<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION NO. 333-37179
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONDOR TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 54-1814931
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1650 TYSONS BOULEVARD, SUITE 600
MCLEAN, VIRGINIA 22102
(703) 847-3290
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
KENNARD F. HILL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONDOR TECHNOLOGY SOLUTIONS, INC.
1650 TYSONS BOULEVARD, SUITE 600
MCLEAN, VIRGINIA 22102
(703) 847-3290
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
CHRISTOPHER T. JENSEN, ESQ. DOUGLAS R. NEWKIRK, ESQ.
Morgan, Lewis & Bockius LLP Sachnoff & Weaver, Ltd.
101 Park Avenue 30 S. Wacker Drive, 29th Floor
New York, New York 10178 Chicago, Illinois 60606-7484
(212) 309-6000 (312) 207-1000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 9, 1998
5,900,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the 5,900,000 shares of Common Stock offered hereby are being sold by
Condor Technology Solutions, Inc. (the "Company"). Prior to this Offering, there
has been no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between $13.00 and
$15.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market, subject to
official notice of issuance, under the symbol "CNDR."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 7-14.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total (3)................................................ $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $4,900,000.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 885,000 additional shares of Common Stock on the same terms and
conditions set forth above solely to cover over-allotments, if any. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the certificates for the shares of Common Stock will be available for delivery
at the offices of Volpe Brown Whelan & Company, LLC, One Maritime Plaza, San
Francisco, California, on or about , 1998.
VOLPE BROWN WHELAN & COMPANY
FURMAN SELZ
WHEAT FIRST BUTCHER SINGER
The date of this Prospectus is , 1998
<PAGE>
[PICTURES OF IT SERVICE PROFESSIONALS PERFORMING CONSULTING
SERVICES, SYSTEM SERVICES AND DESKTOP SERVICES]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
------------------------
The Company owns or otherwise has rights to trademarks and trade names that
it uses in conjunction with the sale and licensing of its products. The Safari
InfoTools-TM- trademark mentioned in this Prospectus is owned by the Company.
All other trademarks or trade names referred to in this Prospectus are the
property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. SIMULTANEOUSLY WITH AND AS
A CONDITION TO THE CLOSING OF THIS OFFERING, CONDOR TECHNOLOGY SOLUTIONS, INC.
WILL ACQUIRE, IN SEPARATE TRANSACTIONS (THE "MERGERS") IN EXCHANGE FOR CASH AND
SHARES OF ITS COMMON STOCK, PAR VALUE $.01 PER SHARE (THE "COMMON STOCK"), EIGHT
INFORMATION TECHNOLOGY ("IT") SERVICE COMPANIES (EACH, A "FOUNDING COMPANY" AND,
COLLECTIVELY, THE "FOUNDING COMPANIES"). UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO THE "COMPANY" HEREIN INCLUDE CONDOR TECHNOLOGY SOLUTIONS, INC. AND
THE FOUNDING COMPANIES, AND REFERENCES HEREIN TO "CONDOR" MEAN CONDOR TECHNOLOGY
SOLUTIONS, INC. PRIOR TO THE CLOSING OF THE MERGERS. FOR MORE INFORMATION ABOUT
THE MERGERS, SEE "CERTAIN TRANSACTIONS."
UNLESS OTHERWISE INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION
IN THIS PROSPECTUS: (I) HAS BEEN ADJUSTED TO GIVE EFFECT TO THE MERGERS; (II)
ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $14.00 PER SHARE; (III) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND (IV) GIVES EFFECT TO A
ONE-FOR-5.26227 REVERSE STOCK SPLIT TO BE EFFECTIVE ON THE DAY IMMEDIATELY
PRECEDING THE DATE OF THIS PROSPECTUS. EXCEPT AS INDICATED OTHERWISE, ALL
REFERENCES TO THE COMMON STOCK ALSO INCLUDE THE RESTRICTED COMMON STOCK, PAR
VALUE $.01 PER SHARE (THE "RESTRICTED COMMON STOCK"), OF THE COMPANY. SEE
"DESCRIPTION OF CAPITAL STOCK."
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE FOLLOWING SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Condor was established to create a leading provider of 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 has entered
into agreements (the "Merger Agreements") to acquire, simultaneously with and as
a condition to the closing of this Offering, eight established IT service
providers. The Founding Companies are (i) Management Support Technology Corp.
("MST"); (ii) Computer Hardware Maintenance Company, Inc. ("CHMC"); (iii)
Federal Computer Corporation ("Federal"); (iv) Corporate Access, Inc.
("Corporate Access"); (v) Interactive Software Systems Incorporated ("ISSI");
(vi) U.S. Communications, Inc. ("USComm"); (vii) InVenture Group, Inc.
("InVenture"); and (viii) MIS Technologies, Inc. ("MIS"). The Founding Companies
provide a 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 $103.2 million for the year ended December 31,
1996 and approximately $105.7 million for the nine months ended September 30,
1997.
The Company will focus on marketing its 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 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.
