business.
DEPENDENCE ON CONTINUED AUTHORIZATION TO RESELL AND PROVIDE
MANUFACTURER-AUTHORIZED SERVICES. The Company's future success with IT services
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 position, cash flows 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
8
<PAGE>
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
position, cash flows 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 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 position, cash
flows and business.
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
$35.0 million revolving credit facility (the "Revolver") from a major commercial
bank and a $13 million floor planning facility (this facility is secured by a $6
million letter of credit issued under the Revolver and certain working capital
of the desktop services division) from a separate bank to support the working
capital needs of the companies in its desktop services division. The Company
must comply with various loan covenants including (i) maintenance of certain
financial ratios, (ii) restrictions on additional indebtedness; (iii)
restrictions on liens, guarantees, advances and dividends; and (iv) restrictions
on the type, size and number of acquisitions. If the Company fails to comply
with these covenants, these facilities may become unavailable to finance the
Company's growth. There can be no assurance that the Revolver will provide the
Company with all of the financing that it will need or that additional financing
will be available on terms it deems acceptable. If the Company's financial
resources are inadequate to support its acquisition activities, the Company's
future results of operations, financial position, cash flows and business could
be materially and adversely affected.
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 position, cash flows and business could be adversely
affected. Although each of the executive officers of the Company and individual
Founding Companies has entered into an employment agreement with the Company or
a Founding Company, which includes 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 does not presently maintain key person life
insurance on any of its executive officers.
RISKS OF FEDERAL GOVERNMENT BUSINESS AND CONTRACTING. Approximately 25% of
the Company's pro forma combined revenues for the year ended December 31, 1997
and the three months ended March 31, 1998 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 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
9
<PAGE>
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 position, cash flows 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.
AMORTIZATION CHARGES. The Company incurs 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 is 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 majority of
the amount amortized, however, will not give rise to a deduction for tax
purposes. The Company recorded approximately $58.0 million of goodwill and other
intangibles in connection with the acquisition of the Founding Companies, $2.8
million of which will be amortized during the Company's fiscal year ended
December 31, 1998. See Notes 2 and 3 of the Unaudited Pro Forma Combined
Financial Statements of the Company and the Founding Companies included
elsewhere in this Prospectus. If the Company makes additional acquisitions, the
Company's amortization charges, however, could be substantially greater than the
amount of amortization charges currently expected to be incurred by it. A
reduction in net income resulting from amortization charges may have a material
and adverse impact on 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. The 6,785,000 shares sold in the Offering (including through
the exercise of the Underwriters' over-allotment option) are freely tradable
unless held by affiliates of the Company. The holders of Common Stock who did
not purchase shares in the Offering own 4,196,422 shares of Common Stock
(excluding 13,178 shares repurchased by the Company subsequent to the Mergers),
consisting of (i) the stockholders of the subsidiaries of the Company, who
received, in the aggregate, 2,317,293 shares of Common Stock as a portion of the
consideration for the sale of their businesses to Condor; and (ii) founders,
consultants and management of Condor, who own 1,879,129 shares of Common Stock
(excluding 13,178 shares repurchased by the Company subsequent to the Mergers).
These shares have not been registered under the Securities Act and, therefore,
may not be sold unless registered under the Securities Act or sold pursuant to
an exemption from registration, such as the exemption provided by Rule 144.
Certain of the Company's executive officers, directors and existing stockholders
owning in the aggregate 1,801,744 shares of Common Stock 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 ending February 4, 1999,
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
10
<PAGE>
during the one-year period ending February 4, 1999, without the prior written
consent of Volpe Brown Whelan & Company, LLC, except for the granting of options
pursuant to its 1997 Long-Term Incentive Plan or the issuance of shares of
Common Stock upon the exercise of outstanding options or in connection with
acquisitions. 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 provided piggyback registration
rights with respect to the Common Stock issued to the Founding Companies and
existing Company stockholders. The shares of Common Stock offered by this
Prospectus 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 this
Registration Statement.
POSSIBLE VOLATILITY OF STOCK PRICE. 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.
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 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.
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. In addition, the Revolver includes restrictions on the
ability of the Company to pay dividends without the consent of the lender.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS. This Prospectus contains
certain forward-looking statements, such as the Company's or management's
intentions, hopes, beliefs, expectations, strategies, predictions or any other
variation thereof or comparable phraseology of the Company's future activities
or other future events or conditions within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended, which are intended to be covered by the safe harbors created thereby.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty, including, without limitation, the sufficiency of the Company's
working capital and the ability of the Company to realize benefits from
consolidating certain general and administrative functions, to pursue strategic
acquisitions and alliances, to retain management and to implement its focused
business strategy to leverage consulting services, secure full-service
contracts, expand client relationships, successfully recruit, train and retain
personnel, expand services and geographic reach and successfully defend itself
in ongoing and future litigation. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and, therefore, there
can be no assurance that the forward-looking statements included in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
11
<PAGE>
THE COMPANY
The Company was established to create a leading provider of a wide range of
IT services and solutions to middle market organizations. In order to become a
single-source provider of IT services and solutions to middle market
organizations, Condor acquired, simultaneously with and as a condition to the
closing of the Offering, the eight established IT service providers described
below. The Founding Companies are wholly-owned subsidiaries of the Company.
These businesses provide a single source for 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 should 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 or product offering. The Founding Companies, on a pro forma
combined basis, had revenues of approximately $144.3 million for the year ended
December 31, 1997, and $40.7 million for the three months ended March 31, 1998.
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 combining 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, design of strategic IT initiatives in
mission critical business processes, requirements assessment 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 Treasury. MST
had revenues of approximately $7.7 million for the year ended December 31, 1997.
MST had 24 employees as of December 31, 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 $44.1 million for its year ended February 28, 1997 and for the
eleven months ended January 31, 1998, respectively. CHMC had 235 employees as of
December 31, 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. Federal provides IT services such as systems integration,
implementation and support services, including network design and installation;
system upgrades and enhancements; hardware and software maintenance; 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
Service, the U.S. Department of Justice, the U.S. Postal Service and the U.S.
Social Security Administration. Federal had revenues of approximately $34.1
million and $18.3 million for its year ended October 31, 1997 and for the three
months ended January 31, 1998, respectively. Federal had 39 employees as of
December 31, 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 commercial clients and
governmental entities in the Greater Boston metropolitan area. Corporate Access
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provides other IT services including network installation and services, system
management and custom applications development. Major clients include
PictureTel, Rockwell Collins and Hewlett-Packard. Corporate Access had revenues
of approximately $17.5 million and $11.3 million for its year ended June 30,
1997 and for the seven months ended January 31, 1998, respectively. Corporate
Access had 26 employees as of December 31, 1997 and is headquartered in Andover,
Massachusetts.
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED--ISSI, a Colorado corporation
founded in 1979, develops 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 types of databases (relational,
legacy and application-proprietary), computing platforms and operating systems
in a three-tiered, client/ server environment. ISSI offers 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 Baan, Computer Associates,
AMD, Boeing, Motorola, Pentastar, Citibank, Hughes and USDA. ISSI's products and
services have been provided to approximately 2,000 customers in 23 countries,
representing approximately 150,000 end-users. ISSI had revenues of approximately
$12.3 million for the year ended December 31, 1997. ISSI had 99 employees as of
December 31, 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 a broad range of 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 $8.3 million for the year ended
December 31, 1997. USComm had 18 employees as of December 31, 1997 and is
headquartered 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 the creation of client
relationship programs. Major clients include XLSource, CIC Systems, Cisco, IBM
Software Spectrum, Boise Technology and MicroAge. InVenture had revenues of
approximately $3.4 million for the year ended December 31, 1997. InVenture had
25 employees as of December 31, 1997 and is headquartered 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 uses 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 Services and Hertz. MIS had revenues of approximately
$4.3 million for the year ended December 31, 1997. MIS had 64 employees as of
December 31, 1997, is headquartered in Tulsa, Oklahoma and has six branches in
the mid- and southwestern United States.
The aggregate consideration paid by Condor to acquire the Founding Companies
was approximately $78.4 million, consisting of approximately $47.1 million in
cash, 2,307,693 shares of Common Stock and the assumption of approximately $1.3
million in outstanding indebtedness of the Founding Companies. In addition,
pursuant to earn-out arrangements with six of the Founding Companies, an
aggregate of 2,666,410 additional shares may be issued (based upon a stock price
of $13.00 per share at the time of such issuance; such number of shares will
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 $13.00 per
share), and approximately $16.7 million additional cash consideration may be
paid to stockholders of such Founding
13
<PAGE>
Companies if such companies achieve specific earnings thresholds in specified
periods following the closing of the Mergers.
For additional information regarding the employment agreement entered into
by the Company with one of the executive officers of the Founding Companies, see
"Management--Employment Agreements; Covenants-Not-To-Compete." For a further
description of the transactions pursuant to which these businesses were
acquired, see "Certain Transactions--Organization of the Company."
Condor Technology Solutions, Inc. is a Delaware corporation. Its executive
offices are located at Annapolis Office Plaza, 170 Jennifer Road, Suite 325,
Annapolis, Maryland 21401, and the Company's telephone number at that address is
(410) 266-8700.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market since
February 5, 1998. On May 28, 1998, the last sale price of the Common Stock was
$14.625 per share, as published in THE WALL STREET JOURNAL on May 29, 1998. At
May 27, 1998, there were approximately 67 stockholders of record of the Common
Stock. The following table sets forth the range of high and low sale prices for
the Common Stock for the period from February 5, 1998, the date of commencement
of the Offering, through March 31, 1998.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
February 5, 1998 through March 31, 1998........................................................ 16.38 $ 13.00(1)
</TABLE>
- ------------------------
(1) Represents the initial public offering price.
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, the Revolver includes
restrictions on the ability of the Company to pay dividends without the consent
of the lender.
14
<PAGE>
SELECTED FINANCIAL DATA
On February 10, 1998, the Company acquired the Founding Companies
concurrently with the consummation of the Offering. The following selected
financial data represent (i) the actual historical financial data for the
Company and (ii) pro forma combined statement of operations data for the Company
and the Founding Companies as if the Mergers and the Offering had occurred on
January 1, 1997. 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 of the Company and the Founding Companies included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED(2)
------------------------------------
HISTORICAL(1)
-------------- YEAR ENDED THREE MONTHS
THREE MONTHS DECEMBER 31, ENDED MARCH 31,
ENDED ------------ ----------------------
MARCH 31, 1998 1997 1997 1998
-------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 25,663 $ 144,277 $ 33,926 $ 40,704
Gross profit................................... 7,226 35,337 7,421 10,588
Income (loss) from operations.................. (3,250) 9,654 2,126 2,674
Net income (loss).............................. $ (3,007) $ 6,011(3) $ 1,218(3) $ 1,625(3)
Basic and dilutive net income (loss) per
share........................................ $ (0.42) $ 0.69 $ 0.14 $ 0.15
Shares used in computing net income (loss) per
share........................................ 7,117,349(4) 8,684,067(5) 8,402,922(6) 10,971,822(7)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------
<S> <C>
HISTORICAL BALANCE SHEET DATA (IN THOUSANDS)(1):
Cash and cash equivalents....................................................................... $ 11,686
Short-term investments.......................................................................... 23,028
Working capital................................................................................. 32,223
Total assets.................................................................................... 125,838
Long-term debt, net of current maturities....................................................... 593
Stockholders' equity............................................................................ 93,614
</TABLE>
- ------------------------
(1) Represents the historical statement of operations data for the three months
ended March 31, 1998 and the financial position as of March 31, 1998 for
Condor; which includes the Founding Companies subsequent to their
acquisition in February, 1998. All pro forma transactions described in the
pro forma information elsewhere in this Prospectus were consumated during
the quarter ended March 31, 1998.
(2) The pro forma combined statement of operations data assume that the Mergers
and the Offering were consummated on January 1, 1997.
(3) Assumes all income is subject to an effective corporate income tax rate of
39% and the majority of the intangible amortization is not tax-deductible.
(4) Historical earnings per share have been calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share", which requires the Company to compute and present basic and diluted
earnings per share. Dilutive securities are excluded from the computation in
periods which they have an anti-dilutive effect.
(5) Includes (i) 2,307,693 shares issued to the stockholders of the Founding
Companies; (ii) 1,892,307 shares issued to founders, consultants and
management of Condor; and (iii) 4,484,067 of the 6,785,000 shares sold in
the Offering necessary to pay the cash portion of the Merger consideration,
S Corporation distributions, underwriting discounts and commissions and
expenses of the Offering.
(6) Includes (i) 2,307,693 shares issued to the Stockholders of the Founding
Companies; (ii) 1,611,162 shares issued to the founders, consultants and
management of Condor; and (iii) 4,484,067 of the 6,785,000 shares sold in
the Offering necessary to pay the cash portion of the Merger consideration,
S Corporation distributions, underwriting discounts and commissions and
expenses of the Offering.
(7) Includes (i) 2,307,693 shares issued to the stockholders of the Founding
Companies; (ii) 1,879,129 shares (excluding 13,178 shares repurchased by the
Company subsequent to the Mergers) issued to founders, consultants and
management of Condor; and (iii) 6,785,000 shares sold in the Offering.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of each of the Founding Companies and the related notes thereto and
"Selected Financial Data" 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 was established to create a leading provider of a wide range of IT
services and solutions to middle market organizations. The Company provides a
single source for 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. Condor was formed in August 1996 and conducted no operations prior
to the 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 should 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. In
certain instances, the Company undertakes projects billed on a fixed-price
basis, 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.
16
<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, 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. Additionally, the 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"). The
Compensation Differentials for 1997 and the first quarter of 1998 were $5.9
million and $4.2 million, respectively, and have been reflected as pro forma
adjustments in the Unaudited Pro Forma Combined Statements of Operations of the
Company and the Founding Companies. 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 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 ("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 acquisition accounting. Condor 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 acquired totals
approximately $58.0 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. 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. The pro forma impact
of this amortization expense, the majority of which is not deductible for tax
purposes, is approximately $2.8 million per year. See Notes 2 and 4 of the
Unaudited Pro Forma Combined Financial Statements of the Company and the
Founding Companies. A total of $5.0 million of the purchase price has been
allocated to in-process research and development and was expensed at the closing
of the Mergers. This expense has been eliminated as a pro forma adjustment in
the Unaudited Pro Forma Combined Statements of Operations of the Company and the
Founding Companies for the three months ended March 31, 1998.
17
<PAGE>
HISTORICAL CONSOLIDATED RESULTS OF OPERATIONS
Financial statement audits of the Founding Companies have been completed
through January 31, 1998. As there were no significant transactions from
February 1, 1998 to the February 10, 1998 closing of the Mergers, January 31,
1998 is considered to represent the pre-Merger closing balance sheet. Upon
consummation of the Mergers, all of the individual Founding Companies on a
fiscal year financial reporting basis converted to a calendar year financial
reporting basis. In addition, all individual Founding Companies are now included
in the consolidated tax return of the Company and have, therefore, converted
their tax status to be taxed under subchapter C of the Internal Revenue Code of
1986, as amended.
On February 1, 1998 (the date of post-Merger balance sheet), the Company
began reporting on a consolidated basis. For the year ended December 31, 1998,
the Company will report consolidated operating results of the Founding Companies
for 11 months. Similarly, the Company's consolidated 1998 first quarter results
include only February and March 1998 operations and cash flows for the Founding
Companies.
The following table sets forth certain selected financial data for the
Company on an historical basis and as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
------------------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PERCENTAGES)
Revenues............................................................... $ 25,663 100.0%
Cost of revenues....................................................... 18,437 71.8
----------- -----------
Gross profit........................................................... 7,226 28.2
Selling, general and administrative expenses........................... 4,956 19.3
Intangible amortization................................................ 520 2.0
In process research and development.................................... 5,000 19.5
----------- -----------
Income from operations................................................. $ (3,250) (12.7)%
----------- -----------
----------- -----------
</TABLE>
REVENUES. For the three months ended March 31, 1998, the Company's revenues
included the revenues of the Founding Companies for February and March. Revenues
from the federal government accounted for approximately 25% of total revenues.
No single customer accounts for more than 10% of the Company's consolidated
revenues during this period.
COST OF REVENUES. Cost of revenues was $18.4 million, or 71.8% of total
revenues for the three months ended March 31, 1998. The Company generates higher
gross margins from its systems and consulting services businesses while the
procurement component of its desktop services business generates its lowest
margins. Revenues from procurement sales for the quarter were approximately 57%
of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $5.0 million and consisted of salaries, benefits,
commissions payable to the Company's sales and marketing personnel, finance and
other general and administrative costs.
INTANGIBLE AMORTIZATION. Intangible amortization was $520,000 for the three
months ended March 31, 1998 which included the amortization of goodwill from the
purchase of the Company's subsidiaries, internally developed software costs, and
the technology license recorded in connection with a new contract.
18
<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 of the Company and the Founding Companies 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 unaudited 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>
THREE MONTHS ENDED
MARCH 31, 1998
----------------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PERCENTAGES)
Revenues.................................................................................... $ 40,704 100.0%
Cost of revenues............................................................................ 30,116 74.0
--------- -----
Gross profit................................................................................ 10,588 26.0
Selling, general and administrative expenses................................................ 7,160 17.6
Intangible amortization..................................................................... 754 1.9
--------- -----
Income from operations...................................................................... $ 2,674 6.6%
--------- -----
--------- -----
</TABLE>
PRO FORMA COMBINED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED
TO THE THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased $6.8 million, or 20.0%, from $33.9 million for
the three months ended March 31, 1997 (pro forma) to $40.7 million for the three
months ended March 31, 1998 (pro forma). This increase was attributable to
growth in revenues of approximately $4.6 million from the systems services
division and approximately $2.1 million from the desktop services division.
The system services revenue growth was primarily attributable to a
significant, new contract, an increase in other service revenues within the
Founding Companies and an increase in sales of the Company's Safari Infotools
software products.
The desktop services division's revenue growth was primarily attributable to
increased service revenues from the Company's help-desk and other service
offerings.
COST OF REVENUES. Cost of revenues increased $3.6 million, or 13.6%, from
$26.5 million for the three months ended March 31, 1997 (pro forma) to $30.1
million for the three months ended March 31, 1998 (pro forma). This increase was
primarily attributable to the revenue growth discussed above. Cost of revenues
as a percentage of revenues decreased from 78.1% of revenues for the three
months ended March 31, 1997 (pro forma) to 74.0% of revenues for the three
months ended March 31, 1998 (pro forma). This decrease was primarily
attributable to the shift in revenue mix toward a higher percentage of service
revenues as compared to procurement revenues which decreased from 65.0% of total
revenues for the three months ended March 31, 1997 (pro forma) to 57.0% of total
revenues for the three months ended March 31, 1998 (pro forma).
19
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.5 million, or 51.8%, from $4.7 million for
the three months ended March 31, 1997 (pro forma) to $7.2 million for the three
months ended March 31, 1998 (pro forma). This increase was attributable to the
hiring of additional sales and marketing staff and administrative personnel at
each of the Founding Companies, start up costs associated with a new contract,
the move of the Company's corporate headquarters and corporate costs not
incurred prior to the Mergers. Selling, general, and administrative expenses
increased from 13.9% of revenues to 17.6% of revenues for the three months ended
March 31, 1997 (pro forma) and March 31, 1998 (pro forma), respectively. This
increase resulted from the additional general and administrative costs
associated with opening a corporate headquarters while retaining the
decentralized operational and administrative structures at each of the Founding
Companies.
INTANGIBLE AMORTIZATION. Intangible amortization increased $175,000, or
30.2%, from $579,000 for the three months ended March 31, 1997 (pro forma) to
$754,000 for the three months ended March 31, 1998 (pro forma). This increase
was associated with the technology license recorded in connection with a new
contract during the first quarter of 1998 and an increase in the goodwill
associated with the acquisition of the Founding Companies due to purchase price
adjustments.
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>
YEAR ENDED
DECEMBER 31, 1997
---------------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PERCENTAGES)
Revenues................................................................. $ 144,277 100.0%
Cost of revenues......................................................... 108,940 75.5
---------- ---------
Gross profit............................................................. 35,337 24.5
Selling, general and administrative expenses............................. 23,451 16.3
Intangible amortization.................................................. 2,232 1.5
---------- ---------
Income from operations................................................... $ 9,654 6.7%
---------- ---------
---------- ---------
</TABLE>
PRO FORMA COMBINED RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased approximately $41.1 million, or 39.8%, from
$103.2 million in 1996 (pro forma) to $144.3 million in 1997 (pro forma). 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 $30.1 million and $4.1 million, respectively.
COST OF REVENUES. Cost of revenues increased approximately $32.5 million,
or 42.5%, from $76.4 million in 1996 (pro forma) to $108.9 million in 1997 (pro
forma), primarily as a result of the net increase in revenues described above.
As a percentage of revenues, cost of revenues increased from 74.0% in 1996 (pro
forma) to 75.5% in 1997 (pro forma), primarily as a result of lower gross profit
margins at Federal resulting from the deferred recognition of certain revenue to
match expected warranty costs with respect to one of its mainframe
implementation contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.9 million, or 26.3%, from $18.6 million in
1996 (pro forma) to $23.5 million in 1997 (pro forma), due primarily to an
increase in infrastructure needed to support increased volume. As a percentage
of revenues, selling, general and administrative expenses decreased from 18.0%
in 1996 (pro forma) to 16.3% 1997 (pro forma) as the infrastructure costs
increased less rapidly than revenues. Pro forma selling, general and
administrative expenses also include a non-recurring Merger charge of $400,000
in 1997 (pro forma).
20
<PAGE>
INCOME FROM OPERATIONS. Income from operations increased $3.7 million, or
61.7%, from $6.0 million in 1996 (pro forma) to $9.7 million in 1997 (pro
forma). As a percentage of revenues, operating income increased from 5.8% in
1996 (pro forma) to 6.7% in 1997 (pro forma). This change was attributable to
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Condor is a holding company that conducts its operations through its
subsidiaries. Accordingly, Condor's principal sources of liquidity are the cash
flow of its subsidiaries, cash available from the Revolver and other credit
facilities it may establish and the unallocated net proceeds of the Offering.
After the closing of the Mergers and the Offering, the Company had approximately
$35.1 million in cash and cash equivalents and approximately $1.3 million of
indebtedness outstanding (on a pro forma basis), other than the Revolver
discussed below. At March 31, 1998, the Company had approximately $11.7 million
in cash and cash equivalents, $23.0 million in short-term investments and $1.1
million of indebtedness outstanding.
In April 1998, the Company obtained a $35.0 million revolving credit
facility (the "Revolver") from a major commercial bank. The Revolver includes a
letter of credit facility of up to $15.0 million, of which $6.0 million is
currently issued and outstanding to secure a floor planning facility with a
separate bank. Borrowings under the Revolver bear interest at the London
Interbank Offering Rate ("LIBOR") plus 150 basis points or the Base Rate, which
is the greater of the Federal Funds Rate plus 0.50% or the Prime Rate, at the
option of the Company. The Company is subject to additional interest rate
margins, based on a pricing ratio of debt to earnings, ranging from 0.25% to
1.25% when using the Base Rate or ranging from 1.50% to 2.50% when using the
LIBOR rate. The Company is also required to pay a commitment fee at the annual
percentage rate ranging from 0.25% to 0.50% as defined in the agreement. The
Company must comply with various loan covenants including (i) maintenance of
certain financial ratios; (ii) restrictions on additional indebtedness; (iii)
restrictions on liens, guarantees, advances and dividends; and (iv) restrictions
on the type, size and number of acquisitions. The Revolver, which expires in
April 2001, is intended to be used for acquisitions, working capital and general
corporate purposes.
Also in April 1998, the Company obtained a $13.0 million floor planning
facility to support the working capital needs of the companies in its desktop
services division. This facility is secured by a $6.0 million letter of credit
issued under the Revolver and certain of the assets of the desktop services
division. The floor planning facility requires the Company to comply with
various loan covenants identical to those required under the Revolver. The
agreement expires in April 2001.
Indebtedness under both the Revolver and the floor planning facility are
collateralized by substantially all of the assets of Condor and its
subsidiaries.
On an historical basis, net cash provided by operating activities was $2.8
million for the three months ended March 31, 1998 and net cash used in investing
activities was $62.9 million for the three months ended March 31, 1998. Net cash
used in investing activities included $40.8 million, net of cash acquired, for
the acquisition of the Founding Companies and $21.8 million used to purchase
short term investments.
Net cash provided by financing activities was $71.8 million for the three
months ended March 31, 1998; consisting of $73.1 million from the Offering,
offset by the payment of costs associated with the Offering, repayment of notes
payable and purchase of shares from a stockholder.
The Company made capital expenditures of approximately $800,000 in 1996 (pro
forma), approximately $795,000 in 1997 (pro forma) and approximately $219,000
for the three months ended March 31, 1998, on an historical basis, 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
21
<PAGE>
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
the Offering, cash flow from operations and borrowings, including borrowings
under the credit facilities, as well as from issuances of additional shares of
Common Stock.
The Company believes that cash flow from operations, borrowings under the
credit facilities and the unallocated net proceeds of the 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.
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
higher in the third and fourth calendar quarters as a result of patterns of
capital spending by clients, principally 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; 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 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."
INFLATION
The Company believes the effects of inflation generally do not have a
material impact on its operations or financial position or cash flows.
22
<PAGE>
YEAR 2000
The Company has assessed the impact of the Year 2000 on its financial and
management information system software, and has determined that any modification
to the software will not have a material impact on the Company, its results of
operations, financial position or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Comprehensive Income." SFAS No. 130
requires the reporting and display of comprehensive income and its components in
the financial statements. Comprehensive income is the change in equity during
the period from transactions with non-owner sources. Comprehensive income
includes net income and other comprehensive income, including foreign currency
translation adustments and gains and losses on certain marketable securities.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in the statement. The
Company implemented SFAS No. 130 during the first quarter of 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 will change the way public companies report information about segments of
their business in annual financial statements and requires them to report
selected segment information in their quarterly reports issued to stockholders.
It also requires entity-wide disclosures about the products and services an
entity provides, the countries in which the entity holds material assets and
reports material revenues and major customers. The Company will implement SFAS
No. 131 during the fourth quarter of 1998.
Statement of Position 97-2 ("SOP 97-2") regarding Software Revenue
Recognition will be effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 addresses contract accounting issues
in the context of the software industry. Adoption of SOP 97-2 is not expected to
have a material impact on the Company.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE FOUNDING COMPANIES
The following discussion should be read in conjunction with the historical
financial statements of the Founding Companies and related notes thereto
appearing elsewhere in this Prospectus.
MST RESULTS OF OPERATIONS
MST provides strategic IT management consulting, systems integration and
project management services to major U.S. and global companies and governmental
agencies.