3
<PAGE>
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 can 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.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 5,900,000 shares
Common Stock to be outstanding after this
Offering...................................... 10,100,000 shares (1)
Use of proceeds................................. To pay the cash portion of the purchase
price for the Founding Companies, to
repay expenses incurred in connection
with the Mergers and this Offering and
for working capital and other general
corporate purposes, including future
acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol................... CNDR
</TABLE>
- ------------------------
(1) Includes 2,153,355 shares of Common Stock to be issued in connection with
the Mergers (assuming an initial public offering price of $14.00 per share).
Excludes (x) up to an aggregate of 2,475,952 additional shares (assuming a
stock price of $14.00 per share at the time the additional shares are
issued) that may be issued in connection with the Mergers of six Founding
Companies pursuant to certain earn-out provisions if such Founding Companies
achieve specified earnings thresholds; and (y) 912,163 shares of Common
Stock issuable upon exercise of options to be granted by the Company in
connection with the Mergers and this Offering. See "Management--1997
Long-Term Incentive Plan," "Certain Transactions--Organization of the
Company," "Description of Capital Stock" and "Shares Eligible for Future
Sale."
4
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Condor will acquire the Founding Companies simultaneously with and as a
condition to the closing of this Offering. In July 1996, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 97 ("SAB 97") relating
to business combinations immediately prior to an initial public offering. SAB 97
requires that these combinations be accounted for using the purchase method of
accounting. In accordance with SAB 97, Condor has been identified as the
"accounting acquiror" for financial statement presentation purposes. The pro
forma combined table below presents unaudited pro forma combined financial data
for the Company that give effect to the completion of the Mergers and certain
pro forma adjustments to the historical financial statements described below and
as adjusted to reflect the closing of this Offering and the application of the
net proceeds therefrom. The summary pro forma combined financial data are not
necessarily indicative of operating results or financial position that would
have been achieved had the events described above been consummated during the
periods presented and should not be construed as representative of future
operating results or financial position of the Company. See "Selected Financial
Data," the Unaudited Pro Forma Combined Financial Statements and the related
Notes thereto and the Founding Companies' Historical Financial Statements and
the related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
---------------------------------------------
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED --------------------------
DECEMBER 31, 1996 1996 1997
----------------- ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
STATEMENT OF OPERATIONS DATA (1):
Revenues........................................................... $ 103,202 $ 73,627 $ 105,723
Gross profit....................................................... 26,818 19,546 25,572
Selling, general and administrative expenses (2)................... 19,063 13,177 16,291
Goodwill amortization (3).......................................... 1,827 1,370 1,370
Income from operations............................................. 5,928 4,999 7,911
Interest and other income, net..................................... 1,119 763 631
Income before income taxes......................................... 7,047 5,762 8,542
Net income (4)..................................................... $ 3,393 $ 2,872 $ 4,530
Net income per share............................................... $ 0.42 $ 0.35 $ 0.55
Shares used in computing pro forma net income
per share (5).................................................... 8,171,043 8,171,043 8,171,043
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
<S> <C> <C>
AS
PRO FORMA ADJUSTED
COMBINED (6) (7)
------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 4,343 $ 28,064
Working capital................................................................. (38,911)(8) 33,007
Total assets.................................................................... 91,530 114,012
Long-term debt, net of current maturities....................................... 96 96
Stockholders' equity............................................................ 19,334 91,252
</TABLE>
- ------------------------
(1) The pro forma combined statement of operations data assume that the Mergers
and this Offering were consummated on January 1, 1996.
(2) The pro forma combined statement of operations data reflect pro forma
reductions in salaries, bonuses and benefits to the stockholders and
management of the Founding Companies that have been
5
<PAGE>
agreed to prospectively (the "Compensation Differential"). The Compensation
Differential amounted to approximately $1,896,000, $1,422,000 and $3,091,000
for the year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997, respectively. Additionally, the pro forma combined statement
of operations data reflect the elimination of the non-recurring compensation
charge of $692,000 associated with the issuance of shares to management of
Condor. The Company will record a non-recurring non-cash compensation charge
of approximately $1,639,000, in the quarter ended December 31, 1997, related
to the issuance of Common Stock to management, representing the difference
between the amount paid for the shares and the estimated fair value of the
shares on date of issuance.
(3) Consists of amortization of $57,821,000 of identifiable intangibles and
goodwill to be recorded as a result of the Mergers over a five to 35-year
period and computed on the basis described in the Notes to the Unaudited Pro
Forma Combined Financial Statements.
(4) Assumes all income is subject to an effective corporate income tax rate of
40% and all goodwill is not tax-deductible.
(5) Includes (i) 2,153,355 shares to be issued to the stockholders of the
Founding Companies; (ii) 2,046,645 shares issued to founders, consultants
and management of Condor; and (iii) 3,971,043 of the 5,900,000 shares sold
in this Offering necessary to pay the cash portion of the Merger
consideration, S corporation distributions, underwriting discounts and
commissions and estimated expenses of this Offering.
(6) The pro forma combined and as adjusted balance sheet data assume that the
Mergers were consummated on September 30, 1997.
(7) Adjusted to reflect the sale of the 5,900,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
(8) Includes $48,155,000 payable to the stockholders of the Founding Companies,
representing the cash portion of the Merger consideration to be paid from
the net proceeds of this Offering.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION. Condor was
founded in August 1996 to acquire the Founding Companies. Condor is a holding
company and has conducted no operations and generated no revenues to date.