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>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenue.................................. $ 6,193 100.0% $ 8,211 100.0% $ 7,743 100.0%
Cost of revenue.......................... 2,415 39.0 3,783 46.1 3,840 49.6
General and administrative expenses...... 1,606 25.9 2,188 26.6 2,100 27.1
--------- --------- --------- --------- --------- ---------
Income from operations................... $ 2,172 35.1% $ 2,240 27.3% $ 1,803 23.3%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
MST 1997 COMPARED TO 1996
REVENUE. Revenue decreased approximately $468,000, or 5.7%, from $8.2
million in 1996 to $7.7 million in 1997. This decrease resulted primarily from
the completion of short-term consulting contracts in 1996 that were not renewed
or replaced during 1997. In 1996, revenue from CIGNA Property & Casualty
(including revenue from The CSN Company ("CSN"), which was acquired in 1996)
("CIGNA") and Reinsurance Solutions International ("RSI"), an affiliate of
CIGNA, accounted for 61% and 25%, respectively, of total revenue. In 1997,
revenue from CIGNA and RSI accounted for 67% and 21%, 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 $57,000, or 1.5%,
from 1996 to 1997 due to 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 46.1% in 1996 to 49.6% 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 $88,000, or 4.0%, from $2.2 million in 1996 to $2.1
million in 1997. The decrease resulted primarily from decreases in professional
fees and travel-related expenses. General and administrative expenses as a
percentage of revenue increased from 26.6% in 1996 to 27.1% in 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.
24
<PAGE>
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.
CHMC RESULTS OF OPERATIONS
CHMC provides tailored, value-added computer technology products and
services to a broad range of companies, educational institutions and
governmental agencies.
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
(in thousands, except percentages) :
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1997
-------------- --------------
<S> <C> <C> <C> <C>
Revenues............................................ $30,808 100.0% $44,718 100.0%
Cost of revenues.................................... 26,223 85.1 38,403 85.9
------- ----- ------- -----
Gross profit........................................ 4,585 14.9 6,315 14.1
Selling, general and administrative expenses........ 3,844 12.5 4,784 10.7
------- ----- ------- -----
Income from operations.............................. $ 741 2.4% $ 1,531 3.4%
------- ----- ------- -----
------- ----- ------- -----
<CAPTION>
ELEVEN MONTHS ENDED
JANUARY 31,
1997 1998
-------------- --------------
<S> <C> <C> <C> <C>
Revenues............................................ $41,297 100.0% $44,100 100.0%
Cost of revenues.................................... 35,500 86.0 34,928 79.2
------- ----- ------- -----
Gross profit........................................ 5,797 14.0 9,172 20.8
Selling, general and administrative expenses........ 4,010 9.7 9,163 20.8
------- ----- ------- -----
Income from operations.............................. $ 1,787 4.3% $ 9 0.0%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
CHMC ELEVEN MONTHS ENDED JANUARY 31, 1998 COMPARED TO ELEVEN MONTHS ENDED
JANUARY 31, 1997 (UNAUDITED)
REVENUES. Revenues increased approximately $2.8 million, or 6.8%, from
$41.3 million in the eleven months ended January 31, 1997 to $44.1 million in
the eleven months ended January 31, 1998. This increase was primarily
attributable to continued expansion of CHMC's service revenues (a $3.5 million
increase), including on-site services, help-desk and project management and
other support programs. The increase in services was offset by a $693,000
decrease in hardware and software procurement. The decrease in procurement sales
was primarily a result of unusually large sales of laptop computers to two
customers in this period in 1997.
COST OF REVENUES. Cost of revenues decreased approximately $572,000, or
1.6%, from $35.5 million in the eleven months ended January 31, 1997 to $34.9
million in the eleven months ended January 31, 1998. Cost of revenues as a
percentage of revenues decreased from 86.0% in the eleven months ended January
31, 1997 to 79.2% in the eleven months ended January 31, 1998. This reduction in
costs as a percentage of revenues resulted from decreasing revenues and costs
associated with hardware sales and the expansion of CHMC's service and project
management businesses (which are typically at higher margins). Through
enhancements to its help-desk call 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 $5.2 million, or 128.5%, from
$4.0 million in the eleven months ended January 31, 1997 to $9.2 million in the
eleven months ended January 31, 1998. These expenses as a percentage of revenues
increased from 9.7% to 20.8% in these periods, primarily as a result of
increases in discretionary
25
<PAGE>
management bonuses of approximately $3.2 million. These bonuses resulted from
improved earnings over the prior period.
CHMC FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Revenues increased approximately $13.9 million, or 45.2%, from
$30.8 million in fiscal 1996 to $44.7 million in fiscal 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 period included two
large 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 in fiscal 1996 to $38.4 million in fiscal 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 in fiscal 1996 to $4.8 million in fiscal 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% in fiscal 1996 to
10.7% in fiscal 1997.
FEDERAL RESULTS OF OPERATIONS
Federal provides computer products and services to governmental and
commercial entities. Federal provides IT services such as systems 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 following table (in thousands,
except percentages):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------
1995 1996 1997
---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................................... $46,186 100.0% $26,417 100.0% $33,298 100.0%
Cost of revenues.................................. 38,732 83.9 19,168 72.6 27,088 81.4
------- ------- ------- ----- ------- -----
Gross profit...................................... 7,454 16.1 7,249 27.4 6,210 18.6
Selling, general and administrative expenses...... 7,619 16.5 5,794 21.9 7,298 21.9
------- ------- ------- ----- ------- -----
(Loss) income from operations..................... $ (165) (0.4)% $ 1,455 5.5% $(1,088) (3.3)%
------- ------- ------- ----- ------- -----
------- ------- ------- ----- ------- -----
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
-------------------------------
1997 1998
-------------- --------------
<S> <C> <C> <C> <C>
Revenues.......................................... $3,222 100.0% $18,082 100.0%
Cost of revenues.................................. 1,954 60.6 15,510 85.8
------ ------ ------- -----
Gross profit...................................... 1,268 39.4 2,572 14.2
Selling, general and administrative expenses...... 1,333 41.4 1,116 6.2
------ ------ ------- -----
(Loss) income from operations..................... $ (65) (2.0)% $ 1,456 8.0%
------ ------ ------- -----
------ ------ ------- -----
</TABLE>
26
<PAGE>
FEDERAL THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1997 (UNAUDITED)
REVENUES. Revenues increased approximately $14.9 million, or 461.2%, from
$3.2 million in the three months ended January 31, 1997 to $18.1 million in the
three months ended January 31, 1998. This increase was caused primarily by
larger government contract sales with the U.S. Postal Service and the State of
Virginia.
COST OF REVENUES. Cost of revenues increased approximately $13.6 million,
or 693.8%, from $2.0 million in the three months ended January 31, 1997 to $15.5
million for the same period in 1998. Cost of revenues as a percentage of
revenues increased from 60.6% in the three months ended January 31, 1997 to
85.8% in the three months ended January 31, 1998. 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 a change in the revenue mix. In 1998, there was a higher
percentage of equipment and installation revenues compared to maintenance and
other service revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $217,000, or 16.3%, from $1.3
million in the three months ended January 31, 1997 to $1.1 million in the three
months ended January 31, 1998. As a percentage of revenues, selling, general and
administrative expenses decreased from 41.4% in the three months ended January
31, 1997 to 6.2% in the three months ended January 31, 1998. The primary reasons
for this decrease were the increase in revenues and a decrease in commissions
paid relative to revenues earned, in the 1998 period compared to the 1997
period.
FEDERAL FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Revenues increased approximately $6.9 million, or 26.0%, from
$26.4 million in fiscal 1996 to $33.3 million in fiscal 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 $7.9 million, or
41.3%, from $19.2 million in fiscal 1996 to $27.1 million in fiscal 1997. Cost
of revenues as a percentage of revenues increased from 72.6% in fiscal 1996 to
81.4% in fiscal 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 October
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 increased approximately $1.5 million, or 26.0%, from
$5.8 million in fiscal 1996 to $7.3 million in fiscal 1997. As a percentage of
revenues, selling, general and administrative expenses have remained flat at
21.9% in fiscal 1996 and fiscal 1997. The primary reason for this increase was
the incentive compensation paid to Federal's principal shareholders in
accordance with its Merger Agreement with Condor (see Note 6 to the Federal
Consolidated Financial Statements).
FEDERAL FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Revenues decreased approximately $19.8 million, or 42.8%, from
$46.2 million in fiscal 1995 to $26.4 million in fiscal 1996. This decrease was
caused primarily by significant mainframe purchases under unusually large
contracts which ended in fiscal 1995.
COST OF REVENUES. Cost of revenues decreased approximately $19.6 million,
or 50.5%, from $38.7 million in fiscal 1995 to $19.2 million in fiscal 1996.
Cost of revenues as a percentage of revenues decreased from 83.9% in fiscal 1995
to 72.6% in fiscal 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
27
<PAGE>
due to a decrease in the mainframe procurement revenues relative to higher
margin maintenance and service revenues in fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $1.8 million, or 24.0%, from
$7.6 million in fiscal 1995 to $5.8 million in fiscal 1996, due mainly to the
decrease in revenues discussed above. As a percentage of revenues, selling,
general and administrative expenses increased from 16.5% in fiscal 1995 to 21.9%
in fiscal 1996. This percentage increase resulted from significant bid and
proposal expenses incurred by Federal during fiscal 1996 in an effort to win new
business.
CORPORATE ACCESS RESULTS OF OPERATIONS
Corporate Access offers 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 (in thousands, except percentages):
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED JANUARY 31,
------------------------------------------
<S> <C> <C> <C> <C>
1998
1997 --------------------
--------------------
(UNAUDITED)
Revenues................................................ $ 9,555 100.0% $ 11,299 100.0%
Cost of revenues........................................ 8,189 85.7% 9,728 86.1%
--------- --------- --------- ---------
Gross profit............................................ 1,366 14.3% 1,571 13.9%
Selling, general and administrative expenses............ 995 10.4% 1,858 16.4%
--------- --------- --------- ---------
Income (loss) from operations........................... $ 371 3.9% $ (287) (2.5)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 SEVEN MONTHS ENDED JANUARY 31, 1998 COMPARED TO SEVEN
MONTHS ENDED JANUARY 31, 1997 (UNAUDITED)
REVENUES. Revenues increased approximately $1.7 milion, or 18.3%, from $9.6
million in the seven months ended January 31, 1997 to $11.3 million in the seven
months ended January 31, 1998, 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 $1.5 million, or
18.8%, from $8.2 million in the seven months ended January 31, 1997 to $9.7
million in the seven months ended January 31, 1998. The overall increase in cost
of revenues was attributable to an increase in sales volume. As a percentage of
revenues, cost of revenues remained stable at 85.7% in the 1997 period compared
to 86.1% in the 1998 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $863,000, or 86.7%, from
$995,000 in the seven months ended January 31, 1997 to $1.9 million in the seven
months ended January 31, 1998. As a percentage of revenues, selling, general and
administrative expenses increased from at 10.4% in the 1997 period to 16.4% in
the 1998 period. The increase was primarily due to an increase of approximately
$800,000 in bonuses and incentives paid in the 1998 period.
28
<PAGE>
ISSI RESULTS OF OPERATIONS
ISSI develops end-user software solutions and tools for information access,
data management and report writing.
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>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues................................ $ 6,610 100.0% $ 9,028 100.0% $ 12,253 100.0%
Cost of revenues........................ 2,010 30.4 1,482 16.4 1,682 13.7
--------- --------- --------- --------- --------- ---------
Gross profit............................ 4,600 69.6 7,546 83.6 10,571 86.3
Selling, general and administrative
expenses.............................. 4,453 67.4 4,557 50.5 6,053 49.4
Research and development................ 804 12.2 766 8.5 1,263 10.3
--------- --------- --------- --------- --------- ---------
Income from operations.................. $ (657) (10.0)% $ 2,223 24.6% $ 3,255 26.6%
--------- --------- --------- --------- --------- ---------
</TABLE>
ISSI 1997 COMPARED TO 1996
REVENUES. Revenues increased approximately $3.2 million, or 35.7%, from
$9.0 million in 1996 to $12.3 million in 1997. This increase was due to 49% and
24% increases in license and maintenance revenues, respectively. 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 $200,000, or
13.5%, from $1.5 million in 1996 to $1.7 million in 1997. Cost of revenues as a
percentage of revenues decreased from 16.4% in 1996 to 13.7% in 1997. This
decrease was primarily due to increased average selling prices for its software
licenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $1.5 million, or 32.8%, from
$4.6 million in 1996 to $6.1 million in 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 decreased as a percentage of
revenues from 50.5% in 1996 to 49.4% in 1997.
RESEARCH AND DEVELOPMENT. Research and development costs increased
approximately $497,000, or 64.9%, from $766,000 in 1996 to $1.3 million in 1997.
As a percentage of revenues, research and development increased from 8.5% in
1996 to 10.3% in 1997. This increase was primarily due to expenditures,
including the additional 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.
29
<PAGE>
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.
USCOMM RESULTS OF OPERATIONS
USComm provides a broad range of IT training solutions and is a value added
reseller of hardware and software products and services to mid-size companies
and governmental entities.
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
(in thousands, except percentages):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------
1996 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues................................................. $ 7,215 100.0% $ 8,330 100.0%
Cost of revenues......................................... 6,574 91.1 7,793 93.6
--------- --------- --------- ---------
Gross profit............................................. 641 8.9 537 6.4
Selling, general and administrative expenses............. 475 6.6 505 6.1
--------- --------- --------- ---------
Income from operations................................... $ 166 2.3% $ 32 0.3%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
USCOMM 1997 COMPARED TO 1996
REVENUES. Revenues increased approximately $1.1 million, or 15.5%, from
$7.2 million in 1996 to $8.3 million in 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 $1.2 million, or
18.5%, from $6.6 million in 1996 to $7.8 million in 1997. As a percentage of
revenues, cost of revenues increased from 91.1% to 93.6%. 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
its IT services, 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 $30,000, or 6.3%, from $475,000
in 1996 to $505,000 in 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 6.6% 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.
30
<PAGE>
INVENTURE RESULTS OF OPERATIONS
InVenture is a strategic marketing communications company that creates
integrated business plans, marketing strategies, brand development and promotion
strategies for IT service providers and resellers of IT products, as well as for
companies 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
(in thousands, except percentages):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------
1996 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues................................................. $ 5,416 100.0% $ 3,399 100.0%
Cost of revenues......................................... 3,948 72.9 1,819 53.5
--------- --------- --------- ---------
Gross profit............................................. 1,468 27.1 1,580 46.5
Selling, general and administrative expenses............. 1,464 27.0 1,784 52.5
--------- --------- --------- ---------
Income from operations................................... $ 4 0.1% $ (204) (6.0)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
INVENTURE 1997 COMPARED 1996
REVENUES. Revenues decreased approximately $2.0 million, or 37.2%, from
$5.4 million in 1996 to $3.4 million in 1997, primarily due to a shift in
InVenture's business strategy. This strategy includes a reduction in the
provision of collateral marketing services and materials and an increase in the
provision 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 $2.1 million, or
53.9%, from $3.9 million in 1996 to $1.8 million in 1997. As a percentage of
revenues, cost of revenues decreased from 72.9% in 1996 to 53.5% in 1997. 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
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $320,000, or 21.9%, from $1.5
million in 1996 to $1.8 million in 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 27.0% in 1996 to 52.5% in
1997. 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 recruits highly skilled IT consultants and professionals on both a
permanent and contract staffing basis.
31
<PAGE>
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 (in
thousands, except percentages):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------
1996 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues..................................................................... $ 2,582 100.0% $ 4,342 100.0%
Cost of revenues............................................................. 1,426 55.2 2,498 57.5
--------- --------- --------- ---------
Gross profit................................................................. 1,156 44.8 1,844 42.5
Selling, general and administrative expenses................................. 1,150 44.5 1,839 42.4
--------- --------- --------- ---------
Income from operations....................................................... $ 6 0.3% $ 5 0.1%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
MIS 1997 COMPARED TO 1996
REVENUES. Revenues increased approximately $1.8 million, or 68.2%, from
$2.6 million in 1996 to $4.3 million in 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 $1.1 million, or
75.2%, from $1.4 million in 1996 to $2.5 million in 1997. As a percentage of
revenues, cost of revenues increased from 55.2% to 57.5%, which was attributable
to MIS opening new offices during 1997. There is typically a 90 day lag in time
between the opening of a new office and when the office generates revenue
sufficient to support the investment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $689,000, or 59.9%, from $1.2
million in 1996 to $1.8 million in 1997. This increase in selling, general and
administrative expenses was due to the expansion of MIS's infrastructure in
order to support the continued growth of the business, including the opening of
new offices. As a percentage of revenues, selling, general and administrative
expenses decreased from 44.5% to 42.4% during these periods.
32
<PAGE>
BUSINESS
INTRODUCTION
The Company provides a wide range of IT services and solutions to middle
market organizations. The Company provides a single source for a broad 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 and mainframe 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 focuses on marketing its wide range of IT services to middle
market organizations, which the Company believes typically spend from $2 million
to $30 million annually on their IT needs. In order to become a single-source
provider of IT services and solutions to middle market organizations, Condor
acquired the Founding Companies in February 1998 concurrent with the closing of
the Offering. In addition, the Company seeks to deliver comprehensive IT
services to the insurance and 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 markets its services through each of the sales forces at the
Founding Companies and intends to utilize the Company's corporate sales force.
This approach allows 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 March 31, 1998, the Company had
approximately 580 employees. 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 their 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 within the
organization and among clients and suppliers. 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 is rising rapidly, yet the
complexity of purchasing and implementing these systems is increasing.
33
<PAGE>
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 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, training and retaining
IT professionals.
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 by middle market organizations on multiple
service providers creates multiple vendor relationships that are more difficult
and less cost-effective to manage, prevents the existence of a distinct
responsible party and has 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 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 services, from planning and consulting to development, integration and
installation of IT systems to desktop services. This broad range of services
will enable clients to use the Company as a single provider for their IT needs,
which should result in tighter integration, minimized risk and greater
management control. In addition, the Company intends to capitalize on the highly
fragmented nature of the IT service industry by pursuing acquisition
opportunities that complement and enhance its existing IT services. 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 services to middle
market organizations with a focus on select vertical markets. Key elements of
the Company's strategy are presented below.
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<PAGE>
LEVERAGE CONSULTING SERVICES. 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 developed by
the Company. 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.
EXPAND CLIENT RELATIONSHIPS. The Company believes it should be able to
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
option for a variety of IT services. The Company believes that the access to and
goodwill derived from its long-term relationships with its clients will provide
it with significant advantages in marketing additional services 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. The
Company believes that its ability to be a single-source provider will offer 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 Common Stock.
EXPAND SERVICES AND GEOGRAPHIC REACH. The Company plans to expand its
services 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
services 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.
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 any 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 any 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 should 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
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<PAGE>
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 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.
_______CONSULTING SERVICES_______
- - IT NEEDS ANALYSIS
- - TECHNOLOGY INFRASTRUCTURE DESIGN
- - FUTURE TECHNOLOGY PLANNING
AND REFRESHMENT
- - SYSTEMS ARCHITECTURE DEVELOPMENT
- - DECISION SUPPORT PLANNING AND ANALYSIS
- - BUSINESS PROCESS REENGINEERING
- - YEAR 2000 PLANNING AND CONSULTING
- - STRATEGIC MARKETING SERVICES
_________SYSTEM SERVICES_________
- - CLIENT/SERVER DEVELOPMENT AND INTEGRATION
- - LAN/WAN DESIGN AND IMPLEMENTATION
- - PROJECT MANAGEMENT AND RESOURCE PLANNING
- - HARDWARE AND SOFTWARE SELECTION
- - INFORMATION ACCESS SOFTWARE DESIGN AND IMPLEMENTATION
- - SOFTWARE APPLICATION DESIGN AND DEVELOPMENT
- - CONTRACT STAFFING AND RECRUITING
- - TRAINING AND CONTINUING EDUCATION
- - CONFIGURATION, TESTING AND INSTALLATION
_______DESKTOP SERVICES_______
- - HARDWARE AND SOFTWARE PROCUREMENT
- - SYSTEMS MAINTENANCE AND SUPPORT
- - HARDWARE AND SOFTWARE MAINTENANCE
- - HELP-DESK OPERATIONS
- - SYSTEMS TESTING AND ENGINEERING
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.
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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 types of 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
intends to use 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 is a certified reseller
of products of leading hardware and software manufacturers, including Microsoft,
IBM, Novell, NEC, 3Com, Compaq, Unisys, Hewlett-Packard and Toshiba.
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: insurance and 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.
For the year ended December 31, 1997, the Company's top 10 clients accounted
for 49.9% of the Company's pro forma combined revenues. For the quarter ended
March 31, 1998, the Company's top 10 clients accounted for 36.4% of the
Company's pro forma combined revenues. In 1997, no single client accounted for
10% of the Company's pro forma combined revenues, except for the U.S. Postal
Service,
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which accounted for 10.8% of the Company's pro forma combined revenues. During
the quarter ended March 31, 1998, no single client accounted for 10% of the
Company's pro forma combined revenues.
SALES AND MARKETING
The Company's marketing efforts focus on middle market organizations, which
the Company believes typically spend from $2 million to $30 million annually on
their IT needs. In addition, the Company targets the insurance and 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 the Company as a
nationally recognized, full-service provider of IT services.
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 of its senior management team within the IT
service industry. The Company also intends to retain senior industry consultants
to assist in identifying, marketing and securing large IT service contracts with
middle market organizations.
The Company has begun 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 has begun to work directly with the Founding
Companies to assist them in identifying and coordinating opportunities to
cross-sell additional services.
The Company has begun 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 integrators,
"Big Six" accounting firms, applications development firms, service
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<PAGE>
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. An
emerging group of service companies is exploring opportunities in broader
markets, including Cambridge Technology Partners, Perot Systems Corporation,
Renaissance-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 in
these new markets 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.
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 supplements 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
has issued and will continue to issue options to its employees under its 1997
Long-Term Incentive Plan. Most importantly, in addition to formal programs, the
Company maintains 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
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<PAGE>
assurance the Company will be able to recruit or retain the technical personnel
necessary to execute its business and growth strategy.
As of March 31, 1998, the Company had approximately 580 employees. 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
its relations with its employees to be good.
FACILITIES
The Company's headquarters are located in Annapolis, Maryland. 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
McLean, VA.................................................. 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 1998 and 2007. The aggregate
square footage for all of the Company's offices and warehouses is 118,877 square
feet.
The Company has entered into a four-year lease agreement (subject to a
five-year renewal option), dated March 1, 1998, with Annapolis Office Plaza LLC
for 5,200 square feet of office space. The first year's annual rental payments
for such lease are $109,200, increasing three percent per year thereafter.
The Company has entered into a lease agreement, dated August 1, 1997 and as
amended on December 12, 1997, with Tysons II Development Co. Limited Partnership
for 4,121 square feet of leased space at 1650 Tysons Boulevard, Suite 650,
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 $144,600. In May 1998, the Company closed a
sublease agreement with rental payments to begin July 1, 1998.
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<PAGE>
LEGAL PROCEEDINGS
In the course of Condor's consolidation efforts, SCM LLC d/b/a The
Commonwealth Group ("Commonwealth") and 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 the promoter of the offering, Commonwealth, executed two
confidentiality agreements pursuant to which each agreed, among other things,
not to disclose certain confidential information and Commonwealth agreed that it
would not seek to enter into a business transaction with any 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. On October 18, 1997, Emtec filed
a Complaint in the United States District Court for the Eastern District of
Pennsylvania against Condor, Commonwealth, J. Marshall Coleman, a Managing
Director of Commonwealth and the former Chairman of the Board of Condor, and
Kennard F. Hill, the Company's Chairman of the Board and Chief Executive
Officer, alleging breach of contract, tortious interference with Emtec's
business relationship with Corporate Access and CHMC, two of the Founding
Companies, and misappropriation of a trade secret arising out of the
participation of CHMC and Corporate Access in the consolidation and the Offering
without Emtec's written 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. On December 31, 1997, the defendants filed an Answer, denying
the allegations and asserting various affirmative defenses. Pre-trial discovery
proceedings have almost concluded, and the case is scheduled to be ready for
trial on or after June 1, 1998. Condor believes that Emtec's allegations are
without merit and that, in any event, the ultimate resolution of this action
will not have a material adverse effect on the Company's results of operations,
financial position or cash flows. The Company 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. Commonwealth has
agreed to indemnify the Company with regard to any final judgment or settlement
arising out of the above action or any similar action. Commonwealth's
obligations under such agreement have been guaranteed by the three members of
Commonwealth.
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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 are directors and executive officers of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------- --------- -----------------------------------------------------
<S> <C> <C>
Kennard F. Hill.................................. 57 Chairman of the Board and Chief Executive Officer
C. Lawrence Meador............................... 51 Vice Chairman of the Board
Daniel J. Roche.................................. 36 President and Chief Operating Officer
William J. Caragol, Jr........................... 31 Vice President and Chief Financial Officer
Peter T. Garahan................................. 51 Director
Ann Torre Grant.................................. 40 Director
William E. Hummel................................ 35 Director
Dennis Logue..................................... 54 Director
Edward J. Mathias................................ 56 Director
William M. Newport............................... 62 Director
</TABLE>
Kennard F. Hill has been Chief Executive Officer and a director of the
Company since January 1997. He became Chairman of the Board of the Company
effective upon the closing of the Offering in February 1998. 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 has been Vice Chairman of the Board of Directors of the
Company and Chief Executive Officer of MST since the closing of the Offering in
February 1998. 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 became President of the Company effective upon the closing
of the Offering. Mr. Roche previously served 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. From 1991 to May 1996, Mr.
Roche was the
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<PAGE>
President and Chief Executive Officer of Rapid Systems Solutions, Inc. ("RSSI"),
a provider of client/ server applications with competencies in database
management systems, networking, communications and graphical user interfaces,
which Mr. Roche founded and which Medaphis Corp. acquired in May 1996. Mr. Roche
is cooperating with and has been deposed by the Securities and Exchange
Commission (the "Commission") in connection with an ongoing non-public
investigation by the Commission into certain trading and other issues related to
announcements by Medaphis in August and October 1996 of its results of
operations, including Mr. Roche's disposition of Medaphis stock that he received
in the RSSI acquisition. Mr. Roche has informed the Commission that he sold his
stock in compliance with Medaphis's internal policies, the terms of the RSSI
acquisition agreement and without knowledge of any material, non-public
information regarding Medaphis. 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.
William J. Caragol, Jr. was appointed Vice President and Chief Financial
Officer of the Company in March 1998. Prior to that, he was Vice
President-Finance of the Company 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.
Peter T. Garahan has been a director of the Company since the closing of the
Offering in February 1998. 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. 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.
Ann Torre Grant has been a director of the Company since March 1998. Ms.
Grant has been a strategic and financial consultant since December 1997. Ms.
Grant was Executive Vice President and Chief Financial Officer of NHP,
Incorporated ("NHP"), a multifamily property management company, from February
1995 until the sale of NHP in December 1997. From 1988 to February 1995, Ms.
Grant held various corporate finance positions with U.S. Airways, serving as
Vice President and Treasurer from 1991 to 1995. Since August 1997, Ms. Grant has
been a director of SLM Holding Co. and its subsidiary, Sallie Mae, since
September 1994, and she has been a director of Franklin Mutual Series Mutual
Funds. Ms. Grant received a bachelor in business administration from University
of Notre Dame and a masters in business administration from Cornell University.
William E. Hummel has been a director of the Company since the closing of
the Offering in February 1998. Mr. Hummel has been President of Federal, a
Founding Company, since June 1994. From June 1984 to May 1994, Mr. Hummel was
President of Federal Datatronics Division, Inc., a systems integration company
servicing the federal government. Mr. Hummel received a bachelor of science
degree in business administration from Drake University.
Dennis Logue has been a director of the Company since March 1998. Mr. Logue
has held various faculty positions at the Amos Tuck School of Business
Administration at Dartmouth College since 1974, including Professor of
Management since July 1985 and Associate Dean from July 1989 to June 1993.