Condor has entered into definitive agreements to acquire the Founding Companies
simultaneously with, and as a condition to, the closing of this Offering. The
Founding Companies have been operating as separate independent entities, and
there can be no assurance that Condor will be able to successfully integrate the
operations of these businesses or institute the necessary Company-wide systems
and procedures to successfully manage the combined enterprise on a profitable
basis. The Company's management group has been assembled only recently, and
there can be no assurance that the management group will be able to successfully
manage the combined entity or effectively implement the Company's internal
growth strategy and acquisition program. In this regard, the Company may need to
add members to its management group, but there is no assurance that the Company
will be able to attract and retain such additional members of management. The
pro forma financial results of the Company cover periods when the Founding
Companies and Condor were not under common control or management and, therefore,
may not be indicative of the operating results or financial position that would
have been achieved had Condor and the Founding Companies been under common
control and management during the periods covered by such pro forma financial
results and may not be indicative of the Company's future results of operations,
financial condition and business.
A number of the Founding Companies offer different services, utilize
different capabilities and technologies and target different geographic markets
and client segments. These differences increase the risk inherent in
successfully completing such integration. Further, there can be no assurance
that the Company's strategy to establish a single-source provider of IT services
will be successful, or that the Company's targeted clients will accept the
Company as a provider of such services. In addition, there can be no assurance
that the operating results of the Company will match or exceed the combined
individual operating results achieved by the Founding Companies prior to this
Offering. The inability of the Company to successfully integrate the Founding
Companies would have a material adverse effect on the Company's results of
operations, financial condition and business. See "The Company,"
"Business--Strategy" and "Management."
RISKS OF SUBSTANTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS. The
Company's revenues, gross profit, operating income and net income are likely to
vary in the future from quarter to quarter, perhaps substantially. Factors that
may affect this quarter-to-quarter variability include the short-term nature of
certain client commitments; patterns of 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 service and product offerings; the timing
and size of significant software sales; the timing and size of new projects; the
timing and magnitude of required capital expenditures; pricing changes in
response to various competitive factors; market factors affecting the
availability of qualified technical personnel; timing and client acceptance of
new service offerings; changes in the trends affecting the outsourcing of IT
services; additional selling, general and administrative expenses to acquire and
support new business; increased levels of technological change in the industry;
and general economic conditions. The Company's operating results will be
affected by changes in technical personnel billing and utilization rates.
Technical personnel utilization rates may be adversely affected during periods
of rapid and concentrated hiring in anticipation of future revenues. Gross
margin may also be adversely affected if the Company is required to use contract
personnel rather than Company personnel to complete certain assignments.
Operating results may also be materially and adversely affected by the cost,
timing and other effects of acquisitions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
7
<PAGE>
In addition, most of the Company's project-based contracts are terminable by
the client with limited advance notice, typically not more than 60 days, and
without significant penalty (generally limited to fees earned and expenses
incurred by the Company through the date of termination). The cancellation or
significant reduction in the scope of a large project could have a material
adverse effect on the Company's results of operations, financial condition and
business. Although the Company's principal method of billing a project is on a
time and materials basis, the Company also undertakes projects billed on a
fixed-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
condition and business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Introduction" and "Business--Services."
DEPENDENCE ON AVAILABILITY, RECRUITMENT AND RETENTION OF TECHNICAL
PERSONNEL. The Company depends upon its ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet the
Company's own personnel needs and the staffing requirements of its clients.
Competition for individuals with proven technical skills is intense. In
addition, the IT industry in general experiences a high rate of attrition of
such personnel. The Company competes for such individuals with other systems
integrators, providers of outsourcing services, temporary personnel agencies,
computer systems consultants, clients and potential clients. Many large
competitors have recently announced extensive campaigns to hire additional
technical personnel. Competition for quality technical personnel has continued
to intensify, resulting in increased personnel costs for many IT service
providers. There can be no assurance the Company will be able to recruit or
retain the technical personnel necessary to execute its strategy. Failure to do
so would have a material adverse effect on the Company's results of operations,
financial condition and business. See "Business--Strategy."
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY. The Company
intends to grow 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 without substantial costs, delays or
other operational or financial problems. Failure to acquire and integrate such
companies may adversely affect the Company's ability to bid successfully on
certain engagements and otherwise to grow its business. Client dissatisfaction
or performance problems at a single acquired company could have an adverse
effect on the reputation of the Company as a whole, resulting in increased
difficulty in marketing services or acquiring companies in the future. In
addition, there can be no assurance that the Founding Companies or other IT
service companies acquired in the future will operate profitably. Acquisitions
involve a number of additional risks, including diversion of management's
attention, failure to retain key acquired clients or personnel, risks associated
with unanticipated events or liabilities and amortization of goodwill and
acquired intangible assets, some or all of which could have a material adverse
effect on the Company's results of operations, financial condition and business.
See "Business--Strategy."
RISKS ASSOCIATED WITH THE MANAGEMENT OF GROWTH. The Company expects to
expend significant time and effort to attempt to expand its existing businesses
and to acquire additional IT service companies. There can be no assurance that
the Company's systems, procedures, controls and management resources will be
adequate to support the Company's future operations. Any future growth also will
impose significant added responsibilities on members of senior management,
including the need to identify, recruit and integrate new senior-level managers
and executives. There can be no assurance that such additional management will
be identified and retained by the Company. To the extent that the Company is
unable to manage its growth efficiently and effectively, or is unable to attract
and retain additional qualified management, the Company's results of operations,
financial condition and business could be materially and adversely affected. See
"Business--Strategy" and "Management."
8
<PAGE>
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 the Company, are in
the business of employing people and placing them in the workplace of other
businesses. Therefore, the Company is also exposed to liability with respect to
actions taken by its employees while on assignment, such as damages caused by
employee errors and omissions, misuse of client proprietary information,
misappropriation of funds, discrimination and harassment, theft of client
property, other criminal activity or torts and other claims. Although the
Company maintains general liability insurance coverage, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large claims, or
that the insurer will not disclaim coverage as to any future claim. The
successful assertion of one or more large claims against the Company that exceed
available insurance coverage or changes in the Company's insurance policies,
including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on the Company's
results of operations, financial condition and business.
COMPETITION. The market for the Company's services is highly competitive.
The Company's competitors vary in size and in the scope of the products and
services that they offer. Primary competitors generally include consulting and
systems 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 condition and business. See "Business--Competition."
DEPENDENCE ON CONTINUED AUTHORIZATION TO RESELL AND PROVIDE
MANUFACTURER-AUTHORIZED SERVICES. The Company's future success with IT service
offerings and product sales depends in part on its continued authorization as a
service provider and its continued status as a certified reseller of certain
hardware and software products. Without such sales and service authorizations,
the Company would be unable to provide the range of services and products
currently offered by the Company. In general, the agreements between the Company
and such manufacturers include termination provisions, some of which are
immediate. There can be no assurance that such manufacturers will continue to
authorize the Company as an approved reseller or service provider, and the loss
of one or more of such authorizations could have a material adverse effect on
the Company's results of operations, financial condition and business.
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DEPENDENCE ON SUPPLIERS. Although the Company has not experienced
significant problems with its suppliers of hardware, software and peripherals,
there can be no assurance that such relationships will continue or that, in the
event of a termination of its relationships with any given supplier, it would be
able to obtain alternative sources of supply without a material disruption in
the Company's ability to provide products and services to its clients.
Furthermore, as is typical in the industry, the Company receives credits or
allowances from many manufacturers for market development which are used to
offset a portion of the Company's cost of products sold. Changes in the
availability, structure or timing of these credits or allowances or any material
disruption in the Company's supply of products could have a material adverse
effect on the Company's results of operations, financial condition and business.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS. The IT service
industry is characterized by rapid technological change, evolving industry
standards, changing client preferences and new product and service
introductions. The Company's success will depend in part on its ability to
develop IT solutions that keep pace with continuing changes in the IT service
industry. There can be no assurance that the Company will be successful in
adequately addressing these developments on a timely basis or that, if these
developments are addressed, the Company will be successful in the marketplace.
In addition, there can be no assurance that products or technologies developed
by others will not render the Company's services non-competitive or obsolete.
The Company's failure to address these developments could have a material
adverse effect on the Company's results of operations, financial condition and
business. See "Business-- Services."
NEED FOR ADDITIONAL FINANCING. The Company intends to finance future
acquisitions and contingent purchase prices for the acquisition of the Founding
Companies in part by using shares of its Common Stock. In the event that its
Common Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to utilize more of its cash resources, if available, in order to pursue its
acquisition program and to pay the contingent purchase prices for the
acquisition of the Founding Companies. If the Company does not have sufficient
cash resources, its growth could be limited unless it is able to obtain
additional capital through debt or equity financings. The Company has obtained a
commitment from a major commercial bank, subject to a diligence review, for a
$30.0 million line of credit. There can be no assurance that the Company will be
able to obtain such line of credit or any other financing it will need on terms
it deems acceptable. If the Company's financial resources are inadequate to
support its acquisition activities, the Company's future operating results could
be materially and adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-- Pro Forma Combined Liquidity
and Capital Resources."
DEPENDENCE ON KEY PERSONNEL. The Company's operations are dependent on the
continued efforts of its executive officers and the senior management of the
Founding Companies, in particular Kennard F. Hill and Daniel J. Roche.
Furthermore, the Company will likely be dependent on the senior management of
any businesses acquired in the future. If any of these persons becomes unable to
continue in his or her role with the Company, or if the Company is unable to
attract and retain other qualified employees, the Company's results of
operations, financial condition and business could be adversely affected.
Although each of the executive officers of the Company and individual Founding
Companies will enter into an employment agreement with the Company or a Founding
Company, which will include confidentiality and non-compete provisions, there
can be no assurance that any individual will continue in his or her present
capacity with the Company or such Founding Company for any particular period of
time. The Company intends to obtain an insurance policy on the life of Kennard
F. Hill. The Company does not presently maintain key person life insurance on
any of its executive officers. See "Management."