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<PAGE>
From January 1994 to January 1995, Mr. Logue was the Economic Advisor to the
Governor of New Hampshire. Prior to joining the faculty at the Amos Tuck School
in 1974, Mr. Logue taught at Indiana University and worked at the U.S. Treasury
as a senior research economist. In addition, Mr. Logue has been a visiting
professor at the University of California at Berkeley, the University of
Virginia and Georgetown University. Mr. Logue was a founder and has served on
the board of directors of Ledyard National Bank since 1991. Mr. Logue is also a
Trustee of Crossroads Academy and a Trustee of the Josiah Bartlett Center for
Public Policy. Mr. Logue received a bachelor of arts degree in English and
philosophy from Fordham University, a masters degree in business administration
from Rutgers University and a Ph.D. in managerial economics from Cornell
University.
Edward J. Mathias has been a director of the Company since the closing of
the Offering in February 1998. 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
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, U.S.A. Floral Products, Inc., Sirrom Capital and PathoGenesis.
William M. Newport has been a director of the Company since the closing of
the Offering in February 1998. In addition, 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 1990. Mr. Newport has also been a director of Ovum Holdings plc, a
privately held London based consulting firm specializing in communications and
IT, since January 1997 and a director of Authentix Network, Inc., a privately
held company engaged in providing cellular roaming fraud prevention solutions to
the cellular industry, since July 1996. Mr. Newport has been the Chairman of the
Board of Ursus Telecom Corporation, an international telecommunications service
company headquartered in Sunrise City, Florida since April 1998. Mr. Newport was
an executive at Bell Atlantic Corporation from 1983 to December 1992, most
recently as Vice President, Strategic Planning. Mr. Newport received a bachelor
of science degree in electrical engineering from Purdue University and a master
of science degree 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
The Board of Directors is divided into three classes of directors, 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. Logue, Mathias and
Hummel; and the directors whose terms expire in 2000 are Messrs. Newport and
Hill and Ms. Grant.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee, both of which are composed of independent directors. The Audit
Committee reviews the results and scope of the audit and other services provided
by the Company's independent accountants and consists of Ms. Grant and Messrs.
Newport and Logue. The Compensation Committee approves salaries and certain
incentive compensation for management and key employees of the Company,
administers the 1997 Long-Term Incentive Plan and consists of Messrs. Garahan
and Mathias and Ms. Grant.
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<PAGE>
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries receives an
annual retainer fee of $5,000. In addition, under the Company's 1997 Long-Term
Incentive Plan, each person serving as a non-employee director at the
commencement of the Offering was granted automatically an option to acquire
10,000 shares of Common Stock, and each person who subsequently becomes a
non-employee director will be granted automatically an initial option to acquire
10,000 shares 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. Each such option will have an exercise price equal to the fair market
value per share of Common Stock on the date of grant. 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.
For consulting services rendered prior to becoming a director, Ann Torre
Grant was paid $25,000 in February 1998.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation of the
Company's President and Chief Executive Officer in 1997. No other executive
officer's total salary and bonus exceeded $100,000 in 1997. In addition, no
executive officers were granted options in or prior to 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
NAME AND POSITION YEAR SALARY BONUS
- ------------------------------------------------------------------ --------- ---------- -----------
<S> <C> <C> <C>
Kennard F. Hill-President and Chief Executive Officer 1997 $ 216,000 --
</TABLE>
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company has entered into the following employment agreements with
Messrs. Hill, Meador, Roche 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 the Offering and $300,000 after the closing of the
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. A
trust, of which Mr. Hill is a trustee, acquired 174,652 shares of the Common
Stock and Mr. Hill was granted options to purchase 150,000 shares of 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 (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 and Caragol has entered into an employment
agreement with the Company providing for an annual base salary of $431,815,
$220,000 and $135,000, respectively, and a bonus to be determined annually in
accordance with an annual bonus program of the Company for senior
45
<PAGE>
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 was effective
as of the closing of the 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. 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 provides 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 and Mr. Caragol, 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.
Pursuant to his employment agreement, Mr. Roche acquired 139,722 shares of
the Company's Common Stock. In addition, options to purchase 75,000 shares of
the Company's Common Stock have been 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 the 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 October 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
46
<PAGE>
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 initially has been 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 as a
non-employee director was granted an initial option to acquire 10,000 shares,
and each person who subsequently becomes a non-employee director will be granted
an initial option to acquire 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 the Offering unless that director
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 the 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 the Offering, the exercise price was the initial
public offering price per share in the 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 the Offering, in addition to the options automatically
granted to non-employee directors, options in the form of NQSOs to purchase a
total of 285,000 shares of Common Stock of the Company were granted to executive
officers of the Company as follows: 150,000 shares to Mr. Hill, 75,000 shares to
Mr. Roche and 60,000 shares to Mr. Caragol. In addition, options to purchase
709,415 shares were granted to directors of the Company and other employees of
the Company and to employees of the Founding Companies in connection with the
Offering. Each of the foregoing options had an exercise price equal to the
initial public offering price per share in the 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 the Offering. Unvested options generally will be forfeited upon a
participant's voluntary termination of employment. 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. At May 26, 1998, options
in the form of NQSOs to purchase 1,192,875 shares of Common Stock of the Company
were outstanding under the 1997 Long-Term Incentive Plan.
47
<PAGE>
In connection with the Mergers, the Company assumed options to acquire
shares of common stock of certain of the Founding Companies which, following the
Mergers, constitute options to purchase an aggregate of 62,471 shares of Common
Stock at an exercise price equal to the initial public offering price per share.
The other terms of such options are 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 the 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.
48
<PAGE>
CERTAIN TRANSACTIONS
Condor was formed in August 1996. Condor was initially capitalized by
Commonwealth, a Virginia-based merchant banking firm, of which J. Marshall
Coleman, formerly the Chairman of the Board of Condor, is a member. In
connection with the organization of the Company, members of Commonwealth
acquired 1,204,223 shares of Common Stock in exchange for consulting, financial
advisory and capital raising services provided by members of Commonwealth to
Condor and the commitment of a member of Commonwealth to provide the funds
necessary to effect the Mergers and the Offering. These shares were distributed
to the members of Commonwealth, Mr. Coleman, James J. Martell, Jr. and Charles
F. Smith, in November 1997. Commonwealth was reimbursed for the funds advanced
by it to the Company out of the proceeds of the Offering, together with interest
on such advances at the prime rate. Such advances aggregated approximately $2.5
million as of the closing of the Offering.
Simultaneously with the closing of the Offering, Condor acquired by merger
all of the issued and outstanding stock of the eight Founding Companies, at
which time each Founding Company became a wholly owned subsidiary of the
Company. The aggregate consideration paid by Condor in the Mergers consisted of
(i) approximately $47.1 million in cash; (ii) 2,307,693 shares of Common Stock,
for an aggregate value of approximately $30.0 million; and (iii) approximately
$1.3 million of indebtedness of the Founding Companies assumed by the Company.
The Company also assumed options to purchase shares of common stock of one of
the Founding Companies, which constitute options to purchase an aggregate of
62,471 shares of Common Stock of the Company at the initial public offering
price.
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 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 repurchased certain shares held by
a minority stockholder for $2.0 million and distributed $1.0 million to its
stockholders and another Founding Company distributed $4.0 million to certain
stockholders.
The aggregate consideration paid by Condor for each of the Founding
Companies was as follows:
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- DEBT
FOUNDING COMPANY NUMBER DOLLAR VALUE CASH ASSUMED TOTAL
- ----------------------------------------- ---------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
MST (1).................................. 603,846 $ 7,850,000 $ 9,750,000 $ 550,000 $ 18,150,000
CHMC..................................... 146,154 1,900,000 17,100,000 200,000 19,200,000
Federal (2).............................. 576,923 7,500,000 7,500,000 15,000,000
Corporate Access......................... 200,000 2,600,000 5,200,000 7,800,000
ISSI (3)................................. 538,462 7,000,000 5,000,000 28,000 12,028,000
USComm (4)............................... 46,154 600,000 600,000 130,000 1,330,000
InVenture (5)............................ 57,692 750,000 750,000 1,500,000
MIS (6).................................. 138,462 1,800,000 1,200,000 371,000 3,371,000
---------- ------------- ------------- ------------ -------------
Total.................................... 2,307,693 $ 30,000,000 $ 47,100,000 $ 1,279,000 $ 78,379,000
---------- ------------- ------------- ------------ -------------
---------- ------------- ------------- ------------ -------------
</TABLE>
- ------------------------
(1) 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.
49
<PAGE>
(2) 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.
(3) 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.
(4) Pursuant to an earn-out, contingent consideration of up to $5,000,000 may be
paid, $1,500,000 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 1998
and 1999.
(5) Pursuant to an earn-out, contingent consideration of up to $9,500,000 may be
paid, $3,166,667 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
1998 and 1999.
(6) 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.
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 the
Offering.
In connection with the Merger of MST into the Company, and as consideration
for his interest in MST, Mr. Meador, who is an executive officer, director and
holder of more than 5% of the outstanding shares of Common Stock of the Company,
received 603,846 shares of Common Stock and approximately $9.8 million in cash.
OTHER TRANSACTIONS
One of the Founding Companies, CHMC, had a financing arrangement that had
been personally guaranteed by certain of its stockholders. At December 31, 1997,
the aggregate amount of CHMC's current financing that was subject to personal
guarantees was approximately $2.2 million. Subsequent to the Merger, the Company
assumed the personal guarantees on such financing arrangements.
During 1995, 1996 and 1997 MST paid approximately $86,000, $245,000 and
$77,000, respectively in consulting fees to two companies that have directors in
common with MST under arm's-length terms.
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.
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
50
<PAGE>
Condor. In addition, in November 1996, Messrs. Horner and Wright acquired 70,281
and 17,465 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 52,396 shares of Common Stock (each, an "Option") upon the successful
completion of the 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 the
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 (iii) Mr. Horner relinquished his Option in exchange for a cash payment of
$50,000 at the closing of the 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 the Offering; (iii)
Mr. Wright relinquished his Option; and (iv) Mr. Wright acquired an additional
26,460 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.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of May 28, 1998 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; (iii) each named executive
officer; and (iv) all executive officers and 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)...................................................................... 175,702 1.7%
C. Lawrence Meador....................................................................... 603,846 6.0%
Daniel J. Roche (2)...................................................................... 140,562 1.4%
William J. Caragol, Jr. (3).............................................................. 8,785 *
Peter T. Garahan (4)..................................................................... -- *
Ann Torre Grant (4)...................................................................... 4,000 *
William E. Hummel (5).................................................................... 115,385 1.1%
Dennis Logue (4)......................................................................... -- *
Edward J. Mathias (3).................................................................... 26,355 *
William M. Newport (4)................................................................... 5,000 *
----------
All executive officers, directors and
named directors as a group (10 persons)................................................ 1,079,635 10.7%
</TABLE>
- ------------------------
* less than 1.0%
(1) 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 150,000 shares issuable in connection with options that are not
exercisable within 60 days of the date hereof.
(2) Does not include 75,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(3) Does not include 60,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(4) Does not include 10,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(5) Does not include 5,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
52
<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, and 1,000,000 shares of undesignated
preferred stock, par value $.01 per share (the "Preferred Stock"). Without
giving effect to the issuance of shares as contemplated by this Prospectus, the
Company has 10,981,422 shares of Common Stock and no shares of Preferred Stock
issued and outstanding. 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
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. Subject
to the rights of any then outstanding shares of Preferred Stock, the holders of
Common Stock are entitled to 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 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 have no preemptive rights to purchase
shares of stock of the Company. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of the
Company. All outstanding shares of 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.
The Common Stock trades on the Nasdaq National Market under the symbol
"CNDR."
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.
53
<PAGE>
STATUTORY BUSINESS COMBINATION PROVISION
The Company is 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.
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 and the By-Laws provide 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
54
<PAGE>
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.
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.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 10,981,422 shares of Common Stock. The 5,000,000
shares that may be sold in this offering will be freely tradable following the
sale thereof without restriction unless acquired by parties to the transaction
or affiliates thereof, 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 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 Company meets the public information requirements of
Rule 144, Rule 145 permits a person who is not an affiliate of the Company to
freely resell such securities. In some instances, the Company may contractually
restrict the sale of shares issued in connection with future acquisitions. The
6,785,000 shares sold in the Offering are freely tradable without restriction
unless acquired by affiliates of the Company, in which case they may be sold
pursuant to Rule 144 under the Securities Act or other applicable exemption from
registration. None of the remaining 4,196,422 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.
Certain of the Company's executive officers, directors and existing
stockholders owning in the aggregate 1,801,744 shares of Common Stock 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 ending February 4,
1999 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 ending February 4, 1999 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 or in connection with acquisitions. 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 agreed to provide piggyback
registration rights with respect to the Common Stock issued to the stockholders
of the Founding Companies and other existing 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
56
<PAGE>
stockholders. The piggyback registration rights described above do not apply to
the shares covered by this Registration Statement.
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 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.
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.
57
<PAGE>
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.
EXPERTS
The Condor financial statements as of December 31, 1996 and 1997 and for the
period from inception to December 31, 1996 and the year ended December 31, 1997;
the CHMC financial statements as of February 28, 1997 and January 31, 1998 and
for each of the two years in the period ended February 28, 1997 and the eleven
months in the period ended January 31, 1998; the ISSI financial statements as of
December 31, 1996 and 1997 and January 31, 1998 and for each of the three years
in the period ended December 31, 1997 and for the one month ended January 31,
1998; the Corporate Access financial statements as of June 30, 1997 and January
31, 1998 and for the year ended June 30, 1997 and for the seven months in the
period ended January 31, 1998; the USComm and MIS financial statements as of
December 31, 1996 and 1997 and January 31, 1998 and for each of the two years in
the period ended December 31, 1997 and for the one month ended January 31, 1998;
and the InVenture financial statements as of December 31, 1996 and 1997 and
January 31, 1998 and for each of the two years in the period ended December 31,
1997 and for the one month ended January 31, 1998 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, 1996 and 1997 and January
31, 1998 and for each of the three years in the period ended December 31, 1997
and for the one month ended January 31, 1998 included 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 explanatory paragraphs relating to the chief executive officer/sole
stockholder's compensation being at his sole discretion and the acquisition of
MST by Condor Technology Solutions, Inc. on February 10, 1998), and are 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, 1996, 1997, and
January 31, 1998 and the consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended October
31, 1997 and for the three months ended January 31, 1998 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 is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can 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 Northwest Atrium 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.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the 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 with respect to the Company and such Common Stock, reference is made
to such Registration Statement and exhibits. A copy of the Registration
Statement on file with the Commission may be obtained from the Commission's
principal office in Washington, D.C. upon payment of the fees prescribed by the
Commission and through the Commission's Internet Web site.
The Company's Common Stock is traded on the Nasdaq National Market. Proxy
Statements and other information concerning the Company can also be inspected at
the offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006.
58
<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 Statement of Operations for the Year Ended December 31, 1997................ F-4
Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended March 31, 1998........... F-5
Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended March 31, 1997 F-6
Notes to Unaudited Pro Forma Combined Financial Statements............................................... F-7
CONDOR TECHNOLOGY SOLUTIONS, INC.
Report of Independent Accountants........................................................................ F-11
Balance Sheets........................................................................................... F-12
Statements of Operations................................................................................. F-13
Statement of Changes in Stockholders' Equity (Deficit)................................................... F-14
Statements of Cash Flows................................................................................. F-15
Notes to Financial Statements............................................................................ F-16
FOUNDING COMPANIES
MANAGEMENT SUPPORT TECHNOLOGY CORP.
Independent Auditors' Report........................................................................... F-25
Balance Sheets......................................................................................... F-26
Statements of Operations and Retained Earnings......................................................... F-27
Statements of Cash Flows............................................................................... F-28
Notes to Financial Statements.......................................................................... F-29
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
Report of Independent Accountants...................................................................... F-34
Balance Sheets......................................................................................... F-35
Statements of Operations............................................................................... F-36
Statements of Changes in Stockholders' Equity.......................................................... F-37
Statements of Cash Flows............................................................................... F-38
Notes to Financial Statements.......................................................................... F-39
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
Report of Independent Accountants...................................................................... F-47
Consolidated Balance Sheets............................................................................ F-48
Consolidated Statements of Operations.................................................................. F-49
Consolidated Statements of Changes in Shareholders' Equity............................................. F-50
Consolidated Statements of Cash Flows.................................................................. F-51
Notes to Consolidated Financial Statements............................................................. F-52
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CORPORATE ACCESS, INC.
Report of Independent Accountants...................................................................... F-65
Balance Sheets......................................................................................... F-66
Statements of Operations............................................................................... F-67
Statements of Changes in Stockholders' Equity.......................................................... F-68
Statements of Cash Flows............................................................................... F-69
Notes to Financial Statements.......................................................................... F-70
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
Report of Independent Accountants...................................................................... F-74
Consolidated Balance Sheets............................................................................ F-75
Consolidated Statements of Operations.................................................................. F-76
Consolidated Statements of Changes in Stockholders' (Deficit) Equity................................... F-77
Consolidated Statements of Cash Flows.................................................................. F-78
Notes to Consolidated Financial Statements............................................................. F-79
U.S. COMMUNICATIONS, INC.
Report of Independent Accountants...................................................................... F-85
Balance Sheets......................................................................................... F-86
Statements of Operations............................................................................... F-87
Statements of Changes in Stockholder's Equity.......................................................... F-88
Statements of Cash Flows............................................................................... F-89
Notes to Financial Statements.......................................................................... F-90
INVENTURE GROUP, INC.
Report of Independent Accountants...................................................................... F-95
Balance Sheets......................................................................................... F-96
Statements of Operations............................................................................... F-97
Statements of Changes in Stockholder's Deficit......................................................... F-98
Statements of Cash Flows............................................................................... F-99
Notes to Financial Statements.......................................................................... F-100
MIS TECHNOLOGIES, INC.
Report of Independent Accountants...................................................................... F-105
Balance Sheets......................................................................................... F-106
Statements of Operations............................................................................... F-107
Statements of Changes in Stockholder's Equity (Deficit)................................................ F-108
Statements of Cash Flows............................................................................... F-109
Notes to Financial Statements.......................................................................... F-110
</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 occured simultaneously with the closing of Condor's
initial public offering and were accounted for using the purchase method of
accounting. Condor was 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 statements of operations give effect to
these transactions as if they had occurred on January 1, 1997.
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. All pro forma transactions described in the pro forma
information were consummated during the quarter ended March 31, 1998 and,
therefore, a pro forma balance sheet is not presented. 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 also "Risk Factors" included elsewhere in this Prospectus.
F-3
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CORPORATE
CONDOR MST CHMC FEDERAL ACCESS ISSI USCOMM INVENTURE MIS
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ -- $ 7,743 $ 46,429 $ 42,718 $ 18,987 $ 12,253 $ 8,330 $ 3,399 $ 4,418
Cost of revenues.... -- 3,840 37,568 37,447 16,294 1,682 7,793 1,819 2,497
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Gross profit........ -- 3,903 8,861 5,271 2,693 10,571 537 1,580 1,921
Selling, general &
administrative.... 544 2,100 6,298 5,863 2,768 7,316 505 1,784 1,810
Intangible
amortization...... -- -- -- -- -- -- -- -- --
One-time merger
charges........... 2,171 -- -- -- -- -- -- -- --
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Income (loss) from
operations........ (2,715) 1,803 2,563 (592) (75) 3,255 32 (204) 111
Other income
(expense):
Interest income... -- -- -- 213 20 137 -- -- --
Interest
expense......... -- (24) (49) (21) -- -- (19) -- (25)
Other, net........ -- 2 334 945 -- (4) -- 117 2
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Income (loss) before
income taxes...... (2,715) 1,781 2,848 545 (55) 3,388 13 (87) 88
Provision for
(benefit from)
income taxes...... -- 50 1,073 -- -- 1,168 5 (17) --
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Net income (loss)... $ (2,715) $ 1,731 $ 1,775 $ 545 $ (55) $ 2,220 $ 8 $ (70) $ 88
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Net income per
share.............
Shares used in
computing pro
forma net income
per share (See
Note 4)...........
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
------------- -----------
<S> <C> <C>
Revenues............ $ -- $ 144,277
Cost of revenues.... -- 108,940
------------- -----------
Gross profit........ -- 35,337
Selling, general &
administrative.... (5,937) 23,051
Intangible
amortization...... 2,232 2,232
One-time merger
charges........... (1,771) 400
------------- -----------
Income (loss) from
operations........ 5,476 9,654
Other income
(expense):
Interest income... -- 370
Interest
expense......... -- (138)
Other, net........ -- 1,396
------------- -----------
Income (loss) before
income taxes...... 5,476 11,282
Provision for
(benefit from)
income taxes...... 2,992 5,271
------------- -----------
Net income (loss)... $ 2,484 $ 6,011
------------- -----------
------------- -----------
Net income per
share............. $ 0.69
-----------
-----------
Shares used in
computing pro
forma net income
per share (See
Note 4)........... 8,684,067
-----------
-----------
</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 THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(B)
(A) -----------------------------------------------------------------------------------------
--------- CORPORATE
CONDOR MST CHMC FEDERAL ACCESS ISSI USCOMM INVENTURE
--------- ----- --------- ----------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $ 25,663 $ 692 $ 4,349 $ 5,934 $ 1,598 $ 846 $ 894 $ 321
Cost of revenues.......... 18,437 420 3,244 5,266 1,382 164 813 164
--------- ----- --------- ----------- ----------- --------- ----- -----
Gross profit.............. 7,226 272 1,105 668 216 682 81 157
Selling, general &
administrative.......... 4,956 256 4,438 371 219 634 45 127
Intangible amortization... 520 -- -- 41 -- -- -- --
In process research and
development expense..... 5,000 -- -- -- -- -- -- --
--------- ----- --------- ----------- ----------- --------- ----- -----
Income from operations.... (3,250) 16 (3,333) 256 (3) 48 36 30
Other income (expense):
Interest income......... 225 -- 9 57 3 9 -- --
Interest expense........ -- (4) (4) -- -- -- (2) --
Other, net.............. 3 -- 33 46 (36) 1 -- 3
--------- ----- --------- ----------- ----------- --------- ----- -----
Income before income
taxes................... (3,022) 12 (3,295) 359 (36) 58 34 33
Provision (benefit) for
income taxes............ (15) 36 -- -- -- 20 12 11
--------- ----- --------- ----------- ----------- --------- ----- -----
Net income................ $ (3,007) $ (24) $ (3,295) $ 359 $ (36) $ 38 $ 22 $ 22
--------- ----- --------- ----------- ----------- --------- ----- -----
--------- ----- --------- ----------- ----------- --------- ----- -----
Net income per share......
Shares used in computing
pro forma net income per
share (See
Note 4).................
<CAPTION>
PRO FORMA PRO FORMA
MIS ADJUSTMENTS COMBINED
--------- ------------- -----------
<S> <C> <C> <C>
Revenues.................. $ 407 $ -- $ 40,704
Cost of revenues.......... 226 -- 30,116
--------- ------------- -----------
Gross profit.............. 181 -- 10,588
Selling, general &
administrative.......... 161 (4,047) 7,160
Intangible amortization... -- 193 754
In process research and
development expense..... -- (5,000) --
--------- ------------- -----------
Income from operations.... 20 8,854 2,674
Other income (expense):
Interest income......... 2 -- 305
Interest expense........ -- -- (10)
Other, net.............. -- 12 62
--------- ------------- -----------
Income before income
taxes................... 22 8,866 3,031
Provision (benefit) for
income taxes............ 9 1,333 1,406
--------- ------------- -----------
Net income................ $ 13 $ 7,533 $ 1,625
--------- ------------- -----------
--------- ------------- -----------
Net income per share...... $ 0.15
-----------
-----------
Shares used in computing
pro forma net income per
share (See
Note 4)................. 10,971,822
-----------
-----------
</TABLE>
- ------------------------
(a) Includes three months of the operations of Condor and two months of the
operations of the Founding Companies.
(b) Includes January 1998 operations for each Founding Company.
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 (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CORPORATE
CONDOR MST CHMC FEDERAL ACCESS ISSI USCOMM INVENTURE MIS
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ -- $ 1,960 $ 10,847 $ 10,673 $ 4,385 $ 2,087 $ 1,737 $ 1,189 $ 1,048
Cost of revenues.... -- 929 8,987 9,316 3,742 372 1,631 876 652
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Gross profit........ -- 1,031 1,860 1,357 643 1,715 106 313 396
Selling, general &
administrative.... -- 492 2,112 841 505 1,540 106 425 324
Intangible
amortization...... -- -- -- -- -- -- -- -- --
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Income from
operations........ -- 539 (252) 516 138 175 -- (112) 72
Other income
(expense):
Interest income... -- -- 7 79 5 38 -- 1 --
Interest
expense......... -- (1) (26) -- -- (1) (2) -- (6)
Other net......... -- -- 67 -- 3 4 -- 1 --
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Income before income
taxes............. -- 538 (204) 595 146 216 (2) (110) 66
Provision for income
taxes............. -- -- -- 268 10 70 -- -- --
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Net income.......... $ -- $ 538 $ (204) $ 327 $ 136 $ 146 $ (2) $ (110) $ 66
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
----------- --------- --------- --------- ----------- --------- ----------- ----------- ---------
Net income per
share.............
Shares used in
computing pro
forma net income
per share (See
Note 4)...........
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
------------- -----------
<S> <C> <C>
Revenues............ $ -- $ 33,926
Cost of revenues.... -- 26,505
------------- -----------
Gross profit........ -- 7,421
Selling, general &
administrative.... (1,629) 4,716
Intangible
amortization...... 579 579
------------- -----------
Income from
operations........ 1,050 2,126
Other income
(expense):
Interest income... -- 130
Interest
expense......... -- (36)
Other net......... -- 75
------------- -----------
Income before income
taxes............. 1,050 2,295
Provision for income
taxes............. 729 1,077
------------- -----------
Net income.......... $ 321 $ 1,218
------------- -----------
------------- -----------
Net income per
share............. $ 0.14
-----------
-----------
Shares used in
computing pro
forma net income
per share (See
Note 4)........... 8,402,922
</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
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 acquired 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 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 the Commission's Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES
Concurrently with and as a condition to the closing of the Offering, Condor
acquired all of the outstanding capital stock of the Founding Companies. The
acquisitions will be accounted for using the purchase method of accounting with
Condor 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 paid in cash and in shares
of Common Stock to the stockholders of each of the Founding Companies. For
purposes of computing the purchase price for accounting purposes, the value of
shares was determined using a fair value of $10.40 per share, which represents a
discount of 20 percent from the initial public offering price of $13.00 per
share due to restrictions on the sale and transferability of the shares issued.
<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 $ 315 $ 15,715 35
CHMC.............................. 17,100 1,520 18,620 1,725 16,895 35
Federal........................... 7,500 6,000 13,500 2,080 11,420 35
Corporate Access.................. 5,200 2,080 7,280 427 6,853 30
ISSI.............................. 5,000 5,600 10,600 1,545 5,000(a) 1,555 7
2,500(b) 5
US Comm........................... 600 480 1,080 94 986 30
InVenture......................... 750 600 1,350 (269) 1,619 35
MIS............................... 1,200 1,440 2,640 (292) 2,932 35
--------- ----------- ------------- ----------- ----------- ---------
$ 47,100 $ 24,000 $ 71,100 $ 5,625 $ 7,500 $ 57,975
--------- ----------- ------------- ----------- ----------- ---------
</TABLE>
- ------------------------
(a) Represents amount allocated to in-process research and development.
(b) Represents amount allocated to existing technology.
Pursuant to contingent payment agreements entered into as part of the
transaction, six of the Founding Companies are eligible to receive contingent
consideration in the form of additional Common Stock and cash. Such contingent
consideration is based on a multiple of earnings and may be paid if these
companies achieve a level of earnings in excess of projected earnings. The
maximum earn-outs in 1998 and
F-7
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF FOUNDING COMPANIES (CONTINUED)
1999 are $26,700,000 and $24,700,000, respectively, of which $8,668,000 and
$8,068,000, respectively, are payable in cash.
3. 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, 1997:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Selling, general and administrative............... $ (5,937) $ -- $ -- $ -- $ -- $ (5,937)
Intangible amortization........................... -- 1,732 500 -- -- 2,232
One-time merger charges........................... -- -- -- -- (1,771) (1,771)
--------- --------- --------- --------- --------- -----------
Income (loss) from operations..................... 5,937 (1,732) (500) -- 1,771 5,476
Other income (expense):
Interest expense.................................. -- -- -- -- -- --
--------- --------- --------- --------- --------- -----------
Income (loss) before income taxes................. 5,937 (1,732) (500) -- 1,771 5,476
Provision for income taxes........................ 2,992 2,992
--------- --------- --------- --------- --------- -----------
Net income (loss)................................. $ 5,937 $ (1,732) $ (500) $ (2,992) $ 1,771 $ 2,484
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
</TABLE>
For the three months ended March 31, 1998:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (F) (G) ADJUSTMENTS
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Selling, general and administrative.... $ (4,047) $ -- $ $ -- -- -- $ (4,047)
Intangible amortization................ -- 151 42 -- -- -- 193
In process research and development.... -- -- -- -- (5,000) -- (5,000)
--------- --------- --------- --------- --------- --------- -----------
Income from operations................. 4,047 (151) (42) -- 5,000 -- 8,854
Other income (expense):
Interest expense....................... 12 -- -- -- -- -- 12
--------- --------- --------- --------- --------- --------- -----------
Income (loss) before income taxes...... 4,059 (151) (42) -- 5,000 -- 8,866
Provision (benefit) for income taxes... -- -- -- 301 -- 1,032 1,333
--------- --------- --------- --------- --------- --------- -----------
Net income (loss)...................... $ 4,059 $ (151) $ (42) $ (301) 5,000 (1,032) $ 7,533
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
</TABLE>
F-8
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS (CONTINUED)
For the three months ended March 31, 1997:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Selling, general and administrative.......................... $ (1,629) $ -- $ -- $ -- $ (1,629)
Intangible amortization...................................... -- 454 125 -- 579
--------- --------- --------- --------- -----------
Income (loss) from operations................................ 1,629 (454) (125) -- 1,050
Other income (expense):
Interest expense............................................. -- -- -- -- --
--------- --------- --------- --------- -----------
Income (loss) before income taxes............................ 1,629 (454) (125) -- 1,050
Provision for income taxes................................... -- -- -- 729 729
--------- --------- --------- --------- -----------
Net income (loss)............................................ $ 1,629 $ (454) $ (125) $ (729) $ 321
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</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. On a prospective basis, bonuses will only be paid if earnings
increase to a level well in excess of 1997 pro forma levels.
(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 the
majority of intangible amortization is not tax deductible.
(E) Reflects the reduction in compensation expense related to the
non-recurring, non-cash compensation charge of $1,771,000 recorded by Condor in
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.
(F) Reflects the elimination of a $5,000,000 non-recurring charge for
purchased research and development related to the purchase of one of the
Founding Companies.
(G) Reflects the elimination of a $1,032,000 tax benefit related to the
reduction of a deferred tax valuation allowance that had been recorded prior to
the Mergers and the Offering.
4. UNAUDITED PRO FORMA SHARES USED IN COMPUTING PRO FORMA NET INCOME PER SHARE
Unaudited pro forma shares used in computing pro forma net income per share
for the year ended December 31, 1997 include (i) 1,892,307 shares issued to
founders, consultants and management of Condor; (ii) 2,307,693 shares issued to
owners of the Founding Companies; and (iii) 4,484,067 of the
F-9
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA SHARES USED IN COMPUTING PRO FORMA NET INCOME PER SHARE
(CONTINUED)
6,785,000 shares sold in the Offering necessary to pay the cash portion of the
Merger consideration and to pay expenses of the Offering.
Unaudited pro forma shares used in computing pro forma net income per share
for the three months ended March 31, 1998 include (i) 2,307,693 shares issued to
the stockholders of the Founding Companies; (ii) 1,879,129 shares (excluding
13,178 shares repurchased by the Company subsequent to the Mergers) issued to
the founders, consultants and management of Condor and (iii) 6,785,000 shares
sold in the Offering.
Unaudited pro forma shares used in computing pro forma net income per share
for the three months ended March 31, 1997 include (i) 2,307,693 shares issued to
the stockholders of the Founding Companies; (ii) 1,611,162 shares issued to the
founders, consultants and management of Condor; and (iii) 4,484,067 of the
6,785,000 shares sold in the Offering necessary to pay the cash portion of the
Merger consideration, S Corporation distributions, underwriting discounts and
commissions and expenses of the Offering.
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Condor Technology Solutions, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Condor
Technology Solutions, Inc. at December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the two years in the period ended
December 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
Falls Church, VA
March 11, 1998
F-11
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash............................................................................ $ -- $ 26 $ 11,686
Marketable Securities........................................................... -- -- 23,028
Accounts Receivable, net........................................................ -- -- 22,812
Inventory, net.................................................................. -- -- 1,063
Prepaids and other current assets............................................... -- -- 1,298
Deferred offering costs......................................................... 265 4,900 --
--------- --------- -----------
Total current assets........................................................ 265 4,926 59,887
PROPERTY AND EQUIPMENT, NET....................................................... -- -- 1,964
GOODWILL AND OTHER INTANGIBLES, NET............................................... -- -- 63,035
OTHER ASSETS...................................................................... -- -- 952
--------- --------- -----------
TOTAL ASSETS................................................................ $ 265 $ 4,926 $ 125,838
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable................................................................ $ -- $ -- $ 11,685
Accrued expenses and other current liabilities.................................. -- 2,689 9,689
Amounts due to stockholder...................................................... 178 2,492 487
Deferred Revenue................................................................ -- -- 5,314
Current portion of long-term obligations........................................ -- -- 489
--------- --------- -----------
Total current liabilities................................................... 178 5,181 27,664
LONG TERM DEBT.................................................................... -- -- 593
OTHER LONG-TERM OBLIGATIONS....................................................... -- -- 3,967
--------- --------- -----------
Total liabilities........................................................... 178 5,181 32,224
--------- --------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par, 1,000,000 authorized; none outstanding
Common stock, $.01 par, 49,000,000 authorized; 1,413,806, 1,892,307 and
10,985,000 issued and outstanding at December 31, 1996 and 1997 and March 31,
1998, respectively............................................................ 14 19 110
Additional paid in capital...................................................... 73 2,441 99,487
Accumulated deficit............................................................. -- (2,715) (5,722)
Cumulative translation adjustment............................................... -- -- (67)
Treasury stock, at cost (13,178 Shares at March 31, 1998)....................... -- -- (194)
--------- --------- -----------
Total stockholders' equity (deficit)........................................ 87 (255) 93,614
--------- --------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)................................................................. $ 265 $ 4,926 $ 125,838
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- -------------------
1996 1997 1998
--------- --------- -------------------
<S> <C> <C> <C>
(UNAUDITED)
Revenues.................................................................. $ -- $ -- $ 25,663
Cost of Revenues.......................................................... -- -- 18,437
--------- --------- -------
Gross profit.............................................................. -- -- 7,226
Selling, general and administrative....................................... -- 2,715 4,956
Intangible amortization................................................... -- -- 520
In process research and development expense............................... -- -- 5,000
--------- --------- -------
Loss from operations...................................................... -- (2,715) (3,250)
Interest income, net...................................................... -- -- 225
Other income.............................................................. -- -- 3
--------- --------- -------
Loss before income taxes.................................................. -- (2,715) (3,022)
Income tax benefit........................................................ -- -- (15)
--------- --------- -------
Net loss.................................................................. $ -- $ (2,715) $ (3,007)
--------- --------- -------
--------- --------- -------
Net loss per basic and diluted share...................................... $ (1.62) $ (0.42)
--------- -------
--------- -------
Weighted average basic and diluted shares outstanding..................... 1,680 7,117
--------- -------
--------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDERS'
------------------------- PAID-IN ACCUMULATED TRANSLATION TREASURY EQUITY
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT STOCK (DEFICIT)
------------ ----------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........ 1,413,806 $ 14 $ 73 $ -- $ -- $ -- $ 87
Issuance of common stock.......... 478,501 5 2,368 -- -- -- 2,373
Net loss.......................... -- -- -- (2,715) -- -- (2,715)
------------ ----- ----------- ------------ ----------- ----------- -------------
Balance, December 31, 1997........ 1,892,307 19 2,441 (2,715) -- -- (255)
Issuance of common stock in
initial public offering, net of
offering costs.................. 6,785,000 68 73,069 -- -- -- 73,137
Issuance of common stock for
purchase of Founding
Companies....................... 2,307,693 23 23,977 -- -- -- 24,000
Purchase of treasury stock........ -- -- -- -- -- (194) (194)
Foreign currency translation
adjustment...................... -- -- -- -- (67) -- (67)
Net loss.......................... -- -- -- (3,007) -- -- (3,007)
------------ ----- ----------- ------------ ----------- ----------- -------------
Balance, March 31, 1998
(unaudited)..................... 10,985,000 $ 110 $ 99,487 $ (5,722) $ (67) $ (194) $ 93,614
------------ ----- ----------- ------------ ----------- ----------- -------------
------------ ----- ----------- ------------ ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- -------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- -------------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $ -- $ (2,715) $ (3,007)
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock compensation expense........................................... -- 1,771 --
Research and development charge...................................... -- -- 5,000
Depreciation and amortization........................................ -- -- 746
Deferred income taxes................................................ -- -- (1,032)
Changes in assets and liabilities:
Deferred offering costs............................................ (178) (4,183) 4,900
Amounts due stockholder............................................ 178 2,314 (2,005)
Accrued liabilities and other current liabilities.................. -- 2,689 7,000
Other changes in assets and liabilities............................ -- -- (8,841)
--------- --------- -------
Net cash (used) provided by in operating activities.............. -- (124) 2,761
--------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................... -- -- (219)
Purchase of Short term investments................................... -- -- (21,822)
Purchase of Founding Companies, net of cash acquired................. -- -- (40,823)
--------- --------- -------
Net cash used in investing activities............................ -- -- (62,864)
--------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock...................................... -- 150 --
Payments on long term debt........................................... -- -- (1,174)
Proceeds from initial public offering................................ -- -- 73,131
Purchase of treasury shares.......................................... -- -- (194)
--------- --------- -------
Net cash provided by financing activities........................ -- 150 71,763
--------- --------- -------
Net increase in cash..................................................... -- 26 11,660
Cash, beginning of year.................................................. -- -- 26
--------- --------- -------
Cash, end of year........................................................ $ -- $ 26 11,686
--------- --------- -------
--------- --------- -------
NONCASH TRANSACTIONS:
Issuance of stock........................................................ $ 87 $ 2,223 $ 24,000
--------- --------- -------
--------- --------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<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
Information Technology ("IT") service company to provide 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 entered into
agreements (the "Mergers") to acquire all of the common stock of eight
established IT service providers (the "Founding Companies") and concurrently
completed an initial public offering (the "Offering") of its common stock (the
"Common Stock"). On February 10, 1998, the Offering and the Mergers were
completed (Note 10).
The Company has not conducted any significant operations, other than payment
of salary to one officer and facility costs. All activities to date have related
to the Offering and the Mergers. The Company's cash balances were provided from
the sale of stock to investors and advances from a member of The Commonwealth
Group ("Commonwealth"), whose three principals were founding stockholders of
Condor.
As of December 31, 1996 and 1997, costs of approximately $265,000 and
$4,900,000, respectively, have been incurred in connection with the Offering.
These costs will be recorded as a reduction of the proceeds of the Offering.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company's accounting records are maintained on the accrual basis of
accounting.
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.
INCOME TAXES
Income taxes are provided in accordance with 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.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") provides a 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,
"Accounting for Stock Issued to Employees," ("APB No. 25"). Companies electing
to remain with the accounting 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. The Company will account for stock based
compensation pursuant to the requirements of APB No. 25 and will provide pro
forma disclosure of net income and net
F-16
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income per share, pursuant to the requirements of SFAS No. 123 as applicable, in
the notes to financial statements.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of accrued expenses approximate fair value.
NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS No. 128") replaces the presentation of primary earnings per share ("EPS")
with a presentation of basic EPS, and requires dual presentation of basic and
diluted EPS on the face of the income statement. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the weighted-
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock that then
shared in the earnings of the entity. Dilutive securities are excluded from the
computation in periods in which they have an anti-dilutive effect, and net
income available to common shareholders is adjusted accordingly for the effect
of cumulative dividends on convertible preferred stock. The Company adopted this
statement during the fourth quarter of 1997, as required.
3. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK AND PREFERRED STOCK
The Company has effected a one-for-5.72568 reverse stock split effective on
the day preceding the date of the final Prospectus for the Offering. In
addition, on October 1, 1997, the Company increased the number of authorized
shares of common stock to 49 million 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 sheets and the accompanying notes.
In connection with the organization of the Company, Condor issued 1,413,806
shares of Common Stock 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 the Offering. These non-monetary assets are considered to have an
aggregate value of $87,000. Amounts due to stockholder will be reimbursed out of
the proceeds of the Offering, together with interest on such advances at the
prime rate. Subsequent to the issuance of shares to Commonwealth, such shares
were distributed to its individual principals.
During 1997, 255,820 shares of Common Stock were issued in exchange for
services associated with the Offering that are considered to have an aggregate
value of $452,031, and 39,297 shares were sold to investors for $150,000.
During 1997, the Company issued a total of 183,384 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 $1,771,000 for the
year ended December 31, 1997, representing the estimated fair value of the
shares on the date of issuance.
F-17
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEFERRED COSTS
In connection with the Offering, the Company has incurred costs which are
directly attributable to the Offering. These costs, which include legal fees,
accounting fees, printing fees and other costs of approximately $265,000 and
$4,900,000, have been deferred as of December 31, 1996 and 1997, respectively,
and will be charged against the proceeds of the Offering.
5. 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 was granted automatically an
initial option to purchase 10,000 shares, and thereafter each person who becomes
a non-employee director will be granted automatically 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 the 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 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, 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 the Offering, and in addition to the options
automatically granted to non-employee directors, options in the form of NQSOs to
purchase shares of the Company's Common Stock were granted to the executive
officers of the Company, the employees of the Company and the Founding
Companies. Each of the foregoing options has an exercise price equal to the
initial public offering price per share in the Offering, and vests as to 33%
each on the date that is 12 months, 24 months and 36 months after the date of
closing of the Offering. These options will not be exercisable until they are
vested,
F-18
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCENTIVE COMPENSATION (CONTINUED)
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. No options were outstanding at December 31, 1996 or 1997.
6. NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 becomes effective for fiscal years beginning
after December 15, 1997 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires the reporting and
display of comprehensive income and its components in the financial statements.
Comprehensive income is the change in equity during the period from transactions
from non-owner sources. Comprehensive income includes net income and other
comprehensive income including foreign currency translation adjustments and
gains and losses on certain marketable securities. SFAS No. 130 does not require
a specific format for the financial statement in which comprehensive income is
reported, but does require that an amount representing total comprehensive
income be reported in the statement. The adoption of SFAS No. 130 is not
expected to have a material impact on the Company's financial statements.
7. RELATED PARTY TRANSACTIONS
As of December 31, 1997, a member of Commonwealth had advanced the Company
approximately $2.5 million for the payment of Offering and Merger-related costs.
Such costs are reimburseable, plus interest at the prime rate, subsequent to the
Offering. At December 31, 1997, the Company has deferred these costs to be
offset against the proceeds from the Offering.
8. COMMITMENTS AND CONTINGENCIES
LAWSUIT
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. 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 Inc. and Computer
Hardware Maintenance Company, Inc. ("CHMC") and misappropriation of a trade
secret arising out of the participation of CHMC and Corporate Access, Inc. 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, Inc. 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.
On December 31, 1997, the defendants filed an Answer, denying the allegations
and asserting
F-19
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
various affirmative defenses. Pre-trial discovery proceedings have commenced.
Condor believes that Emtec's allegations are without merit and that, in any
event, the ultimate resolution of this action will not have a material adverse
effect on the Company's results of operations, financial position, cash flows or
business. The Company 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. Commonwealth has agreed to indemnify the
Company with regard to any final judgment or settlement arising out of the above
action or any similar action. Commonwealth's obligations under such agreement
have been guaranteed by the three members of Commonwealth.
OPERATING LEASES
The Company leases certain equipment and office space under operating lease
arrangements expiring through 2005. Future minimum rental payments under
non-cancelable operating leases at December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998................................................................ $ 119
1999................................................................ 123
2000................................................................ 126
2001................................................................ 130
2002................................................................ 134
Thereafter.......................................................... 632
---------
$ 1,264
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $0 and
$49,000 respectively.
9. INCOME TAXES
The provision for income taxes for the year ended December 31, 1997 is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Current
Federal....................................................................... $ --
State......................................................................... --
Foreign....................................................................... --
------------
Total current................................................................. --
------------
Deferred
Federal....................................................................... (869)
State......................................................................... (163)
------------
Total deferred................................................................ (1,032)
------------
Less valuation allowance........................................................ 1,032
------------
--
------------
Total income tax benefit........................................................ $ --
------------
------------
</TABLE>
F-20
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets. The
temporary difference that gives rise to the deferred tax asset is the
carryforward of net operating losses from prior periods. At current statutory
rates, the net operating loss carryforward tax asset will offset approximately
$2,700,000 in taxable income and will expire in 2008.
Gross deferred tax assets at December 31, 1996 and 1997, prior to valuation
allowances, are $0 and $1,032,000, respectively. A valuation allowance of
$1,032,000 was provided for during 1997 against the net deferred tax assets due
to the uncertainty of realizing the benefit of these assets.
No income taxes were paid in 1996 and 1997.
10. SUBSEQUENT EVENTS
On February 10, 1998, the Company acquired all of the common stock and
ownership interests of the Founding Companies simultaneously with the closing of
the Offering. The companies acquired are Management Support Technology Corp.;
CHMC; Federal Computer Corporation; Corporate Access, Inc.; Interactive Software
Systems Incorporated; U.S. Communications, Inc.; InVenture Group, Inc. and MIS
Technologies, Inc. In addition, the Company assumed options to purchase shares
of common stock of one of the Founding Companies which constitute options to
purchase an aggregate of 62,471 shares of Condor's Common Stock.
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price will be allocated to the assets
purchased based on the fair value at the date of acquisition. The aggregate
consideration paid by Condor to acquire the Founding Companies was $47.1 million
in cash and 2.3 million shares of common stock.
The consideration paid in cash and shares of Common Stock and the allocation
of the consideration to net assets and resulting goodwill is as follows (in
thousands).
<TABLE>
<CAPTION>
VALUE TOTAL ADJUSTED
CASH OF SHARES CONSIDERATION NET ASSETS
------- --------- ------------- ----------
<S> <C> <C> <C> <C>
MST......................................................... $ 9,750 $ 6,280 $16,030 $ 709
CHMC........................................................ 17,100 1,520 18,620 2,951
Federal..................................................... 7,500 6,000 13,500 3,563
Corporate Access............................................ 5,200 2,080 7,280 710
ISSI........................................................ 5,000 5,600 10,600 1,768
US Comm..................................................... 600 480 1,080 144
InVenture................................................... 750 600 1,350 (91)
MIS......................................................... 1,200 1,440 2,640 (212)
------- --------- ------------- ----------
$47,100 $24,000 $71,100 $ 9,452
------- --------- ------------- ----------
------- --------- ------------- ----------
<CAPTION>
ALLOCATION
OF PURCHASE
PRICE GOODWILL LIFE
------------- -------- ----
<S> <C> <C> <C>
MST......................................................... $-- $ 15,321 35
CHMC........................................................ -- 15,669 35
Federal..................................................... -- 9,937 35
Corporate Access............................................ -- 6,570 30
ISSI........................................................ 5,000a 1,332 7
2,500b 5
US Comm..................................................... -- 936 30
InVenture................................................... -- 1,441 35
MIS......................................................... -- 2,852 35
------ --------
$ 7,500 $ 54,058
------ --------
------ --------
</TABLE>
- ------------------------
(a) Represents amount allocated to in-process research and development.
(b) Represents amount allocated to existing technology.
F-21
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
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 $16.7 million in cash and issue
up to $34.7 million in shares of Common Stock, based on earnings before taxes
for the years ended December 31, 1998-2000. Contingent consideration, if earned,
will be recorded in a manner consistent with the consideration paid at closing
for each respective 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 each company's historical assets
and liabilities based on their respective estimated fair values, with the
exception of in-process research and development costs and existing technology
at ISSI.
The unaudited pro forma results of operations, assuming that the acquisition
was consummated on January 1, 1997, are as follows:
<TABLE>
<S> <C>
Revenue........................................................... $ 144,277
Net income........................................................ 6,011
Earnings per basic and diluted share.............................. $ 0.69
</TABLE>
Pro forma financial information is presented for informational purposes only
and may not be indicative of what actual results of operations might have been
if the Mergers had been effective as of January 1, 1997. The unaudited pro forma
results of operations include adjustments to the Company's unaudited historical
results of operations which provide for: (1) reductions in salaries, bonuses and
benefits to stockholders and managers of the Founding Companies to which they
have agreed prospectively; (2) amortization of goodwill to be recorded as a
result of the Mergers over a period of seven to 35 years; (3) amortization of
internally developed software acquired as a result of the Mergers over a five
year estimated life; (4) reflects the (a) incremental provision for federal and
state income taxes assuming all entities were subject to federal and state
income taxes, (b) federal and state income taxes relating to the other statement
of operations' adjustments, (c) income taxes on S corporation income, and (d)
the fact that the majority of intangible amortization is not tax deductible; and
(5) reflects the reduction in compensation expense related to the non-recurring,
non-cash compensation charge of $1,771,000 recorded by Condor during 1997
related to Common Stock issued to management and consultants of 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.
REVOLVER
The Company has obtained a commitment from a major commercial bank for a
$35.0 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; (iii) restrictions on liens, guarantees, advances and dividends;
and (iv) restrictions on the type, size and number of acquisitions. The facility
is intended to be used for working capital, general corporate purposes, and
future acquisitions. There can be no assurance that the Company will obtain such
credit facility.
F-22
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
OFFICE LEASE
Subsequent to December 31, 1997, the Company decided to move its
headquarters to Annapolis, Maryland. The Company signed an agreement to lease
certain office space under an operating lease arrangement expiring in 2003.
Future minimum rental payments under non-cancelable operating leases subsequent
to December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $ 91
1999................................................................. 112
2000................................................................. 115
2001................................................................. 119
2002................................................................. 122
Thereafter........................................................... 21
---------
$ 580
---------
---------
</TABLE>
SUBSEQUENT STOCK OPTIONS ISSUED
In conjunction with the Offering, the Company granted 991,865 stock options
at $13.00 per share, the Offering price. In March 1998, the Company granted
40,444 additional options at $14.72, which represents the fair market value at
the date of the grant.
DEFERRED COSTS
Subsequent to December 31, 1997, the Company incurred approximately
$1,600,000 in additional costs which were directly attributable to the Offering.
These costs primarily include legal, accounting and printing fees.
TREASURY STOCK
In February 1998, the Company repurchased 13,178 shares of Common Stock from
one of the founding investors in the Company. The Common Stock was repurchased
for $194,376 and will be recorded as Treasury Stock.
11. SUBSEQUENT EVENTS--UNAUDITED
CREDIT FACILITIES
In April 1998, the Company obtained a $35.0 million revolving credit
facility (the "Revolver") from a major commercial bank. The Revolver includes a
letter of credit facility of up to $15.0 million, of which $6.0 million is
currently issued and outstanding to secure a floor planning facility with a
separate bank. Borrowings under the Revolver bear interest beginning at the
London Interbank Offering Rate plus 150 basis points or the Base Rate, which is
the greater of the Federal Funds Rate plus 0.50% or the Prime Rate, at the
option of the Company. The Company is subject to additional interest rate
margins, based on a pricing ratio of debt to earnings ranging from 0.25% to
1.25% when using the Base Rate or ranging from 1.50% to 2.50% when using the
LIBOR rate. The Company is also required to pay a commitment fee at the annual
percentage rate ranging from 0.25% to 0.50% as defined in the agreement. The
Company must comply with various loan covenants including (i) maintenance of
certain financial ratios; (ii) restrictions on additional indebtedness; (iii)
restrictions on liens, guarantees, advances and dividends; and (iv) restrictions
F-23
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS--UNAUDITED (CONTINUED)
on the type, size and number of acquisitions. The Revolver, which expires in
April 2001, is intended to be used for acquisitions, working capital and general
corporate purposes.
Also in April 1998, the Company obtained a $13.0 million floor planning
facility to support the working capital needs of the companies in its desktop
services division. This facility is secured by a $6.0 million letter of credit
issued under the Revolver and certain of the assets of the desktop service
division. The floor planning facility requires the Company to comply with
various loan covenants identical to those required under the Revolver. The
agreement expires in April 2001.
Indebtedness under both the Revolver and the floor planning facility are
collateralized by substantially all of the assets of Condor and its
subsidiaries.
SUBLEASE AGREEMENT
In May 1998, the Company entered into a five year sublease agreement for the
office space that it vacated in April 1998. Under the terms of the sublease, the
annual rent obligation of the sublessor is equal to the annual rent obligation
of Condor. The sublease is guaranteed by a lease bond equal to one year's rent.
DEFERRED COSTS
Subsequent to December 31, 1997, the Company incurred approximately $4.1
million in additional costs which were directly attributable to the Offering.
These costs primarily include legal, accounting, printing and consulting fees.
ACQUISITION OF FOUNDING COMPANIES
During the three months end March 31, 1998, management reviewed its initial
assessment of the fair value of the Founding Companies' net assets. This review
resulted in recorded goodwill of $58.0 million.
DST ACQUISITION
In May 1998, the Company acquired all of the stock of Decision Support
Technology, Inc., a Boston area systems integrator focusing on decision support
and data-warehousing systems, for a total consideration of $1,490,000,
consisting of $1 million of cash, $340,000 of debt assumed and 9,600 shares of
Common Stock. The acquisition is not expected to have a material effect on the
Company's financial position, results of operations or cash flows.
F-24
<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, 1996 and 1997 and January
31, 1998, and the related statements of operations and retained earnings, and
cash flows for each of the three years in the period ended December 31, 1997 and
for the one month ended January 31, 1998. 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, 1996 and 1997 and January 31, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 and for the one month ended January 31, 1998 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.
As discussed in Note 9 of the notes to financial statements, on February 10,
1998 Condor Technology Solutions, Inc. acquired 100% of the Company's
outstanding common stock.