RISKS OF FEDERAL GOVERNMENT BUSINESS AND CONTRACTING. Approximately 25% of
the Company's pro forma combined revenues for the nine months ended September
30, 1997 was derived from business with the federal government. Changes in the
federal budget could have an adverse effect on the availability and timing of
government funding for IT programs. The Company's federal government contracts
can
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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 property than the Company
would grant to other entities. As a result of engaging in the federal government
contracting business, the Company has been and will be subject to audits, and
may be subject to investigation, by governmental entities. The failure by the
Company to comply with the terms of any of its government contracts could result
in substantial civil and criminal fines and penalties or the Company's
suspension or debarment from future government contracts for a significant
period of time. The fines and penalties that could result from noncompliance
with appropriate standards and regulations, or the Company's suspension or
debarment, could have a material adverse effect on the Company's results of
operations, financial condition and business.
INTELLECTUAL PROPERTY RIGHTS. The Company derives a portion of its net
revenues from the licensing to third parties of software that it owns. The
Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights in its software. The Company typically enters into
confidentiality agreements with its employees and limits distribution of
proprietary information. The Company's standard licensing agreement contains
nondisclosure provisions. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of its
software or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO FOUNDING COMPANY
STOCKHOLDERS. In connection with this Offering and the Mergers, the
stockholders of the Founding Companies will receive an aggregate of 2,153,355
shares (which number will increase or decrease to the extent the initial public
offering price differs from $14.00 per share) and $48.2 million in cash, or
approximately 67.0% of the net proceeds of this Offering. Net proceeds available
for working capital and other uses by the Company will be approximately $23.7
million, or 33.0% of the net proceeds of this Offering (approximately $35.2
million, or 42.2% of the net proceeds of this Offering, if the Underwriters'
over-allotment is exercised in full). See "Use of Proceeds" and "Certain
Transactions."
BENEFITS TO INSIDERS. In connection with the Merger of MST into the
Company, C. Lawrence Meador, who will be an executive officer, director and
holder of more than 5% of the outstanding shares of Common Stock of the Company
upon the closing of this Offering, will receive 560,714 shares of Common Stock
and approximately $9.8 million in cash.
Prior to this Offering, SCM LLC d/b/a The Commonwealth Group
("Commonwealth"), owned 1,310,271 shares of Common Stock of the Company, which
it distributed to its members, J. Marshall Coleman, James J. Martell, Jr. and
Charles F. Smith, in November 1997. As of the closing of this Offering, such
persons will own beneficially in the aggregate approximately 13.0% of the
Company's Common Stock. Assuming an initial public offering price of $14.00 per
share, the aggregate market value of the shares of Common Stock owned
beneficially by Messrs. Coleman, Martell and Smith as of the closing of this
Offering would be approximately $18.3 million. Such persons acquired such shares
in return for financial advisory, consulting and related services valued at
$75,000 in the aggregate. See "Principal Stockholders."
A portion of the net proceeds of this Offering will be used to repay
Commonwealth for advances made to the Company. Such advances aggregated
approximately $1.0 million as of September 30, 1997 and the Company expects such
advances will aggregate approximately $2.2 million as of the closing of this
Offering. See "Use of Proceeds" and "Certain Transactions."
Pursuant to employment agreements, C. Lawrence Meador, Kennard F. Hill,
Daniel J. Roche and William J. Caragol, Jr., who will be the executive officers
of the Company upon the closing of this Offering, will receive annual base
salaries of $431,815, $300,000, $220,000 and $110,000, respectively, and
potential annual bonuses. In addition, in connection with this Offering, Messrs.
Hill, Roche and Caragol purchased 190,032, 152,025 and 9,502 shares of Common
Stock of the Company, respectively, for consideration equal
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to the par value per share. See "Management--Employment Agreements;
Covenants-Not-To-Compete" and "Principal Stockholders."
Messrs. Meador, Hill, Roche and Caragol will each be eligible to participate
in the Company's 1997 Long-Term Incentive Plan, which was amended in November
1997, which provides for, among other things, the award of options to purchase
shares of Common Stock. Such option awards may take the form of incentive stock
options (which must be granted at an exercise price not less than the fair
market value per share of Common Stock on the date of grant) or non-qualified
stock options (which may, but need not, be granted at an exercise price less
than the fair market value per share of Common Stock on the date of grant).
Messrs. Hill, Roche and Caragol will receive grants of non-qualified stock
options to purchase 100,000, 75,000 and 37,500 shares of Common Stock,
respectively, at an exercise price equal to the initial public offering price
per share. See "Management--1997 Long-Term Incentive Plan."
Each non-employee director of the Company is to receive an annual retainer
fee of $5,000 and, pursuant to the 1997 Long-Term Incentive Plan, automatic
initial and annual grants of stock options. Each person serving or who has
agreed to serve as a non-employee director at the commencement of this Offering
will be granted automatically an initial option to purchase 10,000 shares of
Common Stock, and thereafter each person who becomes a non-employee director
will be granted automatically an initial option to purchase 10,000 shares of
Common Stock upon such person's initial election to the Board of Directors. In
addition, each such non-employee director will be granted, subject to a certain
exception, an automatic annual grant of options to purchase 5,000 shares. Each
such option will have an exercise price equal to the fair market value per share
of Common Stock on the date of grant. Mr. Coleman, Edward J. Mathias, Peter T.
Garahan and William M. Newport will each receive such initial grants on the
Effective Date. See "Management--Director Compensation."