Deloitte & Touche LLP
Boston, Massachusetts
February 27, 1998
F-25
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
-------------------- -----------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................................................. $ 102 $ 70 $ 120
Accounts receivable (net of allowance for doubtful accounts of $7 in 1996 and $29
in 1997 and 1998)............................................................... 1,451 1,297 1,137
Prepaid expenses and other current assets......................................... 169 219 254
--------- --------- -----------
Total current assets........................................................ 1,722 1,586 1,511
--------- --------- -----------
Property and equipment:
Equipment......................................................................... 822 934 1,000
Vehicles.......................................................................... 36 -- --
Furniture and fixtures............................................................ 177 185 185
Leasehold improvements............................................................ 34 41 41
--------- --------- -----------
Total....................................................................... 1,069 1,160 1,226
Less accumulated depreciation..................................................... (381) (572) (590)
--------- --------- -----------
Property and equipment--net................................................. 688 588 636
--------- --------- -----------
Deposits and other................................................................ 16 54 54
--------- --------- -----------
Total assets................................................................ $ 2,426 $ 2,228 $ 2,201
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Note payable to a bank............................................................ $ 250 $ 550 $ 550
Accounts payable.................................................................. 95 296 486
Accrued expenses.................................................................. -- 219 348
Income taxes payable.............................................................. -- 50 86
Accrued compensation.............................................................. 280 -- 22
Deferred revenue.................................................................. 250 -- --
--------- --------- -----------
Total current liabilities................................................... 875 1,115 1,492
--------- --------- -----------
Commitments (Note 4)
Stockholder's equity:
Common stock, $.002, $.00025 and $.00025 par value in 1996, 1997 and 1998,
respectively; 20,000,000 shares authorized; 8,105,360 shares issued and
outstanding..................................................................... 2 2 2
Retained earnings................................................................. 1,549 1,111 707
--------- --------- -----------
Total stockholder's equity.................................................. 1,551 1,113 709
--------- --------- -----------
Total liabilities and stockholder's equity.................................. $ 2,426 $ 2,228 $ 2,201
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ONE MONTH
ENDED
YEAR ENDED DECEMBER 31, JANUARY 31,
------------------------------- -----------
1995 1996 1997 1998
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenue.............................................................. $ 6,193 $ 8,211 $ 7,743 $ 692
Cost of revenue...................................................... 2,415 3,783 3,840 420
General and administrative expenses.................................. 1,606 2,188 2,100 256
--------- --------- --------- -----------
Income from operations............................................... 2,172 2,240 1,803 16
Interest expense..................................................... (12) (29) (24) (4)
Interest income and other income (expense)........................... (3) 3 2 --
--------- --------- --------- -----------
Income before provision for income taxes............................. 2,157 2,214 1,781 12
Provision for income taxes........................................... -- -- 50 36
--------- --------- --------- -----------
Net income (loss).................................................... 2,157 2,214 1,731 (24)
Retained earnings, beginning of period............................... 789 878 1,549 1,111
Distributions, net of contributions.................................. (2,068) (1,543) (2,169) (380)
--------- --------- --------- -----------
Retained earnings, end of period..................................... $ 878 $ 1,549 $ 1,111 $ 707
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED ONE MONTH ENDED
DECEMBER 31, JANUARY 31,
------------------------------- -------------------
1995 1996 1997 1998
--------- --------- --------- -------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ 2,157 $ 2,214 $ 1,731 $ (24)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Investment................................................. (270) -- -- --
Compensation............................................... -- -- 200 --
Depreciation and amortization.............................. 123 188 215 18
Gain on sale of fixed assets............................... -- -- (1) --
Provision for doubtful accounts............................ -- -- 22 --
Changes in assets and liabilities:
Accounts receivable........................................ 102 (268) 132 160
Prepaid expenses and other current assets.................. (60) (43) (50) (35)
Deposits and other......................................... (5) -- (38) --
Deferred revenue........................................... 103 (709) (250) --
Accounts payable and accrued expenses...................... 112 166 140 341
Income taxes payable....................................... -- -- 50 36
--------- --------- --------- -----
Total adjustments........................................ 105 (666) 420 520
--------- --------- --------- -----
Cash provided by operating activities.................... 2,262 1,548 2,151 496
--------- --------- --------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................... (393) (260) (126) (66)
Sale of fixed assets......................................... -- -- 12 --
Return of investment......................................... -- 600 -- --
--------- --------- --------- -----
Cash provided by (used for) investing activities......... (393) 340 (114) (66)
--------- --------- --------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable................................................. 200 (250) 300 --
Distributions, net of contributions.......................... (2,068) (1,543) (2,369) (380)
--------- --------- --------- -----
Cash used for financing activities....................... (1,868) (1,793) (2,069) (380)
--------- --------- --------- -----
Increase (decrease) in cash and equivalents.................... 1 95 (32) 50
Cash and equivalents, beginning of period...................... 6 7 102 70
--------- --------- --------- -----
Cash and equivalents, end of period............................ $ 7 $ 102 $ 70 $ 120
--------- --------- --------- -----
--------- --------- --------- -----
SUPPLEMENTAL INFORMATION-INTEREST PAID......................... $ 11 $ 31 $ 19 $ 4
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
Noncash Transactions--In 1995, the Company received an equity position in an
investment in exchange for services with an assigned value at the date of
exchange of $270 (see Note 6). In 1997, the chief executive officer/sole
stockholder received $200 as a distribution, which has been recorded as
compensation.
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS
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
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 December 31, 1997 and January 31, 1998,
the Company has incurred $211,000 and $253,000, respectively, of costs directly
attributable to an offering of securities (the "Offering") in connection with
the Acquisition (see Note 9). These costs have been deferred as of December 31,
1997 and January 31, 1998 and are included in prepaid expenses and other current
assets in the accompanying balance sheets as the Company had a pre-existing
agreement with Condor (Note 9) whereby Condor agreed to reimburse the Company
for the costs. The costs were charged against the gross proceeds of the
Offering, which was completed in February 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. 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
F-29
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. In 1995, revenue from
CIGNA Property & Casualty (including revenue from The CSN Company ("CSN") (see
Note 6), which was acquired in 1996) ("CIGNA") (see Note 7) accounted for 89% of
total revenue. In 1996, revenue from CIGNA and Reinsurance Solutions
International ("RSI"), an affiliate of CIGNA, accounted for 61% and 25%,
respectively, of total revenue. In 1997 revenue from CIGNA and RSI accounted for
67% and 21%, respectively, of total revenue. For the one month ended January 31,
1998, revenue from CIGNA, RSI and Business Design Associates accounted for 61%,
6% and 33%, respectively, of total revenue. No other client accounted for more
than 10% of the Company's revenue in 1995, 1996, 1997 or 1998.
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
domestic income taxes, and has not provided for deferred income taxes. In 1997
and 1998, the Company was required to provide for foreign income taxes of
$50,000 and $36,000, respectively, related to foreign source income. The
Company's Subchapter S status terminated when it was acquired by Condor
Technology Solutions, Inc. (Note 9)
RECLASSIFICATIONS - Certain items in 1995 and 1996 have been reclassified to
conform to the 1997 and 1998 presentation.
2. OFFICER SALARY
Mr. C. Lawrence Meador, the Company's chief executive officer and sole
stockholder, elected not to receive a salary for the year ended December 31,
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
$200,000, which has been recognized in the accompanying statement of operations
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. 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) an 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
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 $2,369,000 (prior to reclassification of salary) paid to
Mr. Meador during the year ended December 31, 1997 as compared to
F-30
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. OFFICER SALARY (CONTINUED)
distributions for the years ended December 31, 1992, 1993, 1994, 1995 and 1996
of $82,000 (unaudited), $224,000 (unaudited), $820,000 (unaudited), $2,068,000,
and $1,543,000, respectively. Cost of revenue includes $200,000 and $480,000 of
compensation to Mr. Meador for the years ended December 31, 1995 and 1996,
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. Mr. Meador received a salary for the one month ended
January 31, 1998 of approximately $36,000, which has been included in cost of
revenue representing one month's salary under his annual contract with Condor
(Note 9).
3. NOTES PAYABLE TO BANK
At December 31, 1996, 1997, and January 31, 1998, the Company had a
line-of-credit agreement with Fleet Bank of Boston, N.A. (the "Bank") which
provided for borrowings of up to $750,000. Borrowings bear interest at the
Bank's prime lending rate plus 0.75% (9% at December 31, 1996 and 9.25% at
December 31, 1997 and January 31, 1998). The line of credit agreement expires
October 2, 1998 and requires compensating balances equal to 5% ($37,500) of the
maximum amount of the loan be maintained at the Bank, which is included under
Deposits and other in the accompanying balance sheet at December 31, 1997 and
January 31, 1998.
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 cars, equipment and office space under operating
lease arrangements. The Company amended the existing lease for its office space
and entered into an extended lease for additional space, the new lease term to
commence February 1, 1998 and expire on January 31, 2003. Future minimum rental
payments under noncancelable operating leases for the Company's office space at
December 31, 1997 follow:
<TABLE>
<S> <C>
Period ended December 31
1998.............................................................. $ 198,000
1999.............................................................. 255,000
2000.............................................................. 227,000
2001.............................................................. 187,000
2002.............................................................. 190,000
Thereafter........................................................ 16,000
</TABLE>
Rent expense in 1995, 1996 and 1997 was $115,000, $136,000 and $143,000,
respectively. Rent expense for the one month ended January 31, 1998 was $12,000.
F-31
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $93,000, $131,000 and
$171,000 in 1995, 1996 and 1997, respectively. Discretionary contributions for
the one month ended January 31, 1998 aggregated $23,000.
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, 1995, 1996 and 1997 and
the one month ended January 31, 1998, 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 $37,000,
$42,000 $45,000 and $6,000 to the plan during 1995, 1996, 1997 and during
January 1998, 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 CSN, which was recently
formed (Note 1). The Company's chief executive officer and stockholder served as
a director of CSN 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, CSN was acquired by CIGNA (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 CSN in exchange for $108,000, plus expenses. Revenue was
recognized as services were provided.
7. OTHER RELATED-PARTY TRANSACTIONS
During 1995, 1996, and 1997 the Company paid approximately $86,000, $245,000
and $77,000, respectively, in consulting fees to two companies that have
directors in common with the Company under arms length terms. No payments were
made during the one month ended January 31, 1998.
During 1995, Mr. Meador (Note 2) became an officer, on an interim assignment
under contract, of CIGNA (Notes 1 and 6).
8. STOCK OPTION PLAN
In June 1997, the Board of Directors and stockholder 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. Effective November 28, 1997, the Board of
Directors voted to terminate the Plan. No options were granted prior to the
termination of the Plan.
F-32
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENT
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 Acquisition closed
on February 10, 1998. The consideration paid by Condor for the Acquisition was
approximately $17.6 million, $9.75 million of which was paid in cash and $7.85
million was 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, up to $2.5 million of which would be paid in cash and the remainder of
which would be paid in additional Condor common stock. Simultaneous with the
closing of the Acquisition, Condor completed an initial public offering of 5.9
million shares of its common stock, raising approximately $66 million in net
proceeds. Employees of the Company also received options to acquire 134,500
shares of Condor common stock in conjunction with the initial public offering.
These options were granted at the initial public offering price of $13 per
share.
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Computer Hardware Maintenance Company, Inc.
In our opinion, the accompanying balance sheets 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 Computer Hardware
Maintenance Company, Inc. at February 28, 1997 and January 31, 1998, and the
results of its operations and its cash flows for each of the two years in the
period ended February 28, 1997, and the eleven months in the period ended
January 31, 1998, 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
Falls Church, VA
March 13, 1998
F-34
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEB. 28, JAN. 31,
--------- ---------
<S> <C> <C>
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 928 $ 998
Accounts receivable, net of allowance of $30 in 1997 and 1998.............................. 5,267 7,791
Inventory.................................................................................. 1,378 802
Deferred income taxes...................................................................... 11 11
Prepaid expenses and other current assets.................................................. 171 540
--------- ---------
Total current assets..................................................................... 7,755 10,142
Fixed assets, net.......................................................................... 307 348
Investment in partnership.................................................................. 17 --
Other long-term assets..................................................................... 47 41
--------- ---------
Total assets............................................................................. $ 8,126 $ 10,531
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................................................. $ -- $ 106
Current portion of capital lease obligations............................................... 10 4
Current portion of long-term debt.......................................................... 34 30
Accounts payable........................................................................... 2,320 2,732
Accrued liabilities........................................................................ 850 2,184
Deferred revenue........................................................................... 1,730 2,450
Other current liabilities.................................................................. 262 46
--------- ---------
Total current liabilities................................................................ 5,206 7,552
Deferred income taxes........................................................................ 28 28
Long-term debt............................................................................... 28 --
Other long-term liabilities.................................................................. 12 --
--------- ---------
Total liabilities........................................................................ 5,274 7,580
--------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized; 5,980,000 shares issued in 1997 and
6,070,000 shares issued in 1998; 4,100,000 and 4,090,000 shares outstanding at February
1997 and January 1998, respectively........................................................
Additional paid-in capital................................................................... 126 306
Deferred stock compensation.................................................................. 174 --
Retained earnings............................................................................ 2,930 3,046
--------- ---------
3,230 3,352
Less: Treasury stock (1,880,000 and 1,980,000 shares at February 1997 and January, 1998,
respectively, all at cost)............................................................... (378) (401)
--------- ---------
Total stockholders' equity............................................................... 2,852 2,951
--------- ---------
Total liabilities and stockholders' equity............................................... $ 8,126 $ 10,531
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
FEB. 29, FEB. 28, JANUARY 31,
--------- --------- ----------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
--------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Services.......................................................... $ 7,997 $ 9,279 $ 8,343 $ 11,839
Hardware and software procurement................................. 22,811 35,439 32,954 32,261
--------- --------- ----------- ---------
Total revenues.................................................. 30,808 44,718 41,297 44,100
--------- --------- ----------- ---------
Cost of revenues:
Services.......................................................... 5,187 6,061 5,942 6,611
Hardware and software procurement................................. 21,036 32,342 29,558 28,317
--------- --------- ----------- ---------
Total cost of revenues.......................................... 26,223 38,403 35,500 34,928
--------- --------- ----------- ---------
Gross profit........................................................ 4,585 6,315 5,797 9,172
Selling, general and administrative expenses........................ 3,844 4,784 4,010 9,163
--------- --------- ----------- ---------
Income from operations.............................................. 741 1,531 1,787 9
--------- --------- ----------- ---------
Other income (expense):
Interest expense, net............................................. (175) (191) (192) (28)
Other income...................................................... 107 152 50 220
--------- --------- ----------- ---------
Total other income (expense).................................... (68) (39) (142) 192
--------- --------- ----------- ---------
Income before income taxes.......................................... 673 1,492 1,645 201
Provision for taxes................................................. 285 598 658 85
--------- --------- ----------- ---------
Net income.......................................................... $ 388 $ 894 $ 987 $ 116
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON ADDITIONAL TREASURY STOCK DEFERRED
STOCK PAID-IN ---------------------- STOCK RETAINED STOCKHOLDERS'
SHARES CAPITAL SHARES AMOUNT COMPENSATION EARNINGS EQUITY
---------- ---------- ---------- ---------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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...................... -- -- -- -- -- 116 116
---------- ---------- ---------- ---------- ----- ----------- ------
Balance, January 31, 1998....... 4,090,000 $ 306 1,980,000 $ (401) $ -- $ 3,046 $ 2,951
---------- ---------- ---------- ---------- ----- ----------- ------
---------- ---------- ---------- ---------- ----- ----------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
YEAR ENDED ----------------------
---------------------- JANUARY 31,
FEB. 29, FEB. 28, ----------------------
1996 1997 1998
----------- --------- 1997 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 388 $ 894 $ 987 $ 116
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization..................................... 117 95 87 60
Loss on sale of fixed assets...................................... -- 2 2 --
Gain on sale of partnership investment............................ -- -- -- (56)
Deferred compensation............................................. -- 174 174 --
Income from partnership........................................... (6) (7) (7) --
Changes in assets and liabilities:
Accounts receivable............................................. 720 (2,242) (3,144) (2,524)
Inventory....................................................... (883) 1,507 1,570 576
Prepaids and other assets....................................... 13 (168) 20 (363)
Deferred taxes.................................................. 10 8 -- --
Accounts payable and accruals................................... 331 800 406 1,530
Deferred revenue................................................ (741) 645 945 720
----- --------- ----------- ---------
Net cash provided by (used in) operating activities........... (51) 1,708 1,040 59
----- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets........................................... (112) (139) (138) (101)
----- --------- ----------- ---------
Net cash used in investing activities......................... (112) (139) (138) (101)
----- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases............. (10) (10) (32) (50)
Borrowings (payments) under line of credit, net..................... 624 (1,531) (1,088) 106
Treasury stock repurchases.......................................... (41) (23) (23) (23)
Proceeds from exercise of stock options............................. -- -- -- 6
Proceeds from sale of investment in partnership..................... -- -- -- 73
----- --------- ----------- ---------
Net cash provided by (used in) financing activities........... 573 (1,564) (1,143) 112
----- --------- ----------- ---------
Net increase (decrease) in cash and cash equivalents.................. 410 5 (241) 70
Cash and cash equivalents, beginning of period........................ 513 923 923 928
----- --------- ----------- ---------
Cash and cash equivalents, end of period.............................. $ 923 $ 928 $ 682 $ 998
----- --------- ----------- ---------
----- --------- ----------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................ $ 217 $ 209 $ 206 $ 200
----- --------- ----------- ---------
----- --------- ----------- ---------
Cash paid for income taxes........................................ $ 289 $ 859 $ 859 $ 564
----- --------- ----------- ---------
----- --------- ----------- ---------
</TABLE>
F-38
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Computer Hardware Maintenance Company, Inc. ("CHMC" or the "Company"), 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.
On February 10, 1998, the Company's stockholders, pursuant to a definitive
agreement with Condor Technology Solutions, Inc. ("Condor"), exchanged all of
the common stock of the Company 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 of cash flows for the eleven months ended
January 31, 1997 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").
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-39
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 29, 1996, February 28, 1997 and the eleven
months ended January 31, 1998. Total revenues for this client were as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY ELEVEN MONTHS
ENDED JANUARY
-------------------- --------------
1996 1997 1998
--------- --------- --------------
<S> <C> <C> <C>
Hardware and software......................................................... $ 3,677 $ 7,571 $ 9,151
Services...................................................................... $ 1,402 1,876 1,563
--------- --------- -------
$ 5,079 $ 9,447 $ 10,714
--------- --------- -------
--------- --------- -------
</TABLE>
At February 28, 1997 and January 31, 1998, accounts receivable from a
commercial client represented approximately 10% and 15% of accounts receivable,
respectively.
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 were comprised of the following (in thousands):
<TABLE>
<CAPTION>
FEB. 28, JAN. 31,
1997 1998
--------- -----------
<S> <C> <C>
New computer products (held for resale)........................................................ $ 578 $ 365
Maintenance supplies........................................................................... 348 33
Maintenance parts.............................................................................. 452 404
--------- -----
$ 1,378 $ 802
--------- -----
--------- -----
</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-40
<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 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 $3,791,000 and $9,063,000 for the years ended
February 29, 1996 and February 28, 1997, respectively and $5,451,000 for the
eleven months ended January 31, 1998. Accounts receivable from such agencies at
February 28, 1997 and January 31, 1998 were $1,215,000 and $1,924,000,
respectively.
4. INVESTMENT IN PARTNERSHIP
The Company was 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 29, 1996 and February 28, 1997
was $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 eleven
months ended January 31, 1998.
F-41
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FIXED ASSETS
Fixed assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
AVERAGE FEB. 28, JAN. 31,
USEFUL LIFE 1997 1998
----------- ----------- ---------
<S> <C> <C> <C>
Computer equipment............................................................... 3-5 years $ 174 $ 210
Software......................................................................... 3 years 20 21
Furniture and equipment.......................................................... 5-7 years 400 407
Motor vehicles................................................................... 5 years 124 124
Leasehold and building improvements.............................................. 1-10 years 218 275
----- ---------
Total fixed assets at cost................................................. 936 1,037
Less accumulated depreciation and amortization................................... (629) (689)
----- ---------
Total fixed assets, net.................................................... $ 307 $ 348
----- ---------
----- ---------
</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. 28, JAN. 31,
1997 1998
----------- -----------
<S> <C> <C>
Furniture and equipment........................................................................ $ 77 $ 77
Less accumulated depreciation.................................................................. (69) (75)
--- ---
$ 8 $ 2
--- ---
--- ---
</TABLE>
Depreciation and amortization of capital leases totaled $117,000, and
$95,000 for the years ended February 29, 1996 and February 28, 1997,
respectively and $8,000 for the eleven months ended January 31, 1998.
6. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
FEB. 28, JAN. 31,
1997 1998
----------- -----------
<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..................................................................................... $ 47 $ 30
Capital leases due through September 2001...................................................... 22 4
Notes payable to stockholder; interest free; due October 1997.................................. 15 --
--- ---
84 34
Less current maturities of long-term debt...................................................... 44 34
--- ---
$ 40 $ --
--- ---
--- ---
</TABLE>
F-42
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. The line of credit is secured by accounts receivable,
inventory, other assets of the Company and the personal guarantees of the
principal stockholders.
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. At January 31, 1998, the Company was
not in compliance with one covenant. Subsequent to January 31, 1998, a waiver
for this violation was obtained from IBM Credit Corp.
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 January 31, 1998, the Company was in compliance with all such
covenants. At February 28, 1997 and January 31, 1998, the Company had
outstanding balances of $2,268,000 and $3,869,000, respectively. These amounts
are included in accounts payable and accrued liabilities 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 was required to pay minimum annual rent of $191,000 through
January 14, 1998. The Company exercised an option to renew the lease in January
1998.
Minimum future lease payments under the above-mentioned lease for the term
of the lease amount to $207,000 for fiscal 1999 and 2000, and $214,000 for
fiscal 2001, 2002 and 2003.
Rent expense, including lease payments, approximated $306,000 and $303,000
for the years ended February 29, 1996 and February 28, 1997, respectively and
$232,000 for the eleven months ended January 31, 1998.
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.
F-43
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFITS DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Savings Plan (the "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 years ended February 29, 1996 and February 28, 1997, employer
contributions to the Plan were $45,000 and $52,000, respectively and $204,000
during the eleven months ended January 31, 1998, respectively.
11. INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED
------------------------ -----------------
FEB. 29, FEB. 28, JAN. 31,
1996 1997 1998
----------- ----------- -----------------
<S> <C> <C> <C>
Current expense:
Federal...................................................................... $ 224 $ 452 $ 66
State........................................................................ 71 134 19
----- ----- ---
295 586 85
----- ----- ---
Deferred expense (income):
Federal...................................................................... (7) 9 --
State........................................................................ (3) 3 --
----- ----- ---
(10) 12 --
----- ----- ---
Total.................................................................... $ 285 $ 598 $ 85
----- ----- ---
----- ----- ---
</TABLE>
The components of net deferred taxes were as follows (in thousands):
<TABLE>
<CAPTION>
FEB. 28, JAN. 31,
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax asset:
Accounts receivable.......................................................................... $ 11 $ 11
--- ---
Deferred tax liability:
Fixed assets................................................................................. (22) (22)
Other........................................................................................ (6) (6)
--- ---
(28) (28)
--- ---
Net deferred tax liability..................................................................... $ (17) $ (17)
--- ---
--- ---
</TABLE>
For the years ended February 29, 1996 and February 28, 1997 and the eleven
months ended January 31, 1998, the effective tax rates of 42%, 40% and 42%,
respectively, approximated the combined Federal and state statutory tax rate.
F-44
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
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 "Stock Purchase Plan") for three employees. Under the terms of the
Stock Purchase 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
------------------------
FIRST DAY LAST DAY
NUMBER OF SHARES TO EXERCISE TO EXERCISE
- ----------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
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>
CHMC adopted the intrinsic value method of accounting for stock options
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," ("APB No. 25") which resulted in compensation expense of $174,000
for the year ended February 28, 1997. During the eleven months ended January 31,
1998, the Stock Purchase Plan was amended to reduce the number of options for
each individual from 75,000 to 30,000. All other provisions of the Stock
Purchase Plan were unchanged. These options to purchase 90,000 shares were
exercised in August 1997. Upon exercise, the new shareholders issued promissory
notes to the Company in the amount of $45,000. The notes were repaid upon the
sale of the Company's stock to Condor (Note 1) and had no stated interest rate.
As a result of the Stock Purchase Plan amendment, compensation expense for the
shares was $135,000.
FASB Statement No. 123, "ACCOUNTING FOR STOCK BASED COMPENSATION," ("SFAS
No. 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 SFAS No. 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 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 year ended February
28, 1997, consistent with the provisions of SFAS No. 123, CHMC's net income
would not have changed by a significant amount.
F-45
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 years ended February 29, 1996 and
February 28, 1997, and the eleven months ended January 31, 1998.
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-46
<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, 1996, 1997, and January
31, 1998, 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, 1997 and for the three months ended January 31, 1998. 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, 1996, 1997 and January
31, 1998, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended October 31, 1997 and for the
three months ended January 31, 1998, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Washington, D.C.
March 25, 1998
F-47
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
-------------------- -----------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 4,229 $ 5,454 $ 2,723
Marketable securities......................................................... 1,112 1,185 1,206
Accounts receivable........................................................... 3,389 7,937 14,382
Other current assets.......................................................... 68 839 834
Income taxes receivable....................................................... 239 765 --
Deferred income taxes......................................................... -- -- 29
--------- --------- -----------
Total current assets...................................................... 9,037 16,180 19,174
--------- --------- -----------
Property and equipment, net..................................................... 82 64 87
Investment in joint venture..................................................... 49 49 --
Other assets.................................................................... 16 16 15
Goodwill, net................................................................... 333 67 1,917
Investment in sales type lease.................................................. -- 492 486
--------- --------- -----------
Total assets.............................................................. $ 9,517 $ 16,868 $ 21,679
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 1,920 $ 7,612 $ 11,369
Accrued expenses.............................................................. 230 285 448
Income taxes payable.......................................................... -- -- 64
Commission payable............................................................ 1,608 -- --
Due to shareholders........................................................... -- 2,400 --
Deferred income taxes......................................................... 418 104 --
Notes payable................................................................. -- -- 355
--------- --------- -----------
Total current liabilities................................................. 4,176 10,401 12,236
Deferred revenue................................................................ 255 1,724 3,165
Deferred income taxes........................................................... 6 -- --
Notes payable, net of current portion........................................... -- -- 562
--------- --------- -----------
Total liabilities......................................................... 4,437 12,125 15,963
--------- --------- -----------
Commitments and contingencies
Shareholders' equity:
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............................................................. 3,991 3,664 4,636
Net unrealized loss on marketable securities.................................. -- (10) (9)
--------- --------- -----------
Total shareholders' equity................................................ 5,080 4,743 5,716
--------- --------- -----------
Total liabilities and shareholders' equity................................ $ 9,517 $ 16,868 $ 21,679
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Equipment sales and installation......................... $ 36,464 $ 18,223 $ 23,142 $ 898 $ 15,671
Maintenance.............................................. 9,000 7,755 8,532 2,106 1,835
Net fee on agency contracts.............................. 619 408 62 27 24
Equity in net earnings from joint venture less
distributions/commissions.............................. 722 439 1,624 218 576
Other, including interest and dividends.................. 1,318 562 693 109 188
--------- --------- --------- ----------- ---------
Total revenues..................................... 48,123 27,387 34,053 3,358 18,294
Expenses:
Cost of equipment sales and installation................. 32,261 13,932 21,407 672 14,658
Maintenance.............................................. 6,471 5,236 5,681 1,282 852
Selling, general and administrative...................... 7,619 5,794 7,298 1,333 1,116
Interest and other....................................... 211 49 21 -- --
--------- --------- --------- ----------- ---------
Total expenses..................................... 46,562 25,011 34,407 3,287 16,626
--------- --------- --------- ----------- ---------
Income (loss) before income taxes........................ 1,561 2,376 (354) 71 1,668
Income tax expense (benefit)............................. 673 1,073 (27) (28) 696
--------- --------- --------- ----------- ---------
Net income (loss)........................................ $ 888 $ 1,303 $ (327) $ 43 $ 972
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<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 UNEARNED
STOCK ------------------------ PAID-IN RETAINED MARKETABLE ESOP
SHARES SHARES AMOUNT CAPITAL EARNINGS SECURITIES SHARES
----------- ----------- ----------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994.... 3,824 5,747 $ 1 $ 126 $ 7,778 $ (64) $ (2,816)
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) -- -- 352
Preferred stock dividends...... -- -- -- -- (35) -- --
Net income..................... -- -- -- -- 888 -- --
----------- ----------- --- ----------- ----------- --- -----------
Balance at October 31, 1995.... 3,824 3,295 -- 1,089 6,279 3 (2,464)
Repurchase and retirement of
preferred stock.............. (3,824) -- -- -- (3,591) -- 2,464
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....... -- -- -- -- -- (10) --
Net loss....................... -- -- -- -- (327) -- --
----------- ----------- --- ----------- ----------- --- -----------
Balance at October 31, 1997.... -- 3,295 -- 1,089 3,664 (10) --
Change in unrealized gain
(loss) on marketable
securities, net of tax....... -- -- -- -- -- 1 --
Net income..................... -- -- -- -- 972 -- --
----------- ----------- --- ----------- ----------- --- -----------
Balance at January 31, 1998.... -- 3,295 $ -- $ 1,089 $ 4,636 $ (9) $ --
----------- ----------- --- ----------- ----------- --- -----------
----------- ----------- --- ----------- ----------- --- -----------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
---------------
<S> <C>
Balance at October 31, 1994.... $ 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....................... 341
Preferred stock dividends...... (35)
Net income..................... 888
------
Balance at October 31, 1995.... 4,907
Repurchase and retirement of
preferred stock.............. (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....... (10)
Net loss....................... (327)
------
Balance at October 31, 1997.... 4,743
Change in unrealized gain
(loss) on marketable
securities, net of tax....... 1
Net income..................... 972
------
Balance at January 31, 1998.... $ 5,716
------
------
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------- ----------------------------
1995 1996 1997 1997 1998
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 888 $ 1,303 $ (327) $ 43 $ 972
Adjustments to reconcile net income (net loss) to net cash
provided by (used in) operating activities:
Depreciation............................................ 66 52 39 10 9
Amortization of goodwill................................ 200 267 266 67 109
Release of unearned ESOP shares......................... 306 -- -- -- --
Deferred income tax provision (benefit)................. 90 206 (316) -- (133)
Undistributed equity in net earnings from joint
ventures.............................................. (198) (249) -- (448) --
Losses on disposition of property, equipment, and
marketable securities, net............................ 192 1 -- 1 --
Changes in assets and liabilities:
Accounts receivable................................... (6,306) 11,502 (4,548) 526 (1,487)
Due from affiliates................................... 577 -- -- -- --
Other current assets.................................. 876 (9) (108) (25) (272)
Income taxes receivable............................... 282 (239) (526) (572) 765
Other assets.......................................... 131 -- -- -- (25)
Accounts payable...................................... 1,514 (7,176) 4,814 291 (748)
Accrued expenses...................................... (654) (79) 55 -- (97)
Due to affiliates..................................... (1,332) -- -- -- --
Commission payable.................................... 1,941 (333) (1,608) (666) --
Due to shareholders................................... -- -- 2,123 -- (2,123)
Income taxes payable.................................. 301 (301) -- -- 64
Deferred revenue...................................... 59 (831) 1,469 (97) 766
--------- --------- --------- ------ ------
Net cash (used in) provided by operating
activities........................................ (1,067) 4,114 1,333 (870) (2,200)
--------- --------- --------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (45) (2) (21) -- (32)
Purchase of marketable securities......................... (46) (1,068) (87) (19) (20)
Sales of marketable securities............................ 3,331 -- -- -- --
Purchase of business, net of cash acquired of $582........ -- -- -- -- (1,426)
Proceeds on sale of property and equipment and
investments............................................. 10 -- -- -- --
--------- --------- --------- ------ ------
Net cash provided by (used in) investing
activities........................................ 3,250 (1,070) (108) (19) (1,478)
--------- --------- --------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit............. 5,277 420 3,750 -- --
Repayments of borrowings under line of credit............. (1,853) (3,845) (3,750) -- --
Repurchase and retirement of common stock................. (2,479) -- -- -- --
Repurchase and retirement of preferred stock.............. -- (1,127) -- -- --
Return of capital......................................... (200) -- -- -- --
Issuance of note payable for lease assignment............. -- -- -- -- 947
--------- --------- --------- ------ ------
Net cash (used in) provided by financing
activities........................................ 745 (4,552) -- -- 947
--------- --------- --------- ------ ------
Net increase (decrease) in cash and cash equivalents........ 2,928 (1,508) 1,225 (889) (2,731)
--------- --------- --------- ------ ------
Cash and cash equivalents, beginning of year................ 2,809 5,737 4,229 4,229 5,454
--------- --------- --------- ------ ------
Cash and cash equivalents, end of year...................... $ 5,737 $ 4,229 $ 5,454 $ 3,340 $ 2,723
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid, net of refunds........................... $ -- $ 1,408 $ 815 $ 839 $ --
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
Interest paid............................................... $ 211 $ 49 $ 21 $ -- $ --
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-51
<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.
On February 10, 1998, the Company's stockholders, pursuant to a definitive
agreement with Condor Technology Solutions, Inc. ("Condor"), exchanged all of
the Common Stock of the Company 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 financial information for the three months ended January 31,
1997 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 and changes in cash flows 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
F-52
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 October 31, 1995, 1996 1997 and for
the three months ended January 31, 1998, would have been approximately
$52,838,000, $30,757,000, $34,480,000 and $18,054,000, respectively. The related
costs for the years ended October 31, 1995, 1996, and 1997 and the three months
ended January 31, 1998, would have been $43,984,000, $25,762,000, $29,894,000
and $15,843,000, 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, 1996,
1997 and January 31, 1998, 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.
F-53
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1996, 1997 and January 31, 1998, two customers accounted
for approximately 67%, 61% and 54%, respectively, of billed and unbilled
accounts receivable.
INVESTMENT IN JOINT VENTURE
During the three months ended January 31, 1998, the Company acquired the
remaining ownership interest in a joint venture for which the Company previously
had a 38% interest. The investment in joint venture was accounted for under the
equity method. Under this method, the original investment was recorded at cost
and adjusted by the Company's share of undistributed earnings. Undistributed
earnings expected to be received in the next fiscal year were recorded as
accounts receivable. The Company's share of earnings was reflected in the
consolidated statements of operations, net of contractual 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 periods ranging from
three to four years. 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, 1996 and 1997
and January 31, 1998 was $466,667, $733,333 and $41,898, respectively. When
goodwill becomes fully amortized, the Company removes the goodwill and the
related accumulated amortization from the accounts. At the conclusion of the
three months ended January 31, 1998, the Company removed $800,000 of fully
amortized goodwill from the accounts.
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 current assets and current liabilities
F-54
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been reclassified to
conform to the current year presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," which addresses the presentation and
display of comprehensive income and its components, and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes a new framework on which to base segment reporting. The Company does
not expect Statement No. 130 and Statement No. 131 to materially impact the
financial statements.
3. ACQUISITIONS
Prior to January 9, 1998 the Company was a 38% partner in an unincorporated
joint venture with INET, Inc. (subsequently acquired by Wang Federal Systems)
and International Data Products Corporation (see note 16). In January 1998, the
Company acquired the remaining 62% interest in the joint venture for an
aggregate cash purchase price of $2,008,000 less $582,000 of cash acquired.
Immediately prior to this acquisition, the joint venture made distributions of
earnings to the partners of $1,523,000 in the aggregate. This acquisition has
been accounted for as a purchase. The aggregate purchase price has been
allocated to the interest acquired on the basis of the estimated fair value of
the assets acquired, consisting primarily of cash and accounts receivable, and
the liabilities assumed, consisting primarily of accounts payable and certain
accrued liabilities. The excess of the aggregate purchase price over the net
assets acquired of $1,927,000, was allocated to goodwill. The goodwill is being
amortized over a four year period.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had been completed at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisition actually been made as of such date or of results
which may occur in the future.
<TABLE>
<CAPTION>
THREE MONTHS
UNAUDITED YEAR ENDED OCTOBER 31, ENDED JANUARY 31,
- ------------------------------------------------------------- ---------------------- -----------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- -----------------
Revenues..................................................... $ 63,746 $ 57,574 $ 22,042
Net income................................................... 5,927 3,947 3,087
</TABLE>
F-55
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
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 common shares to acquire 100% of the
outstanding common stock of six affiliated 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 the Affiliates. The
acquisition of these companies was 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
was allocated on the basis of the estimated fair value of the assets acquired
with $500,000 being allocated to accounts receivable and $800,000 being
allocated to goodwill. As of January 31, 1998, the goodwill was fully amortized
and removed from the accounts.
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.
4. MARKETABLE SECURITIES
The fair value of marketable securities, which consist entirely of equity
securities, was $1,112,000, $1,185,000 and $1,206,000 as of October 31, 1996,
1997 and January 31, 1998, respectively. The cost of such securities was
$1,113,000, $1,201,000 and $1,220,000 as of October 31, 1996, 1997 and January
31, 1998, respectively.
Gross unrealized holding gains were $5,000, $3,000, $4,000 and $5,000 for
the years ended October 31, 1995, 1996, and 1997 and the three months ended
January 31, 1998, respectively. Gross unrealized holding losses were $1,000,
$4,000, $20,000 and $19,000 for the years ended October 31, 1995, 1996, and 1997
and the three months ended January 31, 1998, 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 years ended October 31, 1996 and 1997 and the three
months ended January 31, 1998, respectively.
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).
F-56
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCOUNTS RECEIVABLE (CONTINUED)
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 and collected within the next
operating cycle.
Accounts receivable consists of the following as of (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
-------------------- -----------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Billed........................................................ $ 1,750 $ 1,180 $ 10,234
Unbilled...................................................... 600 4,930 4,148
Amount due from joint venture................................. 1,039 1,827 --
--------- --------- -----------
$ 3,389 $ 7,937 $ 14,382
--------- --------- -----------
--------- --------- -----------
</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.
Prior to the acquisition of the Affiliates, consulting fees earned from the
Affiliates under agreements entitling the Company to receive a portion of the
Affiliates' contract profits approximated $394,000 for the year ended October
31, 1995, and consulting fees incurred with the Affiliates for their work in
helping to obtain and service certain contracts approximated $496,000 for the
year ended October 31, 1995. For the years ended October 31, 1995 and 1996, the
Company paid 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 year ended October 31, 1997, based on a
contractual arrangement between the Company and the related shareholders waiving
their right to receive such commissions. In exchange for waiving the
shareholders' right to the commissions and in connection with the terms of the
acquisition of the Company by Condor Technology Solutions, Inc. (Condor), the
Company recorded a $2,400,000 expense for contractually determined distributions
to the shareholders of the Company. This amount was included in selling, general
and administrative expenses for the year ended October 31, 1997 and was paid to
the shareholders during the three months ended January 31, 1998. As of October
31, 1997 and January 31, 1998, the Company had $277,000 in amounts due from
shareholders, included in Other Current Assets.
Subsequent to January 31, 1998 and immediately prior to the acquisition of
the Company by Condor (see Note 15), the Company reacquired 549 shares of common
stock from a shareholder for $1,600,000. Upon reacquisition, these shares were
retired.
F-57
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONTINUED)
As of October 31, 1996, the commission payable amount is reflected net of
approximately $121,000 in amounts due from the shareholders.
The Company previously owned a 22% limited partnership interest in a
partnership in 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 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.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
-------------------- -------------
1996 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
Owned assets:
Office equipment............................................... $ 255 $ 276 $ 283
Computer equipment............................................. 19 -- 25
--------- --------- -----
274 276 308
Less accumulated depreciation and amortization................... (192) (212) (221)
--------- --------- -----
Property and equipment, net...................................... $ 82 $ 64 $ 87
--------- --------- -----
--------- --------- -----
</TABLE>
Depreciation expense for the years ended October 31, 1995, 1996 and 1997 and
the three months ended January 31, 1998 was $65,655, $51,989, $38,870 and
$9,121, respectively.
8. INVESTMENT IN SALES-TYPE LEASE
At the conclusion of the year ended October 31, 1997, the Company entered
into a contract with the Government for the lease of certain hardware and
software under a 36 month lease. The Company has accounted for this lease as a
sales-type lease. The current portion of the net investment in sales-type lease
of $386,000 is included in other current assets. The components of the net
investment in sales-type lease as of January 31, 1998 are (in thousands):
<TABLE>
<S> <C>
Minimum rentals receivable.......................................... $ 1,014
less: unearned interest income...................................... (142)
---------
Net investment in sales-type lease.................................. $ 872
---------
---------
</TABLE>
F-58
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT IN SALES-TYPE LEASE (CONTINUED)
Minimum rentals receivable under this lease as of January 31, 1998 were as
follows (in thousands):
<TABLE>
<S> <C>
For the subsequent twelve month periods ending January 31,
1999................................................................ 386
2000................................................................ 386
2001................................................................ 242
---------
$ 1,014
---------
---------
</TABLE>
In January 1998, the Company entered into an arrangement with a third party
for the assigment of the Company's rights in the lease payments from the
investment in sales-type lease with the Government for cash of $947,000, which
has been recorded as a note payable (see note 9).
9. 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 January 31, 1998) 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 1997 and January 31, 1998.
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 3.5 to 1.0 but not to exceed 5.0 to
1.0 at any one time during the year. The Company was in compliance with these
covenants at October 31, 1996, 1997 and January 31, 1998.
In connection with the assignment of the Company's rights in the lease
payments from an investment in sales-type lease, the Company entered into a note
payable agreement with the assignee. The note payable, which has an implicit
interest rate of 10%, will be reduced against the investment in sales type lease
over the remaining term of the lease as lease payments are received.
10. 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, including estimated future
expenditures for warranty. As of January 31, 1998, deferred revenue related to
the Company's contracts was $3,165,000 with estimated future contractual revenue
and expenditures of approximately $485,000 and $3,636,000, respectively, as of
January 31, 1998.
F-59
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
The components of the income tax expense (benefit) consist of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED
------------------------------- ---------------------
1995 1996 1997 JANUARY 31, 1998
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
Current expense:
Federal.......................................................... $ 493 $ 677 $ 243 $ 698
State............................................................ 90 191 46 131
--------- --------- --------- -----
583 868 289 829
--------- --------- --------- -----
Deferred expense (benefit):
Federal.......................................................... 76 164 (240) (119)
State............................................................ 14 41 (76) (14)
--------- --------- --------- -----
90 205 (316) (133)
--------- --------- --------- -----
Total.............................................................. $ 673 $ 1,073 $ (27) $ 696
--------- --------- --------- -----
--------- --------- --------- -----
</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>
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED
------------------------------- ---------------------
1995 1996 1997 JANUARY 31, 1998
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
Provision (benefit) based upon federal statutory rate of 34%...... $ 531 $ 808 $ (120) $ 567
State taxes, net of federal benefit............................... 51 160 30 86
Amortization of assets not deductible............................. 76 101 101 41
Other, net........................................................ 15 4 (38) 2
--------- --------- --------- -----
$ 673 $ 1,073 $ (27) $ 696
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
The source and tax effects of temporary differences which give rise to the
net deferred tax liabilities (assets) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
-------------------- -------------
1996 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
Current:
Net earnings from joint venture.................................................... $ 443 $ 133 $ --
Accrued expenses................................................................... (25) (23) (23)
Marketable securities.............................................................. -- (6) (6)
Other.............................................................................. -- -- --
--------- --------- -----
Total current.................................................................... 418 104 (29)
--------- --------- -----
Noncurrent:
Other.............................................................................. 6 -- --
--------- --------- -----
Total noncurrent................................................................. 6 -- --
--------- --------- -----
Total deferred tax liability......................................................... $ 424 $ 104 $ (29)
--------- --------- -----
--------- --------- -----
</TABLE>
F-60
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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
for the twelve month periods ending January 31 are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN
THOUSANDS)
<S> <C>
1999......................................................................... $ 206
2000......................................................................... 206
2001......................................................................... 206
2002......................................................................... 206
2003......................................................................... 189
------
$ 1,013
------
------
</TABLE>
The Company recorded rent expense of $243,000, $394,000, $314,000 and
$79,000 for the years ended October 31, 1995, 1996 and 1997 and the three months
ended January 31, 1998, respectively.
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.
OTHER CONTINGENCIES
In the normal course of business, the Company is involved in various
lawsuits. Management is of the opinion that any liability or loss resulting from
such litigation will not have a material adverse effect on the consolidated
financial position, results of operations and cash flows.
13. MAJOR CUSTOMERS
The Company's primary customers are agencies or departments of the
Government. For the years ended October 31, 1995, 1996, 1997 and the three
months ended January 31, 1998, approximately 36%, 65%, 51% and 79%,
respectively, of contract revenue was derived from two agencies of the
Government.
14. 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
F-61
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BENEFIT PLANS (CONTINUED)
contributions are discretionary. For the years ended October 31, 1995, 1996 and
1997 and the three months ended January 31, 1998, employer contributions to the
plan were $37,669, $56,708, $88,688 and $16,800, 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.
Contributions made by the Company for the years ended October 31, 1996, 1997 and
the three months ended January 31, 1998 were $0, $15,000 and $0, respectively.
Participants are 100% vested in all balances in the profit sharing plan.
15. 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.
16. INVESTMENT IN JOINT VENTURE
The Company was a 38% partner in an unincorporated joint venture formed to
perform computer integration, maintenance, contract management, product
acquisition, and sales and marketing under a
F-62
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INVESTMENT IN JOINT VENTURE (CONTINUED)
contract with the Federal Bureau of Investigation. On January 9, 1998, the
Company acquired the remaining 62% interest in the joint venture (see Note 3).
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 allocated and distributed 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, 1995,
1996 and 1997 and the period from November 1, 1997 to January 9, 1998 (date of
acquisition) was $3,031,685, $1,757,966, $1,624,409 and $576,000, respectively.
At October 31, 1996 and 1997 and January 31, 1998, the Company recorded accounts
receivable of $345,222, $0 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 year ended October 31, 1995, the Company reduced
its proportionate share of the joint venture net earnings by $568,260, 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, 1996, and 1997 and the period November 1, 1997 to January 9,
1998 (date of acquisition), the Company reduced its proportionate share of the
joint venture net earnings by $1,741,020, $1,318,474, $0 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, 1996 were $186,611.
Under the terms of the joint venture agreement, the Company was required to
provide certain maintenance services to the joint venture. These services were
performed by the Company and certain third party subcontractors. For the years
ended October 31, 1995, 1996 and 1997 and the period November 1, 1997 to January
9, 1998 (date of acquisition), the Company recognized $4,438,852, $5,098,600,
$5,450,351, and $610,495 of maintenance revenue for services provided to the
joint venture, of which $693,784, $1,827,519 and $1,233,668, were due to the
Company as accounts receivable at October 31, 1996 and 1997. The Company
incurred maintenance expense of $3,698,454, $2,821,914, $3,426,674 and $495,000
for the years ended October 31, 1995, 1996 and 1997 and the period November 1,
1997 to January 9, 1998 (date of acquisition), respectively.
F-63
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INVESTMENT IN JOINT VENTURE (CONTINUED)
Summarized unaudited financial information of the joint venture consisted of
the following as of (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM NOVEMBER 1,
YEAR ENDED OCTOBER 31, 1997
------------------------------- TO JANUARY 9, 1998
1995 1996 1997 (DATE OF ACQUISITION)
--------- --------- --------- ---------------------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Gross revenues................................... $ 43,282 $ 37,360 $ 25,838 $ 4,446
Operating expenses............................... 35,304 32,736 21,564 2,930
--------- --------- --------- -------
Net earnings..................................... $ 7,978 $ 4,624 $ 4,274 $ 1,516
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
BALANCE SHEETS
Total assets................................................................................... $ 3,885 $ 754
Total liabilities.............................................................................. 3,304 507
--------- ---------
Partnerships' equity........................................................................... $ 581 $ 247
--------- ---------
--------- ---------
</TABLE>
17. SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES (IN
THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED
------------------------------- ---------------------
1995 1996 1997 JANUARY 31, 1998
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
Investment in sales-type lease, net........................ $ -- $ -- $ 878 $ --
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 $ -- $ --
Reduction of note payable for lease assignment............. $ -- $ -- $ -- $ 30
</TABLE>
18. SUBSEQUENT EVENTS
On February 10, 1998, the Company's stockholders, pursuant to a definitive
agreement with Condor exchanged all of the Common Stock of the Company for $15
million, $7.5 million of which was paid in cash and $7.5 million of which was
paid in common stock of Condor, concurrent with the consummation of the initial
public offering of the Common Stock of Condor.
F-64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Corporate Access, Inc.
In our opinion, the accompanying balance sheets 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 January 31, 1998, and the results of its operations
and its cash flows for the year ended June 30, 1997 and the seven months in the
period ended January 31, 1998, 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
Falls Church, VA
March 11, 1998
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
CORPORATE ACCESS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JANUARY 31,
----------- -----------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 109 $ 215
Restricted cash............................................................................ 80 80
Accounts receivable, net of allowance for doubtful accounts of $23 and $23................. 2,030 2,277
Inventory.................................................................................. 97 54
Prepaid expenses and other current assets.................................................. 15 17
----------- -----------
Total current assets................................................................... 2,331 2,643
Fixed assets, net.......................................................................... 159 154
----------- -----------
Total assets........................................................................... $ 2,490 $ 2,797
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................... $ 1,354 $ 1,900
Accrued expenses........................................................................... 162 187
----------- -----------
Total current liabilities.............................................................. 1,516 2,087
----------- -----------
Commitments and contingencies (Note 5)
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.......................................................................... 790 526
----------- -----------
Total stockholders' equity............................................................. 974 710
----------- -----------
Total liabilities and stockholders' equity............................................. $ 2,490 $ 2,797
----------- -----------
----------- -----------
</TABLE>
F-66
<PAGE>
CORPORATE ACCESS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED
JUNE 30, JANUARY 31,
----------- ----------------------
1997 1997 1998
----------- ----------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues..................................................................... $ 17,518 $ 9,555 $ 11,299
Cost of revenues............................................................. 14,999 8,189 9,728
----------- ----------- ---------
Gross profit................................................................. 2,519 1,366 1,571
Selling, general and administrative.......................................... 1,855 995 1,858
----------- ----------- ---------
(Loss) income from operations................................................ 664 371 (287)
Other income (expense)....................................................... 30 (14) 13
----------- ----------- ---------
(Loss) income before income taxes............................................ 694 357 (274)
(Benefit from) provision for state income taxes.............................. 34 13 (10)
----------- ----------- ---------
Net income................................................................... $ 660 $ 344 $ (264)
----------- ----------- ---------
----------- ----------- ---------
Unaudited pro forma information:
Pro forma net income before provision for income taxes..................... $ 694 $ 357 $ (274)
Provision for income taxes................................................. 273 139 --
----------- ----------- ---------
Pro forma income (see Note 2)................................................ $ 421 $ 218 $ (274)
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
CORPORATE ACCESS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ ADDITIONAL RETAINED STOCKHOLDERS'
SHARES AMOUNT PAID-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 loss.............................................. -- -- -- (264) (264)
----- --- ----- ----- -----
Balance, January 31, 1998............................. 3,700 $ 4 $ 180 $ 526 $ 710
----- --- ----- ----- -----
----- --- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
CORPORATE ACCESS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED
JUNE 30, JANUARY 31,
------------- ------------------------------
<S> <C> <C> <C>
1997 1997 1998
------------- ------------- ---------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income..................................................... $ 660 $ 344 $ (264)
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation.................................................... 76 24 26
Loss (gain) on sale of equipment................................ (11) 20 --
Changes in assets and liabilities:
Accounts receivable........................................... (687) (311) (247)
Inventory..................................................... 39 4 43
Other current assets.......................................... (8) (5) (2)
Accounts payable.............................................. 303 54 546
Accrued expenses.............................................. (26) (17) 25
----- ----- -----
Net cash provided by operating activities................. 346 113 127
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.............................................. (74) (48) (21)
Proceeds from sale of equipment....................................... 24 24 --
----- ----- -----
Net cash used in investing activities..................... (50) (24) (21)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends............................................... (187) (59) --
----- ----- -----
Net cash used in financing activities..................... (187) (59) --
----- ----- -----
Net increase in cash and cash equivalents............................. 109 30 106
Cash and cash equivalents, beginning of period........................ 80 80 189
----- ----- -----
Cash and cash equivalents, end of period.............................. $ 189 $ 110 $ 295
----- ----- -----
----- ----- -----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................ $ 1 $ 1 $ --
----- ----- -----
----- ----- -----
Cash paid for income taxes............................................ $ 102 $ 27 $ --
----- ----- -----
----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements
F-69
<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.
On February 10, 1998, the Company's stockholders, pursuant to a definitive
agreement with Condor Technology Solutions, Inc. ("Condor"), exchanged all of
the common stock of the Company 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 of cash flows for the seven months ended
January 31, 1997 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.
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 and January 31, 1998, the Company had invested $410,000 and $970,000 in
overnight securities which included $301,000 and $755,000 in outstanding checks,
respectively.
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 and January 31, 1998, 10 customers accounted for
approximately 57% and 59% of the Company's accounts receivable, respectively.
For these periods, one of these customers accounted for 23% and 13% of the
Company's accounts receivable, respectively.
During the year ended June 30, 1997 and the seven months ended January 31,
1998, 10 customers accounted for approximately 62% and 59% of the Company's net
revenues, respectively, with one of these customers accounting for approximately
30% and 17% of the Company's net revenue, respectively.
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-70
<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. The
Company's Subchapter S status terminated when it was acquired by Condor.
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>
USEFUL
LIVES JUNE 30, JANUARY 31,
IN YEARS 1997 1998
----------- ------------- -------------
<S> <C> <C> <C>
Office furniture and equipment........................................... 7 $ 169 $ 185
Motor vehicles........................................................... 5 87 87
Leasehold improvements................................................... Lease 58 63
term/life
----- -----
314 335
Less accumulated depreciation and amortization........................... (155) (181)
----- -----
Net fixed assets......................................................... $ 159 $ 154
----- -----
----- -----
</TABLE>
F-71
<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 and January 31, 1998, 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 and
January 31, 1998, the Company had $153,000 and $210,000 outstanding under this
agreement, respectively. 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 January 31, 1998).
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 January 31, 1998, 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 and January 31, 1998, the Company had
accounts payable to these vendors totaling $381,000 and $297,000, respectively.
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 year ended June 30, 1997 and the seven months ended January 31, 1998,
rent expense and operating costs incurred by the Company under this lease
amounted to $75,000 and $62,000, respectively.