CONSIDERATION FOR FOUNDING COMPANIES MAY EXCEED ASSET VALUE; AMORTIZATION
CHARGES. The purchase price of the Founding Companies was not established by
independent appraisals, but generally through arm's-length negotiations between
Condor management and representatives of these companies. The consideration paid
for each company was based primarily on the value of such company as a going
concern and not on the value of the acquired assets. Valuations of these
companies determined solely by appraisals of the acquired assets would likely be
less than the consideration that is being paid for these companies. The future
performance of such companies may not be commensurate with the consideration
paid.
The Company expects to incur significant amortization charges resulting from
the consideration paid in excess of the fair value of the net assets
("goodwill") of the companies acquired in business combinations accounted for
under the purchase method of accounting. The Company will be required to
amortize the goodwill from acquisitions accounted for under the purchase method
over a period of time, with the amount amortized in a particular period
constituting an expense that reduces the Company's net income for that period.
The amount amortized, however, will not give rise to a deduction for tax
purposes. The Company expects to record $57.8 million of goodwill and other
intangibles in connection with the acquisition of the Founding Companies, $2.3
million of which will be amortized during the Company's fiscal year ended
December 31, 1998. See Note 2 of the Unaudited Pro Forma Combined Financial
Statements of the Company. If the Company makes additional acquisitions, the
Company's amortization charges, however, could be substantially greater than the
amount of amortization charges 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 following this Offering. The 5,900,000 shares being sold in
this Offering will be freely tradable unless held by affiliates of the Company.
Upon completion of this Offering, the holders of Common Stock who did not
purchase shares in this Offering will own 4,200,000 shares of Common Stock,
consisting of (i) the stockholders of the Founding Companies, who will receive,
in the aggregate, 2,153,355 shares of Common Stock (assuming a $14.00 initial
public offering price) as a portion
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of the consideration for the sale of their businesses to Condor; and (ii)
founders, consultants and management of Condor, who will own 2,046,645 shares.
These shares have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and, therefore, may not be sold unless
registered under the Securities Act or sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144. The Company's
executive officers and directors and existing stockholders have agreed not to
offer, sell, contract to sell, make any short sale or otherwise dispose of any
shares of Common Stock, options to acquire shares of Common Stock or securities
convertible into or exchangeable for, or any rights to purchase or acquire,
shares of Common Stock during the one-year period following the date of this
Prospectus, without the prior written consent of Volpe Brown Whelan & Company,
LLC. The Company also has agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for, or any rights to purchase or acquire, any shares of
Common Stock during the one-year period following the date of this Prospectus
without the prior written consent of Volpe Brown Whelan & Company, LLC, except
for the granting of options pursuant to the Plan or the issuance of shares of
Common Stock upon the exercise of outstanding options, in connection with
acquisitions or in connection with any conversion of the Restricted Common
Stock. Volpe Brown Whelan & Company, LLC, in its discretion, may waive the
foregoing restrictions in whole or in part, with or without a public
announcement of such action. The Company has agreed to provide piggyback
registration rights with respect to the Common Stock issued to the Founding
Companies and existing Company stockholders. The Company plans to register an
additional 5,000,000 shares of its Common Stock under the Securities Act within
90 days after the closing of this Offering for use by the Company as
consideration for future acquisitions. Upon such registration, these shares
generally will be freely tradable after issuance, unless the resale thereof is
contractually restricted or unless the holders thereof are subject to the
restrictions on resale provided in Rule 145 under the Securities Act. The
piggyback registration rights described above will not apply to the registration
statement to be filed with respect to these 5,000,000 shares. See "Shares
Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
Offering, there has been no public market for the Common Stock and there can be
no assurance that an active trading market will develop and continue subsequent
to this Offering or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price for
the Common Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters and may bear no relationship to the price at
which the Common Stock will trade after this Offering. See "Underwriting" for
the factors to be considered in determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National Market,
subject to official notice of issuance. After this Offering, the market price of
the Common Stock may be subject to significant fluctuations in response to
numerous factors, including variations in the annual or quarterly financial
results of the Company or its competitors, timing of announcements of
acquisitions by the Company or its competitors, changes by financial research
analysts in their recommendations or estimates of the earnings of the Company,
conditions in the economy in general or in the IT service sectors in particular,
announcements of technological innovations or new products or services by the
Company or its competitors, proprietary rights development, unfavorable
publicity or changes in applicable laws and regulations (or judicial or
administrative interpretations thereof) affecting the Company or IT service
sectors. Moreover, from time to time, the stock market experiences significant
price and volume volatility that may affect the market price of the Common Stock
for reasons unrelated to the Company's performance.
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
pro forma combined net tangible book value of their shares of $10.69 per share
(assuming a $14.00 initial public offering price). In the event the Company
issues additional Common Stock in the future, including shares issued in
connection with future acquisitions or pursuant to the earn-out provisions of
the Merger Agreements, purchasers of Common Stock in this Offering may
experience further dilution. See "Dilution."
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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. See "Management--Board
Classification" and "Description of Capital Stock."
UNALLOCATED NET PROCEEDS. A portion of the anticipated net proceeds of this
Offering has not been designated for specific uses. Therefore, the Board of
Directors of the Company will have broad discretion with respect to the use of
the undesignated net proceeds of this Offering. See "Use of Proceeds."