The Company leases an automobile and certain office equipment under
non-cancelable operating leases expiring through October 1999. During the year
ended June 30, 1997 and seven months ended
F-72
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
January 31, 1998, the lease expense incurred under these agreements totaled
$5,000 and $3,444, respectively. Commitments under non-cancelable leases at
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1998................................................................................. $ 98
1999................................................................................. 98
2000................................................................................. 71
-----
$ 267
-----
-----
</TABLE>
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 and the seven months ended
January 31, 1998, the Company contributed $34,000 and $50,000 to the plan,
respectively.
7. RELATED PARTIES
The Company leases its office facilities from a related party (see Note 5).
8. INCOME TAXES
The provision for (benefit from) income taxes of $34,000 and $(10,000) for
the year ended June 30, 1997 and the seven months ended January 31, 1998 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-73
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders 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, 1996 and 1997 and January 31, 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, and the one month in the period ended January 31, 1998,
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
Falls Church, VA
March 6, 1998
F-74
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
-------------------- -----------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 2,832 $ 2,907 $ 2,045
Accounts receivable, net of allowance for doubtful accounts of $30, $137 and
$137 in 1996, 1997 and 1998................................................... 2,435 3,685 3,465
Income tax receivable........................................................... 226 -- --
Other current assets............................................................ 107 107 107
Deferred taxes, net............................................................. 59 100 100
--------- --------- -----------
Total current assets........................................................ 5,659 6,799 5,717
--------- --------- -----------
Property, equipment and software:
Office furniture and equipment, net of accumulated depreciation of $1,028,
$1,228 and $1,255 in 1996, 1997 and 1998, respectively........................ 425 452 451
Software, net of accumulated amortization of $1,146, $1,201 and $1,207 in 1996,
1997 and 1998, respectively................................................... 64 97 111
--------- --------- -----------
Total assets................................................................ $ 6,148 $ 7,348 $ 6,279
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 8 $ 11 $ 11
Accounts payable and accrued liabilities........................................ 576 2,777 1,785
Accrued compensation and employee benefits...................................... 678 -- --
Deferred revenue and customer deposits.......................................... 1,805 2,779 2,665
--------- --------- -----------
Total current liabilities................................................... 3,067 5,567 4,461
--------- --------- -----------
Deferred taxes, net............................................................... 36 36
Long-term debt.................................................................... 27 15 14
--------- --------- -----------
Total liabilities........................................................... 3,094 5,618 4,511
--------- --------- -----------
Commitments and contingencies (Notes 3 and 5)
Stockholders' equity:
Common stock, $.01 par value; 7,500,000 shares authorized; 2,640,787, 2,149,387
and 2,149,387 shares issued and outstanding in 1996, 1997 and 1998,
respectively.................................................................. 26 21 21
Additional paid-in capital...................................................... 2,602 607 607
Retained earnings............................................................... 426 1,102 1,140
--------- --------- -----------
Total stockholders' equity.................................................. 3,054 1,730 1,768
--------- --------- -----------
Total liabilities and stockholders' equity.................................. $ 6,148 $ 7,348 $ 6,279
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
------------------------------- ---------------
1995 1996 1997 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Revenues:
License fees....................................................... $ 2,780 $ 4,310 $ 6,419 $ 215
Services and other revenue......................................... 3,830 4,718 5,834 631
--------- --------- --------- -----
Total revenues................................................... 6,610 9,028 12,253 846
--------- --------- --------- -----
Costs and expenses:
Cost of software and other revenue................................. 2,010 1,482 1,682 164
Selling, marketing, general and administrative..................... 4,181 4,297 5,770 490
Research and development........................................... 804 766 1,263 118
Depreciation and amortization...................................... 272 260 283 26
--------- --------- --------- -----
Total costs and expenses......................................... 7,267 6,805 8,998 798
--------- --------- --------- -----
Income (loss) from operations........................................ (657) 2,223 3,255 48
Other income (expense):
Interest income.................................................... 169 101 137 9
Interest expense................................................... (4) (199) (4) --
Other income....................................................... 1 8 1
--------- --------- --------- -----
Total other income (expense)..................................... 166 (90) 133 10
--------- --------- --------- -----
Income before income taxes........................................... (491) 2,133 3,388 58
Provision for (benefit from) income taxes............................ (188) 737 1,168 20
--------- --------- --------- -----
Net income........................................................... $ (303) $ 1,396 $ 2,220 $ 38
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
----------------------- PAID-IN EARNINGS (DEFICIT)
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
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
Redemption of shares................................ (491,400) (5) (1,995) -- (2,000)
Dividends paid...................................... -- -- -- (544) (544)
Dividends declared and unpaid....................... -- -- -- (1,000) (1,000)
Net income.......................................... -- -- -- 2,220 2,220
---------- --- ----------- ----------- -------
Balance, December 31, 1997.......................... 2,149,387 21 607 1,102 1,730
Net income.......................................... -- -- -- 38 38
---------- --- ----------- ----------- -------
Balance, January 31, 1998........................... 2,149,387 $ 21 $ 607 $ 1,140 $ 1,768
---------- --- ----------- ----------- -------
---------- --- ----------- ----------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MONTH ENDED
JANUARY 31,
------------------------------- -----------------
1995 1996 1997 1998
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ (303) $ 1,396 $ 2,220 $ 38
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization..................................... 826 304 323 33
Amortization of investment premiums............................... 53
Gain on sale of fixed assets...................................... -- 74 9 --
Deferred taxes, net............................................... (213) 173 (5) --
Changes in assets and liabilities:
Accounts receivable............................................. (773) (245) (1,250) 220
Income tax receivable........................................... 346 (198) 226 --
Other current assets............................................ (6) 5 -- --
Accounts payable and accrued liabilities........................ 73 294 523 8
Accrued compensation and employee benefits...................... 111 183 -- --
Deferred revenue and customer deposits.......................... 340 149 974 (114)
--------- --------- --------- ------
Net cash provided by operating activities....................... 454 2,135 3,020 185
--------- --------- --------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed asset additions................................................. (284) (214) (303) (26)
Capitalized software development costs................................ (14) (71) (89) (20)
Sales of investment securities........................................ -- 611 -- --
Maturities of investment securities................................... 664 621 -- --
--------- --------- --------- ------
Net cash (used in) provided by investing activities............. 366 947 (392) (46)
--------- --------- --------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt.................................. (16) (311) (9) (1)
Dividends paid........................................................ -- (150) (544) (1,000)
Redemption of common stock............................................ -- (2,500) (2,000) --
--------- --------- --------- ------
Net cash used by financing activities........................... (16) (2,961) (2,553 (1,001)
--------- --------- --------- ------
Net (decrease) increase in cash and cash equivalents.................. 804 121 75 (862)
Cash and cash equivalents, beginning of period........................ 1,907 2,711 2,832 2,907
--------- --------- --------- ------
Cash and cash equivalents, end of period.............................. $ 2,711 $ 2,832 $ 2,907 $ 2,045
--------- --------- --------- ------
--------- --------- --------- ------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................................ $ 5 $ 154 $ 4 $ --
--------- --------- --------- ------
--------- --------- --------- ------
Cash paid for income taxes............................................ $ 4 $ 744 $ 705 $ --
--------- --------- --------- ------
--------- --------- --------- ------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Dividends declared but not paid....................................... $ -- $ -- $ 1,000 $ --
--------- --------- --------- ------
--------- --------- --------- ------
Capital lease obligations............................................. $ 20 $ 6 $ 26 $ 25
--------- --------- --------- ------
--------- --------- --------- ------
Conversion of preferred stock to note payable......................... $ -- $ 2,832 $ -- $ --
--------- --------- --------- ------
--------- --------- --------- ------
Conversion of note payable to common stock............................ $ -- $ 2,534 $ -- $ --
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS, INC.
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.
On February 10, 1998, the Company's stockholders, pursuant to a definitive
agreement with Condor Technology Solutions, Inc. ("Condor"), exchanged all of
the common stock of the Company 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 results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year. Sales of the Company's
products and related services have historically been concentrated in the third
and fourth quarters as a result of patterns of capital spending by clients.
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 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 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. The Company does not anticipate that the
adoption of Statement of Position 97-2, "Software Revenue Recognition" will have
a material impact on the timing of its revenue recognition.
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.
F-79
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables.
For the month ended January 31, 1998, royalties from one major reseller
comprised approximately 70% of total revenue and 53% of total accounts
receivable. During 1997, royalties from two major resellers comprised
approximately 50% and 13% of total revenue, respectively. At December 31, 1997,
these resellers accounted for approximately 51% and 1% of total accounts
receivable, respectively. 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, royalties from a major reseller
comprised 16% of total revenue. At December 31, 1995, the reseller accounted for
9% of total accounts receivable.
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, $55,000, and $6,000 for the years
ended December 31, 1995, 1996, and 1997, and the one month ended January 31,
1998, respectively.
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.
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
F-80
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1997 1998
----------------- ---------------
<S> <C> <C>
1998.............................................................. $ 11 $ 10
1999.............................................................. 11 11
2000.............................................................. 8 8
--- ---
30 29
Less interest..................................................... (4) (4)
--- ---
26 25
Less current portion.............................................. (11) (11)
--- ---
$ 15 $ 14
--- ---
--- ---
</TABLE>
Net assets under capitalized leases were $35,000, $25,000 and $24,000 at
December 31, 1996 and 1997 and January 31, 1998, respectively.
4. CAPITAL STOCK AND STOCK OPTIONS
In October 1997, the Company repurchased 491,400 shares of Common Stock from
an investor for approximately $2,000,000. After the repurchase, the investor
held 149,387 shares of the Company's common stock.
In December 1997, the Company declared a dividend of $1.0 million. This
dividend was paid in January 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 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>
MONTH ENDED
YEAR ENDED DECEMBER 31, JANUARY 31,
------------------------------- -----------------
1995 1996 1997 1998
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Net income (loss):
As reported...................................... $ (303) $ 1,396 $ 2,221 $ 38
Pro forma........................................ $ (335) $ 1,364 $ 2,207 $ 36
</TABLE>
F-81
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
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 minimum value 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. No options were granted in 1997 or in January 1998
A summary of the status of the Company's fixed option plan as of December
31, 1995, 1996 and 1997 and January 31, 1998, and changes during the periods
then ending is presented below. As of January 31, 1998, no options were vested.
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
---------------------------------------------------------------------- ----------------------
1995 1996 1997 1998
---------------------- ---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... -- -- 127,000 $ 3.05 190,000 $ 3.05 156,000 $ 3.05
Granted..................... 161,000 $ 3.05 65,000 3.05 -- -- -- --
Exercised................... -- -- -- -- -- -- -- --
Forfeited................... (34,000) 3.05 (2,000) 3.05 (34,000) 3.05 -- --
--------- ----- --------- ----------- --------- ----------- --------- -----------
Outstanding at end of
year...................... 127,000 $ 3.05 190,000 $ 3.05 156,000 $ 3.05 156,000 $ 3.05
--------- ----- --------- ----------- --------- ----------- --------- -----------
--------- ----- --------- ----------- --------- ----------- --------- -----------
Weighted average fair value of
options granted during the
year........................ $ 0.94 $ 0.68 $ -- $ --
Weighted average remaining
contractual life............ 8.31 years 7.34 years 7.26 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, $273,000, $349,000 and $30,000 for
the years ended December 31, 1995, 1996 and 1997 and the month
F-82
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ended January 31, 1998, respectively. Future minimum annual operating lease
payments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
1997 1998
------------- -----------
<S> <C> <C>
1998.............................................................. $ 358 $ 375
1999.............................................................. 327 378
2000.............................................................. 325 376
2001.............................................................. 157 170
2002.............................................................. 66 66
------ -----------
$ 1,233 $ 1,365
------ -----------
------ -----------
</TABLE>
6. INCOME TAXES
Income (loss) before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
MONTH ENDED
YEAR ENDED DECEMBER 31, JANUARY 31,
------------------------------- ---------------
1995 1996 1997 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Domestic.......................................... $ (312) $ 2,058 $ 2,223 $ 81
Foreign........................................... (180) 73 1,166 (23)
--------- --------- --------- ---
$ (492) $ 2,131 $ 3,389 $ 58
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
The provision for (benefit from) income taxes is comprised of the following
(in thousands):
<TABLE>
<CAPTION>
MONTH ENDED
YEAR ENDED DECEMBER 31, JANUARY 31,
----------------------- -----------------------
1995 1996 1997 1998
----- ---- ------ -----------------------
<S> <C> <C> <C> <C>
Current tax expense
Federal....................................................................... $ 19 $479 $ 645 $ 13
State......................................................................... 6 86 101 3
Foreign....................................................................... -- -- 427 4
----- ---- ------ ---
Total current expense......................................................... 25 565 1,173 20
----- ---- ------ ---
Deferred tax expense (benefit)
Federal....................................................................... (192) 169 5 --
State......................................................................... (21) 5 3 --
Foreign....................................................................... -- (2) (13) --
----- ---- ------ ---
Total deferred expense (benefit).............................................. (213) 172 (5) --
----- ---- ------ ---
Total provision for (benefit from) income taxes............................... $(188) $737 $1,168 $ 20
----- ---- ------ ---
----- ---- ------ ---
</TABLE>
F-83
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differs 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>
MONTH ENDED
YEAR ENDED DECEMBER 31, JANUARY 31,
----------------------- -----------------------
1995 1996 1997 1998
----- ---- ------ -----------------------
<S> <C> <C> <C> <C>
Statutory rate................................................................ $(167) $725 $1,156 $ 20
Non-deductible expenses....................................................... 7 31 12 1
Income tax credits............................................................ (27) (27) (88) --
State income taxes, net of federal benefit.................................... (18) 57 69 2
Tax-exempt interest........................................................... (39) (15) -- --
Changes in valuation allowance................................................ 61 (26) -- --
Differential in foreign tax rates............................................. -- -- 17 (1)
Other......................................................................... (5) (8) 2 (2)
----- ---- ------ ---
Provision (benefit) for income taxes.......................................... $(188) $737 $1,168 $ 20
----- ---- ------ ---
----- ---- ------ ---
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
MONTH ENDED
YEAR ENDED DECEMBER 31, JANUARY 31,
----------------------------------- ---------------
1995 1996 1997 1998
--------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Capitalized software, net............................ $ (27) $ (25) $ (45) $ (45)
Other................................................ (33) -- -- --
--------- --- --- ---
Gross deferred tax liabilities..................... (60) (25) (45) (45)
--------- --- --- ---
Change in tax accounting method...................... 78 54 32 32
Accrued expenses and allowance for doubtful
accounts........................................... 45 30 77 77
Research credit carryforward......................... 97 -- -- --
Foreign net operating loss carryforward.............. 66 40 -- --
--------- --- --- ---
Gross deferred tax assets.......................... 286 124 109 109
--------- --- --- ---
Valuation allowance.................................. (66) (40) -- --
--------- --- --- ---
$ 160 $ 59 $ 64 $ 64
--------- --- --- ---
--------- --- --- ---
</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, $69,000, $100,000
and $0 for the years ended December 31, 1995, 1996 and 1997 and the month ended
January 31, 1998, respectively.
F-84
<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 1997 and January 31, 1998, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1997, and the one month in the period ended January 31, 1998, 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
Falls Church, VA
March 11, 1998
F-85
<PAGE>
U.S. COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
-------------------- -----------
ASSETS 1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Current assets:
Cash........................................................... $ 93 $ 55 $ 30
Accounts receivable, net allowance of $13,000 in 1997 and
1998......................................................... 891 1,447 1,519
Inventory...................................................... 204 62 56
Prepaid expenses and other current assets...................... 3 8 12
--------- --------- -----------
Total current assets......................................... 1,191 1,572 1,617
Fixed assets, net................................................ 75 141 136
Other non-current assets......................................... 2 3 4
--------- --------- -----------
Total assets................................................. $ 1,268 $ 1,716 $ 1,757
--------- --------- -----------
--------- --------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt.............................. $ 6 $ 6 $ 6
Current portion of capital lease obligation.................... -- 28 28
Accounts payable............................................... 989 1,449 1,460
Other accrued expenses......................................... 26 11 15
Deferred revenue............................................... -- 9 7
Income taxes payable........................................... 34 5 12
Notes payable.................................................. 87 50 50
--------- --------- -----------
Total current liabilities.................................... 1,142 1,558 1,578
Long-term debt................................................... 12 36 35
--------- --------- -----------
Total liabilities............................................ 1,154 1,594 1,613
--------- --------- -----------
Commitments (Note 7)
Stockholder's equity:
Common stock, no par value; 100 shares authorized, issued and
outstanding at stated value.................................. 1 1 1
Retained earnings.............................................. 113 121 143
--------- --------- -----------
Total stockholder's equity................................... 114 122 144
--------- --------- -----------
Total liabilities and stockholder's equity................... $ 1,268 $ 1,716 $ 1,757
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
U.S. COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
-------------------- ---------------
1996 1997 1998
--------- --------- ---------------
<S> <C> <C> <C>
Revenues........................................................................ $ 7,215 $ 8,330 $ 894
Cost of revenues................................................................ 6,574 7,793 813
--------- --------- -----
Gross profit.................................................................... 641 537 81
Selling, general and administrative expenses.................................... 475 505 45
--------- --------- -----
Income from operations.......................................................... 166 32 36
Interest expense................................................................ 21 19 2
--------- --------- -----
Income before income taxes...................................................... 145 13 34
Provision for income taxes...................................................... 51 5 12
--------- --------- -----
Net income...................................................................... $ 94 $ 8 $ 22
--------- --------- -----
--------- --------- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<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............................................................ -- -- 8 8
--
--- ----- -----
Balance, December 31, 1997............................................ 100 1 121 122
Net income............................................................ -- -- 22 22
--
--- ----- -----
Balance, January 31, 1998............................................. 100 $ 1 $ 143 $ 144
--
--
--- ----- -----
--- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
U.S. COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
-------------------- ---------------
1996 1997 1998
--------- --------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 94 $ 8 $ 22
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization................................................. 13 60 5
Changes in assets and liabilities:
Accounts receivable, net.................................................... (456) (556) (72)
Inventory................................................................... (167) 142 6
Prepaid expenses and other assets........................................... (4) (5) (4)
Accounts payable............................................................ 596 460 11
Other accrued liabilities................................................... 17 (44) 11
Deferred revenue............................................................ -- 9 (2)
--------- --------- ---
Net cash (used in) provided by operating activities....................... 93 74 (23)
--------- --------- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................................. (22) (126) --
--------- --------- ---
Net cash used in investing activities..................................... (22) (126) --
--------- --------- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in capital lease obligation............................................ -- 84 --
Payments on capital lease obligation............................................ -- (26) (1)
Increase (decrease) notes payable............................................... 26 (38) --
Payments on long term debt and notes payable.................................... (6) (6) (1)
--------- --------- ---
Net cash (used in) provided by financing activities....................... 20 14 (2)
--------- --------- ---
Net (decrease) increase in cash................................................... 91 (38) (25)
Cash, beginning of period......................................................... 2 93 55
--------- --------- ---
Cash, end of period............................................................... $ 93 $ 55 $ 30
--------- --------- ---
--------- --------- ---
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................................... $ 24 $ 16 $ 2
--------- --------- ---
--------- --------- ---
Cash paid for income taxes...................................................... $ 18 $ 22 $ --
--------- --------- ---
--------- --------- ---
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<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 stockholder 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.
On February 10, 1998, the Company's stockholder, pursuant to a definitive
agreement with Condor Technology Solutions, Inc. ("Condor"), exchanged all of
the common stock of the Company 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 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%, 30% and 10% of total revenue from one customer for the years
ended December 31, 1996 and 1997 and for the month ended January 31, 1998,
respectively. The customer also represented approximately 35%, 51% and 38% of
the Company's total accounts receivable balance at December 31, 1996 and 1997
and January 31, 1998, respectively.
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 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 $13,000 allowance for doubtful accounts
at December 31, 1997 and January 31, 1998.
F-90
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
Deferred revenue represents deposits received related to training courses
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-91
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FIXED ASSETS
Fixed assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
AVERAGE -------------------- -------------
USEFUL LIFE 1996 1997 1998
----------- --------- --------- -------------
<S> <C> <C> <C> <C>
Leasehold improvements............................... 3 years $ 21 $ 21 $ 21
Furniture and fixtures............................... 7 years 15 22 22
Computers and office equipment....................... 3 years 27 63 63
Automobiles, trucks and other........................ 5 years 27 26 26
Property under capital lease......................... 3 years -- 84 84
--- --------- -----
90 216 216
--- --------- -----
Less accumulated depreciation and amortization....... (15) (75) (80)
--- --------- -----
$ 75 $ 141 $ 136
--- --------- -----
--- --------- -----
</TABLE>
4. NOTES PAYABLE
Notes payable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
------------------------ ---------------
1996 1997 1998
----- ----- ---------------
<S> <C> <C> <C>
Note payable with Resellers Credit Corporation, with monthly
interest payments at prime plus 3%; principal is due on
demand.......................................................... $ 50 $ 50 $ 50
Loan from stockholder at 0% interest and due on demand; no
written agreement exists........................................ 37 -- --
--- --- ---
Total....................................................... $ 87 $ 50 $ 50
--- --- ---
--- --- ---
</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 December 31, 1997 and January 31, 1998) 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-92
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
------------------------ ---------------
1996 1997 1998
----- ----- ---------------
<S> <C> <C> <C>
Note payable with monthly payments of $283 including interest at
3.9% due in October 1999, secured by a vehicle................ $ 9 $ 6 $ 6
Note payable with monthly payments of $278 including interest at
3.9% due in October 1999, secured by a vehicle................ 9 6 6
-- --
---
Less current portion of debt.................................... (6) (6) (6)
-- --
---
Total....................................................... $ 12 $ 6 $ 6
-- --
-- --
---
---
</TABLE>
The aggregate maturities of long-term notes payable at December 31, 1997 and
January 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1998................................................................................. $ 6
1999................................................................................. 6
---
Total............................................................................ $ 12
---
---
</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 include certain restrictions and conditions. The
Company uses the facilities to purchase merchandise from approved manufacturers.
The conditions of the two credit facilities are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1997 AS OF JANUARY 31, 1998
------------------------------ ------------------------------ ----------------------------
OUTSTANDING UNUSED OUTSTANDING UNUSED OUTSTANDING UNUSED
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------------- --------------- ------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
RCC $ 45,000 $ 55,000 $ 95,000 $ 205,000 $ 254,000 $ 46,000
STAR customer customer customer
$ -- specific $ 56,000 specific $ 126,000 specific
<CAPTION>
HANDLING
CHARGE
INTEREST RATE ON NEW
PER ANNUM ADVANCES
----------------------- -------------
<S> <C> <C>
RCC Prime + 3% .25%
STAR Prime + 3% after 40
days 0.5%
</TABLE>
F-93
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LINES OF CREDIT (CONTINUED)
Prime rate is equivalent to Chase Manhattan Bank's prime rate (8.25% at
December 31, 1996 and 8.5% at December 31, 1997 and January 31, 1998).
Outstanding borrowings at December 31, 1996, December 31, 1997 and January 31,
1998 are included in accounts payable at the respective dates.
7. 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 $55,000 for the
years ended December 31, 1996 and 1997, respectively, and $5,000 for the one
month ended January 31, 1998.
Total future minimum lease payments as of December 31, 1997 and January 31,
1998 for all leasing arrangements are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
AMOUNT AMOUNT
------------- -----------
<S> <C> <C>
1998..................................................................... $ 55 $ 32
1999..................................................................... 32 32
--- ---
Total................................................................ $ 87 64
--- ---
--- ---
Interest................................................................. 6
PV of net lease payments................................................. 58
Less current portion..................................................... 28
---
Long term obligation under capital lease................................. $ 30
---
---
</TABLE>
8. INCOME TAXES
The components of the provision for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
------------------------ -----------------
1996 1997 1998
----- ----- -----------------
<S> <C> <C> <C>
Current income tax expense:
Federal......................................................................... $ 41 $ 3 $ 10
State........................................................................... 10 2 2
--
--- ---
Total income tax.................................................................. $ 51 $ 5 $ 12
--
--
--- ---
--- ---
</TABLE>
The effective tax rate of 35%, 38% and 35% for the years ended December 31,
1996 and 1997 and for the month ended January 31, 1998, respectively,
approximated the combined federal and state income tax rates. Deferred taxes are
immaterial.
F-94
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
InVenture Group, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of InVenture Group,
Inc. at December 31, 1996 and 1997 and January 31, 1998 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1997, and the one month in the period ended January 31, 1998, 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
Falls Church, VA
March 11, 1998
F-95
<PAGE>
INVENTURE GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
-------------------- -----------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................................ $ 80 $ -- $ --
Accounts receivable, net of allowance for doubtful accounts of $35, $52 and $50
for 1996, 1997, and 1998, respectively........................................ 629 312 519
Accounts receivable, officers and employees..................................... 54 28 29
Accounts receivable, affiliates................................................. 62 103 111
Deferred income taxes........................................................... 26 40 40
Prepaid expenses and other current assets....................................... 52 101 67
--------- --------- -----------
Total current assets.......................................................... 903 584 766
--------- --------- -----------
Fixed assets, net................................................................. 153 129 123
Intangible assets, net............................................................ 9 20 20
Other non-current assets.......................................................... 175 4 4
--------- --------- -----------
Total assets.................................................................. $ 1,240 $ 737 $ 913
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................................ $ 830 $ 619 $ 673
Accounts payable, officers...................................................... -- 68 61
Other accrued expenses.......................................................... 410 35 44
Income taxes payable............................................................ 27 -- 11
Deferred Revenue................................................................ 1 119 206
--------- --------- -----------
Total current liabilities..................................................... 1,268 841 995
--------- --------- -----------
Deferred income taxes............................................................. 15 9 9
--------- --------- -----------
Commitments (note 4)
Stockholders' deficit:
Common stock, no par value; 10,500 shares authorized, issued and outstanding at
stated value.................................................................. 11 11 11
Accumulated deficit............................................................. (54) (124) (102)
--------- --------- -----------
Total stockholders' deficit................................................... (43) (113) (91)
--------- --------- -----------
Total liabilities and stockholders' deficit................................... $ 1,240 $ 737 $ 913
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
INVENTURE GROUP, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER MONTH ENDED
31, JANUARY 31,
-------------------- ---------------
1996 1997 1998
--------- --------- ---------------
<S> <C> <C> <C>
Revenues........................................................................ $ 5,416 $ 3,399 $ 321
Cost of revenues................................................................ 3,948 1,819 164
--------- --------- -----
Gross profit.................................................................... 1,468 1,580 157
Selling, general and administrative expenses.................................... 1,464 1,784 127
--------- --------- -----
Income (loss) from operations................................................... 4 (204) 30
--------- --------- -----
Other income.................................................................... 19 117 3
--------- --------- -----
Income (loss) before income taxes............................................... 23 (87) 33
Provision for (benefits from) income taxes...................................... 7 (17) 11
--------- --------- -----
Net income (loss)............................................................... $ 16 $ (70) $ 22
--------- --------- -----
--------- --------- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
INVENTURE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS DEFICIT
----------- ---------- ------------ ---------------
<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 loss................................ -- -- (70) (70)
----------- --- ----- -----
Balance, December 31, 1997.............. 10,500 11 (124) (113)
Net income.............................. -- -- 22 22
----------- --- ----- -----
Balance, January 31, 1998............... 10,500 $11 $(102) $ (91)
----------- --- ----- -----
----------- --- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
INVENTURE GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
-------------------- ---------------
1996 1997 1998
--------- --------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 16 $ (70) $ 22
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................. 77 87 6
Gain on forgiveness of commissions payable.................................... -- (99) --
Barter transactions, net...................................................... (11) 19 3
Deferred income taxes......................................................... 2 (20) --
Changes in assets and liabilities:
Accounts receivable, net...................................................... 199 339 (210)
Prepaid expenses and other current assets..................................... (39) (46) 34
Accounts payable.............................................................. 468 (235) 54
Other accrued expenses........................................................ 7 (55) 9
Income taxes payable.......................................................... 20 (27) 11
Deferred revenue.............................................................. (467) 119 87
--------- --------- -----
Net cash provided by operating activities................................... 272 12 16
--------- --------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (79) (10) --
Purchase of trademark........................................................... (10) -- --
Acquisition of IGI Services, Inc................................................ -- (22) --
Software development costs...................................................... (8) -- --
--------- --------- -----
Net cash used in investing activities....................................... (97) (32) --
--------- --------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to affiliates, net..................................................... (200) (154) (8)
Officers loans, net............................................................. (12) 94 (8)
--------- --------- -----
Net cash used in financing activities....................................... (212) (60) (16)
--------- --------- -----
Net decrease in cash.............................................................. (37) (80) --
--------- --------- -----
Cash, beginning of period......................................................... 117 80 --
--------- --------- -----
Cash, end of period............................................................... $ 80 $ -- $ --
--------- --------- -----
--------- --------- -----
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-99
<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 and event planning.
On February 10, 1998, the Company's stockholders, pursuant to a definitive
agreement with Condor Technology Solutions, Inc. ("Condor"), exchanged all of
the common stock of the Company 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 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
risk 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.
For the year ended December 31, 1996, two clients accounted for 71% and 12%
of revenues and for the year ended December 31, 1997, five clients accounted for
26%, 22%, 14%, 12% and 12% of revenues. For the month ended January 31, 1998,
four clients accounted for 21%, 19%, 19% and 12% of revenues.
Accounts receivable from significant clients totaled $334,000, $146,000 and
$270,000 at December 31, 1996 and 1997 and January 31, 1998, respectively.
In the third quarter of 1997, the contract with the client that accounted
for $397,000 expired and was not renewed. The client that accounted for $467,000
was merged into another company, and business with this company ceased at that
time.
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.
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.
F-100
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
AVERAGE -------------------- -------------
USEFUL LIFE 1996 1997 1998
----------- --------- --------- -------------
<S> <C> <C> <C> <C>
Leasehold improvements............................ 5 years $ 22 $ 22 $ 22
Equipment......................................... 3-7 years 306 350 350
Furniture and fixtures............................ 3-7 years 26 26 26
Software.......................................... 3 years 11 24 24
--------- --------- -----
365 422 422
Less accumulated depreciation and amortization.... (212) (293) (299)
--------- --------- -----
Fixed assets, net................................. $ 153 $ 129 $ 123
--------- --------- -----
--------- --------- -----
</TABLE>
There were no significant operating leases other than leases for office
space (see Note 4).
Depreciation and amortization expense for the years ended December 31, 1996
and 1997 and the month ended January 31, 1998 was $77,000, $87,000 and $6,000,
respectively.
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-101
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 and January 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1998................................................................................. $ 183
1999................................................................................. 184
2000................................................................................. 74
-----
Total................................................................................ $ 441
-----
-----
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 and the month
ended January 31, 1998 was $194,000, $196,000, and $14,000, respectively.
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) 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. The Company
contributed $21,000 to the Plan in 1997 and 1996, respectively, and $2,000 in
the one month ended January 31, 1998.
6. RELATED PARTIES
During 1996, the Company purchased $32,000 of prepress services from IGI
Services, Inc. ("IGI"), a related organization owned by the stockholder of the
Company prior to its acquisition by the Company during 1997 (see Note 8). The
Company also advanced $56,000 to IGI during 1996, net of repayments of $39,000.
IGI shared office space with InVenture and InVenture provided 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 was $62,000,
recorded in the balance sheet as accounts receivable, affiliates. The Company
believed the fees paid to IGI were equivalent to those that would be paid under
an arms'-length transaction.
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 was recorded as a note receivable in the December
31, 1996 balance sheet and included in other non-current assets. During 1997,
the note was transferred to a third party as described in Note 9.
At December 31, 1996 and 1997 and January 31, 1998 the Company had advanced
funds totaling $42,000, $28,000, and $29,000 respectively, to the stockholder of
the Company. This amount is included in the accounts receivable, officers and
employees balance at the end of each year, and is payable on demand. As of
December 31, 1997 and January 31, 1998, the Company had borrowed funds of
$68,000 and $61,000, respectively, from officers of the Company. This amount is
included in accounts payable, officers at December 31, 1997 and January 31, 1998
and is payable in the first quarter of 1998.
F-102
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
-------------------- -------------
1996 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
Current taxes:
Federal.................................................. $ 5 $ 3 $ 9
State.................................................... -- -- 2
--------- --------- ------
Current tax expense...................................... 5 3 11
--------- --------- ------
Deferred taxes:
Federal tax benefit...................................... (5) (20) --
State tax expense........................................ 7 -- --
--------- --------- ------
Deferred tax expense..................................... 2 (20) --
--------- --------- ------
Provision (benefit) for income taxes..................... $ 7 $ (17) $ 11
--------- --------- ------
--------- --------- ------
</TABLE>
Deferred tax liabilities (assets) were comprised of the following at (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
-------------------- -----------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Depreciation................................................ $ 15 $ 9 $ 9
--------- --------- -----------
Deferred tax liabilities.................................. 15 9 9
--------- --------- -----------
Allowance for doubtful accounts............................. (12) (22) (22)
Vacation accrual............................................ (6) (3) (3)
Accrued rent................................................ (8) (15) (15)
--------- --------- -----------
Deferred tax asset........................................ (26) (40) (40)
--------- --------- -----------
Net deferred tax asset.................................... $ (11) $ (31) $ (31)
--------- --------- -----------
--------- --------- -----------
</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. 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
accounts receivable from IGI in the amount of $60,000 and the assumption of
liabilities totaling $22,000.
F-103
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. ACQUISITION OF IGI (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 (in thousands):
<TABLE>
<CAPTION>
AMOUNT
-----------------
<S> <C>
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 statement of
operations from the date of acquisition. Unaudited pro forma information,
assuming the acquisition was consummated on January 1, 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Net sales............................................................... $ 5,674 $ 3,455
Net income.............................................................. $ 14 $ (33)
</TABLE>
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.
9. 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 note receivable from an affiliate in full settlement of this
liability. As the note receivable was $222,000 at the time of this agreement, a
gain of $99,000 was recorded on the transaction in the 1997 statement of
operations.
10. SUPPLEMENTAL CASH FLOW INFORMATION
NONCASH TRANSACTIONS
During 1997, the Company entered into an agreement with a vendor in which
the Company exchanged, without recourse, a note receivable of $222,000 from an
affiliate in full satisfaction of a payable of $321,000 owed by the Company to
the vendor (see Note 9). Separately, the Company purchased the net assets of IGI
Services, Inc., for cash of $22,000 and forgiveness of accounts receivable of
$60,000 (see Note 8). Finally, during the years ended December 31, 1996 and 1997
and the month ended January 31, 1998 the Company sold and purchased goods and/or
services using barter credits, for a net barter inflow (outflow) of $11,000,
$(19,000), and $3,000, respectively.
F-104
<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 (deficit) and of cash flows
present fairly, in all material respects, the financial position of MIS
Technologies, Inc. at December 31, 1996 and 1997 and January 31, 1998, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997, and the one month in the period ended January
31, 1998, 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
Falls Church, VA
March 11, 1998
F-105
<PAGE>
MIS TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
-------------------- -------------
1996 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................................... $ 20 $ 108 $ 66
Investments........................................................................ 75 75 --
Accounts receivable, less allowance for doubtful accounts of $13 at 1996 and $4 at
1997 and 1998, respectively...................................................... 296 429 515
Other current assets............................................................... 5 7 14
--------- --------- -----
Total current assets............................................................. 396 619 595
Fixed assets, net.................................................................... 22 31 34
--------- --------- -----
Total assets..................................................................... $ 418 $ 650 $ 629
--------- --------- -----
--------- --------- -----
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Lines of credit.................................................................... 193 422 505
Accrued expenses................................................................... 107 212 246
Stockholder note payable........................................................... 20 -- --
--------- --------- -----
Total current liabilities........................................................ 320 634 751
--------- --------- -----
Commitments (Note 6)
Stockholder's equity:
Common stock, no par value; 1,000 shares authorized, 500 shares issued and
outstanding at stated value...................................................... 2 2 2
Retained earnings (deficit)........................................................ 96 14 (124)
--------- --------- -----
Total stockholder's equity (deficit)............................................. 98 16 (122)
--------- --------- -----
Total liabilities and stockholder's equity (deficit)............................. $ 418 $ 650 $ 629
--------- --------- -----
--------- --------- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
-------------------- ---------------
1996 1997 1998
--------- --------- ---------------
<S> <C> <C> <C>
Revenues........................................................................ $ 2,582 $ 4,342 $ 407
Cost of revenues................................................................ 1,426 2,498 226
--------- --------- -----
Gross profit.................................................................... 1,156 1,844 181
Selling, general and administrative expenses.................................... 1,150 1,839 161
--------- --------- -----
Income from operations.......................................................... 6 5 20
Net interest income (expense)................................................... (12) (25) 2
Other income.................................................................... -- 2 --
--------- --------- -----
Net income (loss)............................................................... $ (6) $ (18) $ 22
--------- --------- -----
--------- --------- -----
Unaudited pro forma information (see Note 2):
Pro forma net income (loss) before provision for income taxes................. $ (6) $ (18) $ 22
Provision for income taxes.................................................... -- -- 9
--------- --------- -----
Pro forma income................................................................ $ -- $ -- $ 13
--------- --------- -----
--------- --------- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED STOCKHOLDER'S
-------------------------- EARNINGS EQUITY
SHARE AMOUNT (DEFICIT) (DEFICIT)
----------- ------------- ----------- ---------------
<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......................................... -- -- (64) (64)
Net loss............................................................. -- -- (18) (18)
--
--- ----- -----
Balance, December 31, 1997........................................... 500 $ 2 $ 14 $ 16
Distributions to stockholder......................................... -- -- (160) (160)
Net income........................................................... -- -- 22 22
--
--- ----- -----
Balance, January 31, 1998............................................ 500 $ 2 $ (124) $ (122)
--
--
--- ----- -----
--- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MONTH ENDED
DECEMBER 31, JANUARY 31,
-------------------- ---------------
1996 1997 1998
--------- --------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ (6) $ (18) $ 22
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation............................................................. 12 19 1
Changes in assets and liabilities:
Accounts receivable.................................................. (88) (133) (86)
Other assets......................................................... (6) (2) (7)
Accrued liabilities.................................................. 57 105 34
--------- --------- -----
Net cash used by operating activities............................ (31) (29) (36)
--------- --------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from matured of investment.......................................... -- -- 75
Purchases of property and equipment.......................................... (15) (28) (4)
--------- --------- -----
Net cash provided by (used in) investing activities.............. (15) (28) 71
--------- --------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in borrowings under lines of credit................................. 65 229 83
Repayment of stockholder loan................................................ -- (20) --
Distributions to stockholder................................................. (49) (64) (160)
--------- --------- -----
Net cash (used in) provided by financing activities.............. 16 145 (77)
--------- --------- -----
Net (decrease) increase in cash................................................ (30) 88 (42)
Cash, beginning of period...................................................... 50 20 108
--------- --------- -----
Cash, end of period............................................................ $ 20 $ 108 $ 66
--------- --------- -----
--------- --------- -----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest....................................................... $ 17 $ 36 $ 3
--------- --------- -----
--------- --------- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-109
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY AND BUSINESS ORGANIZATION
MIS Technologies, Inc. ("MIS", or the "Company") is an S corporation
headquartered in Tulsa, Oklahoma. The Company, founded in 1985, provides clients
temporary contract information, staffing and permanent placement of qualified
professionals with information technology experience. In addition to these
services, the Company works with clients to assess their management information
systems and staffing needs.
On February 10, 1998, the Company's stockholder, pursuant to a definitive
agreement with Condor Technology Solutions, Inc. ("Condor"), exchanged all of
the common stock of the Company 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 results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
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 December 31, 1997 the Company
had two significant accounts which each accounted for 10% of the total 1997
revenue. At January 31, 1998, the Company had no significant customers.
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 and customer
deposits.
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.
F-110
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 has been
subject to federal and state and income taxes for the entire periods presented.
The Company's S corporation status terminated when it was acquired by Condor.
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, JANUARY 31,
-------------------- -------------
1996 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
Furniture and equipment.................................................. $ 41 $ 52 $ 53
Computers and accessories................................................ 20 37 40
--- --- ---
61 89 93
Less accumulated depreciation............................................ (39) (58) (59)
--- --- ---
$ 22 $ 31 $ 34
--- --- ---
--- --- ---
</TABLE>
F-111
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED EXPENSES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
-------------------- -------------
1996 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
Salaries and wages...................................................... $ 32 $ 83 $ 83
Vacation and sick pay................................................... 28 29 19
Commissions............................................................. 35 28 36
Other accrued liabilities............................................... 12 72 108
--------- --------- -----
$ 107 $ 212 $ 246
--------- --------- -----
--------- --------- -----
</TABLE>
5. STOCKHOLDER NOTE AND LINES OF CREDIT
Stockholder note and lines of credit consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
-------------------------- -------------
1996 1997 1998
--------- --------------- -------------
<S> <C> <C> <C>
BancFirst $600,000 line of credit dated September 11, 1997 expiring
September 6, 1998; interest paid monthly at prime plus 1.5% (10%,
at December 31, 1997 and January 31, 1998), principal due at
maturity......................................................... $ -- $ 400 $ 475
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 $55,000 line of credit dated July 31, 1997 expiring
July 31, 1998; interest paid monthly at prime plus 4.0% (12.50%
at December 31, 1997 and January 31, 1998), principal paid in
monthly installments of varying amounts.......................... -- 22 30
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 $ 422 $ 505
--------- ----- -----
--------- ----- -----
</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 stockholder has personally
guaranteed the lines of credit. The Company made cash interest payments of
$17,000, $36,000 and $3,000 during the years ended December 31, 1996 and
December 31, 1997 and the month ended January 31, 1998, respectively. In
addition, at December 31, 1996, the Company was obligated to repay a $20,000
stockholder note payable to its sole stockholder. The Company repaid the
stockholder during 1997.
F-112
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS
The Company leases certain facilities and equipment under long-term leases
which are accounted for as operating leases. Future minimum rental payments
under non-cancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
-----------
<S> <C>
1998................................................................................. $ 59
1999................................................................................. 32
2000................................................................................. 25
2001................................................................................. 3
2002................................................................................. 1
-----
Total.............................................................................. $ 120
-----
-----
</TABLE>
Rent expense for the years ended December 31, 1996 and December 31, 1997 and
the month ended January 31, 1998 was $36,000, $45,000 and $5,900, respectively.
7. SUBSEQUENT EVENT
The Company 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. The merger occurred simultaneously with the Company's merger
with Condor. Prior to the merger, KTR operated as an independent branch of MIS.
During the years ended December 31, 1996 and December 31, 1997 and the month
ended January 31, 1998, commissions totaling $79,000, $156,000 and $10,000,
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 $23,000, $21,000, and $1,000 for the years ended
December 31, 1996 and 1997 and the one month ended January 31, 1998,
respectively, were paid directly by MIS.
Unaudited pro forma information for the year ended December 31, 1997,
assuming the acquisition was consummated on January 1, 1997 is as follows (in
thousands):
<TABLE>
<S> <C>
Net sales........................................................... $ 4,418
Net income.......................................................... $ 88
</TABLE>
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 1997.
F-113
<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. 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.............................................................. 6
The Company............................................................... 12
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Selected Financial Data................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Founding Companies.................................... 24
Business.................................................................. 33
Management................................................................ 42
Certain Transactions...................................................... 49
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 56
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
5,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
Offering. All of such amounts (except the SEC Registration Fee and the Nasdaq
National Market Listing Fees) are estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 21,111
Nasdaq National Market Listing Fees............................. 17,500
Blue Sky Fees and Expenses...................................... 1,000
Printing and Engraving Costs.................................... 5,000
Accounting and Legal Fees and Expenses.......................... 43,000
Transfer Agent and Registrar Fees and Expenses.................. 1,000
Miscellaneous................................................... 1,389
---------
Total..................................................... $ 90,000
---------
---------
</TABLE>
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.
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.
II-1
<PAGE>
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 J. Patrick 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 August 1997, the Company sold an
additional 150,000 shares to Mr. Wright. 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 A.
Ranelli, in each case for cash consideration of $0.67 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 share figures in this
paragraph do not take into account the one-for-5.72568 reverse stock split
effective on February 4, 1998.
Simultaneously with the completion of the Offering, the Company issued
2,319,000 shares of its Common Stock in connection with the Mergers of the eight
Founding Companies. The Company also assumed options to purchase 177,000 shares
of common stock of certain of the Founding Companies which, following the
Mergers, constitute options to purchase an aggregate of 62,471 shares of Common
Stock of the Company.
In May 1998, the Company issued 9,600 restricted shares of Common Stock for
the purchase of Decision Support Technology, Inc.
Each of the transactions described in this Item 15 was effected without
registration of the relevant securities 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
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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
(Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
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
(Incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
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 (Incorporated by
reference to Exhibit 2.3 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
2.4 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Access
Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.4 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
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 (Incorporated by reference to Exhibit 2.5 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-37179)).
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 (Incorporated by
reference to Exhibit 2.6 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
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 (Incorporated
by reference to Exhibit 2.7 to the Registrant's Registration Statement on Form S-1 (Registration
No. 333-37179)).
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 (Incorporated by
reference to Exhibit 2.8 to the Registrant's Registration Statement of Form S-1 (Registration No.
333-37179)).
3.1 -- Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
3.1A -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1A to Amendment No. 4 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)).
3.2 -- By-Laws of the Company as amended (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No. 333-37179)).
4 -- Form of Certificate Evidencing Ownership of Common Stock of the Company (Incorporated by reference
to Exhibit 4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
5 -- Opinion of Morgan, Lewis & Bockius LLP
10.1 -- 1997 Long-Term Incentive Plan of the Company (Incorporated by reference to Exhibit 10.1 to
Amendment No. 1 to the Registrant's Registration Statement of Form S-1 (Registration No.
333-37179)).
10.2 -- Employment Agreement between the Company and Kennard F. Hill (Incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
10.3 -- Employment Agreement between the Company and C. Lawrence Meador (Incorporated by reference to
Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
10.4 -- Employment Agreement between the Company and Daniel J. Roche (Incorporated by reference to Exhibit
10.4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
10.5 -- Lease between Tysons II Development Co. Limited Partnership and the Company and Guarantee thereof
(Incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)) and Amendment of Lease between Tysons II
Development Co. Limited Partnership and the Company (Incorporated by reference to Exhibit 10.5 to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
10.6 -- Employment Agreement between the Company and William J. Caragol, Jr. (Incorporated by reference to
Exhibit 10.7 to Amendment No.1 to the Registrant's Registration Statement on Form S-1 (Registration
No. 333-37179)).
10.7 -- Indemnification Agreement by and between SCM LLC d/b/a The Commonwealth Group and the Company
(Incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)).
10.8 -- Business Loan and Security Agreement between the Company and First Union Commercial Corporation and
related Stock Security Agreement and Revolving Promissory Note (Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31,
1998).
10.9 -- Agreement for Wholesale Financing between Deutsche Financial Services Corporation and Computer
Hardware Maintenance Company, Inc., Corporate Access, Inc., and U.S. Communications, Inc. and
related Guaranty and Addendum to Guaranty and Agreement for Wholesale Financing (Incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998).
21 -- List of Subsidiaries of the Company.
23.1 -- Consent of Price Waterhouse LLP.
23.2 -- Consent of Cooper & Lybrand L.L.P.
23.3 -- Consent of Deloitte & Touche LLP.
23.4 -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5).
24 -- Power of Attorney (on signature page hereof).
</TABLE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Act
and is, therefor, 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 Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b), if, in the aggregate, the
II-4
<PAGE>
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC.
By: /s/ KENNARD F. HILL
-----------------------------------------
Kennard F. Hill
Chief Executive Officer
</TABLE>
Date: May 29, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kennard F. Hill and Daniel J. Roche, and each of
them, with full power to act without the other, such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, any and all amendments thereto
(including post-effective amendments), any subsequent Registration Statements
pursuant to Rule 462 of the Securities Act of 1933, as amended, and any
amendments thereto and to file the same, with exhibits and schedules thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------------------------------------------- --------------------------------------------- -------------------
<C> <S> <C>
/s/ KENNARD F. HILL Chairman of the Board and Chief Executive
------------------------------------ Officer May 29, 1998
Kennard F. Hill (Principal Executive Officer)
/s/ WILLIAM J. CARAGOL, JR. Vice President and Chief Financial Officer
------------------------------------ (Principal Financial and Accounting May 29, 1998
William J. Caragol, Jr. Officer)
/s/ C. LAWRENCE MEADOR
------------------------------------ Vice Chairman of the Board May 29, 1998
C. Lawrence Meador
/s/ PETER T. GARAHAN
------------------------------------ Director May 29, 1998
Peter T. Garahan
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------------------------------------------- --------------------------------------------- -------------------
<C> <S> <C>
/s/ ANN TORRE GRANT
------------------------------------ Director May 29, 1998
Ann Torre Grant
/s/ WILLIAM E. HUMMEL
------------------------------------ Director May 29, 1998
William E. Hummel
/s/ DENNIS E. LOGUE
------------------------------------ Director May 29, 1998
Dennis E. Logue
/s/ EDWARD J. MATHIAS
------------------------------------ Director May 29, 1998
Edward J. Mathias
/s/ WILLIAM M. NEWPORT
------------------------------------ Director May 29, 1998
William M. Newport
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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
(Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
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
(Incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
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 (Incorporated by
reference to Exhibit 2.3 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
2.4 -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Access
Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.4 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
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 (Incorporated by reference to Exhibit 2.5 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-37179)).
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 (Incorporated by
reference to Exhibit 2.6 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
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 (Incorporated
by reference to Exhibit 2.7 to the Registrant's Registration Statement on Form S-1 (Registration
No. 333-37179)).
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 (Incorporated by
reference to Exhibit 2.8 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
3.1 -- Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
3.1A -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1A to Amendment No. 4 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)).
3.2 -- By-Laws of the Company as amended (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No. 333-37179)).
4 -- Form of Certificate Evidencing Ownership of Common Stock of the Company (Incorporated by reference
to Exhibit 4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
5 -- Opinion of Morgan, Lewis & Bockius LLP
10.1 -- 1997 Long-Term Incentive Plan of the Company (Incorporated by reference to Exhibit 10.1 to
Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.2 -- Employment Agreement between the Company and Kennard F. Hill (Incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-37179)).
10.3 -- Employment Agreement between the Company and C. Lawrence Meador (Incorporated by reference to
Exhibit 10.3 of the Registrant's Report on Form 10-K (Registration No. 0-23635)).
10.4 -- Employment Agreement between the Company and Daniel J. Roche (Incorporated by reference to Exhibit
10.4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
333-37179)).
10.5 -- Lease between Tysons II Development Co. Limited Partnership and the Company and Guarantee thereof
(Incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)) and Amendment of Lease between Tysons II
Development Co. Limited Partnership and the Company. (Incorporated by reference to Exhibit 10.5 of
the Registrant's Report on Form 10-K (Registration No. 0-23635)).
10.6 -- Employment Agreement between the Company and William J. Caragol, Jr. (Incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-37179)).
10.7 -- Indemnification Agreement by and between SCM LL.C d/b/a The Commonwealth Group and the Company
(Incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-37179)).
10.8 -- Business Loan and Security Agreement between the Company and First Union Commercial Corporation and
related Stock Security Agreement and Revolving Promissory Note (Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31,
1998).
10.9 -- Agreement for Wholesale Financing between Deutsche Financial Services Corporation and Computer
Hardware Maintenance Company Inc., Corporate Access, Inc., and U.S. Communications, Inc. and
related Guaranty and Addendum to Guaranty and Agreement for Wholesale Financing (Incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998).
21 -- List of Subsidiaries of the Company.
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Cooper & Lybrand L.L.P.
23.3 -- Consent of Deloitte & Touche LLP
23.4 -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5).
24 -- Powers of Attorney (on signature page hereof).
</TABLE>
<PAGE>
EXHIBIT 5
[LETTERHEAD OF MORGAN, LEWIS & BOCKIUS LLP]
May 27, 1998
Condor Technology Solutions, Inc.
Annapolis Office Plaza
170 Jennifer Road, Suite 325
Annapolis, Maryland 21401
Re: Issuance of Shares 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, of a Registration Statement on Form S-1 (the "Registration Statement")
relating to the public offering by the Company of an aggregate of 5,000,000
shares (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 the Amended and Restated Certificate of
Incorporation of the Company and the By-Laws of the Company. We have assumed
that (i) the Registration Statement, and any post-effective amendments thereto,
will have become effective, (ii) the Shares will have been duly authorized and
reserved for issuance and certificates evidencing the same will have been duly
executed and delivered, against receipt of the consideration approved by the
Board of Directors of the Company or a committee thereof which will be no less
than the par value thereof, and (iii) the Shares will be issued in compliance
with applicable federal and state securities laws.
Based on the foregoing, we are of the following opinion:
1. The Company is a corporation duly incorporated and validly existing
under the laws of the State of Delaware.
2. The Shares, when issued, will be duly authorized, validly issued, fully
paid and non-assessable.
We are expressing the opinions above 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.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF CONDOR TECHNOLOGY SOLUTIONS, INC.
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.
MIS Technologies, Inc.
Decision Support Technology, Inc.
1
<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:
<TABLE>
<CAPTION>
COMPANY DATE
- ------------------------------------------------------------------------ --------------------
<S> <C>
Condor Technology Solutions, Inc........................................ March 11, 1998
Computer Hardware Maintenance Company, Inc.............................. March 13, 1998
Corporate Access, Inc................................................... March 11, 1998
Interactive Software Systems Incorporated............................... March 6, 1998
U.S. Communications, Inc................................................ March 11, 1998
InVenture Group, Inc.................................................... March 11, 1998
MIS Technologies, Inc................................................... March 11, 1998
</TABLE>
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
Falls Church, Virginia
May 28, 1998
<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 March 25, 1998, on our
audits of the consolidated financial statements of Federal Computer Corporation
and Subsidiaries as of October 31, 1996, 1997 and January 31, 1998 and for each
of the three years in the period ended October 31, 1997 and for the three months
ended January 31, 1998. We also consent to the reference to our firm under the
caption "Experts."
Coopers & Lybrand L.L.P.
Washington, D.C.
June 1, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Condor Technology
Solutions, Inc. on Form S-1 (the "Registration Statement") of our report dated
February 27, 1998 (relating to the financial statements of Management Support
Technology Corp. ("MST"), which report expresses an unqualified opinion and
includes explanatory paragraphs relating to the chief executive officer/sole
stockholder's compensation being at his sole discretion and the acquisition of
MST by Condor Technology Solutions, Inc. on February 10, 1998), 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
May 28, 1998