ABSENCE OF DIVIDENDS. The Company intends to retain future net income, if
any, to fund internal growth and to help fund future acquisitions and,
therefore, does not anticipate paying any dividends on its Common Stock in the
foreseeable future. See "Dividend Policy."
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THE COMPANY
The Company was established to create a leading 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 has entered into the Merger Agreements to acquire,
simultaneously with and as a condition to the closing of this Offering, the
eight established IT service providers described below. The Founding Companies
will become 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 will result in cross-selling opportunities and synergies,
foster long-term client relationships with middle market organizations and
minimize the Company's dependence on any single technology or product offering.
The Founding Companies, on a pro forma combined basis, had revenues of
approximately $103.2 million for the year ended December 31, 1996 and
approximately $105.7 million for the nine months ended September 30, 1997.
MANAGEMENT SUPPORT TECHNOLOGY CORP.--MST, a Delaware corporation founded in
1992, provides strategic IT management consulting, systems integration and
project management services to major U.S., European and Asia-Pacific companies
and governmental agencies. By 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 $8.2 million and $5.5 million for the year ended
December 31, 1996 and for the nine months ended September 30, 1997,
respectively. MST had approximately 25 employees as of September 30, 1997 and is
headquartered in Framingham, Massachusetts, with an additional office in Seal
Beach, California.
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.--CHMC, a Pennsylvania
corporation founded in 1972, provides tailored, value-added computer technology
products and services to Fortune 1000 companies, educational institutions and
governmental agencies. CHMC's IT solutions include network design and support,
desktop systems and support, customized help-desk applications and support,
migration consulting and support services, project management services and asset
management services. CHMC maintains business alliances with original equipment
manufacturers ("OEMs") such as Microsoft, Novell, Inc. and IBM. Major clients
include Mack Truck and Aetna/U.S. Healthcare. CHMC had revenues of approximately
$44.7 million and $24.1 million for the year ended February 28, 1997 and for the
six months ended August 31, 1997, respectively. CHMC had approximately 230
employees as of September 30, 1997 and is headquartered in Langhorne,
Pennsylvania, with a sales and support network throughout the mid-Atlantic
region.
FEDERAL COMPUTER CORPORATION--Federal, a Virginia corporation founded in
1982, provides computer products and services to governmental and commercial
entities. 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 and the U.S. Social Security
Administration. Federal had revenues of approximately $26.4 million and $33.3
million for the year ended October 31, 1996 and for the year ended October 31,
1997, respectively. Federal had approximately 43 employees as of September 30,
1997 and is headquartered in Falls Church, Virginia.
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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
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 $4.7 million for the year ended June 30, 1997
and for the three months ended September 30, 1997, respectively. Corporate
Access had approximately 25 employees as of September 30, 1997 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 AMD, Boeing, Motorola,
Pentastar, Citibank, Hughes and USDA. ISSI's products and services have been
provided to over 2,000 customers in 23 countries, representing approximately
150,000 end-users. ISSI had revenues of approximately $9.0 million and $8.4
million, for the year ended December 31, 1996 and for the nine months ended
September 30, 1997, respectively. ISSI had approximately 94 employees as of
September 30, 1997 and is headquartered in Denver, Colorado, with offices in
California, Massachusetts, The Netherlands and Germany.
U.S. COMMUNICATIONS, INC.--USComm, a Maryland corporation founded in 1994,
provides 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 $7.2 million and $6.0 million
for the year ended December 31, 1996 and for the nine months ended September 30,
1997, respectively. USComm had approximately 20 employees as of September 30,
1997 and is 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 and MicroAge. InVenture had revenues of approximately $5.4
million and $3.2 million for the year ended December 31, 1996 and for the nine
months ended September 30, 1997, respectively. InVenture had approximately 33
employees as of September 30, 1997 and is 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
$2.6 million and $3.4 million for the year ended December 31, 1996 and for the
nine months ended September 30, 1997. MIS had approximately 62 employees as of
September 30, 1997, is headquartered in Tulsa, Oklahoma and has six branches in
the mid-and southwestern United States.
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The aggregate consideration being paid by Condor to acquire the Founding
Companies is approximately $79.6 million, consisting of approximately $48.2
million in cash, 2,153,355 shares of Common Stock (based on an initial public
offering price of $14.00 per share) and the assumption of approximately $1.3
million in outstanding indebtedness of the Founding Companies. In order to
maintain the dollar value of the stock consideration as of the closing of this
Offering, the total shares issuable in the Mergers will increase or decrease to
the extent the initial public offering price differs from $14.00 per share. In
addition, pursuant to earn-out arrangements with six of the Founding Companies,
an aggregate of 2,475,952 additional shares may be issued (assuming a stock
price of $14.00 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 $14.00 per
share), and approximately $18.8 million additional cash consideration may be
paid to stockholders of such Founding Companies if such companies achieve
specific earnings thresholds in specified periods following the closing of the
Mergers.
The closing of the Mergers is subject to customary conditions. These
conditions include, among others, the simultaneous closing of this Offering and
the transactions contemplated by the Merger Agreements; the accuracy on the
closing date of the Mergers of the representations and warranties made by the
Founding Companies, their principal stockholders and Condor; the performance of
each of the parties' respective covenants included in the Merger Agreements; the
nonexistence of a material adverse change in the results of operations,
financial condition or business of any of the Founding Companies; and the
execution of employment agreements between the principal executive officers of
each of the Founding Companies and the Company or such Founding Company. There
can be no assurance that the conditions to the closing of all the Mergers will
be satisfied or waived or that each Merger will close. If any of the Merger
Agreements is terminated for any reason, it is likely that the Company will not
close this Offering on the terms described herein.
For additional information regarding the employment agreement to be entered
into by the Company with one of the executive officers of the Founding
Companies, see "Management--Employment Agreements; Covenants-Not-To-Compete."
For a further description of the transactions pursuant to which these businesses
will be acquired, see "Certain Transactions--Organization of the Company."
Condor Technology Solutions, Inc. is a Delaware corporation. Its executive
offices are located at 1650 Tysons Boulevard, Suite 600, McLean, Virginia 22102,
and the Company's telephone number at that address is (703) 847-3290.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,900,000 shares of
Common Stock offered hereby are estimated to be approximately $71.9 million
($83.4 million if the Underwriters' over-allotment option is exercised in full)
at an assumed initial public offering price of $14.00 per share, after deducting
underwriting discounts and commissions and estimated expenses of this Offering.
Of the net proceeds, approximately $48.2 million will be used to pay the
cash portion of the purchase price for the Founding Companies, of which
approximately $9.8 million will be paid directly to Mr. Meador, a stockholder of
a Founding Company who will become an officer, director and holder of more than
5% of the Common Stock of the Company. Additional cash may be used to pay
contingent purchase prices that may be earned over the next three years if the
applicable earnings thresholds of six of the Founding Companies are achieved.
See "Risk Factors--Need for Additional Financing" and "Certain
Transactions--Organization of the Company."
The approximately $23.7 million of remaining net proceeds will be used for
working capital and for general corporate purposes, including future
acquisitions. Pending such uses, the net proceeds will be invested in
short-term, interest-bearing, investment-grade securities.
17
<PAGE>
In addition to the net proceeds of this Offering, the Company will have
approximately $5.6 million in cash and marketable securities on a pro forma
combined basis. The Company has obtained a commitment from a major commercial
bank, subject to a diligence review, for a $30.0 million line of credit to be
used for working capital and other general corporate purposes, including future
acquisitions. There can be no assurance that such line of credit will be
obtained or that, if obtained, it will be on terms that are favorable to the
Company. See "Risk Factors--Need for Additional Financing" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Pro
Forma Combined Liquidity and Capital Resources."
Commonwealth, a Virginia-based merchant banking firm, of which Mr. Coleman,
currently a director of the Company, is a Managing Director, has agreed to
advance to Condor such funds as are necessary to effect the Mergers and this
Offering. The members of Commonwealth are significant stockholders of the
Company. Commonwealth will be reimbursed for these advances out of the proceeds
of this Offering, together with interest on such advances at the prime rate.
Such advances aggregated approximately $1.0 million as of September 30, 1997,
and the Company expects such advances will aggregate approximately $2.2 million
as of the closing of this Offering. See "Certain Transactions--Organization of
the Company" and "Principal Stockholders."
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, in the event the Company is
successful in obtaining one or more lines of credit, it is likely that any such
facility will include restrictions on the ability of the Company to pay
dividends without the consent of the lender.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and current maturities of
long-term debt and the capitalization at September 30, 1997 of the Company (i)
on a pro forma combined basis to give effect to the Mergers; and (ii) as
adjusted to give effect to the Mergers, this Offering and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
"Selected Financial Data," "Use of Proceeds" and the Unaudited Pro Forma
Combined Financial Statements of the Company and the related Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------
PRO FORMA COMBINED AS ADJUSTED
-------------------- -----------
<S> <C> <C>
(IN THOUSANDS)
Short-term debt and current maturities of long-term debt....................... $ 1,183 $ 1,183
------- -----------
------- -----------
Long-term debt, less current maturities........................................ 96 96
------- -----------
Stockholders' equity:
Preferred Stock: $0.01 par value, 1,000,000 shares authorized; none issued
or outstanding........................................................... - -
Common Stock: $0.01 par value, 49,000,000 shares authorized; 4,200,000
shares issued and outstanding, pro forma;
10,100,000 shares issued and outstanding, as adjusted (1)................ 42 101
Additional paid-in capital................................................. 20,123 91,982
Accumulated earnings (deficit)............................................. (831) (831)
------- -----------
Total stockholders' equity............................................. 19,334 91,252
------- -----------
Total capitalization................................................... $ 19,430 $ 91,348
------- -----------
------- -----------
</TABLE>
- ------------------------
(1) Common Stock outstanding includes 2,046,645 shares of Restricted Common
Stock issued to founders, consultants and management of Condor. Excludes (x)
up to an aggregate of 2,475,952 additional shares (assuming a stock price of
$14.00 per share at the time the additional shares are issued) that may be
issued in connection with the Mergers of six Founding Companies pursuant to
certain earn-out provisions if such Founding Companies achieve specified
earnings thresholds; and (y) 912,163 shares of Common Stock issuable upon
exercise of options to be granted by the Company in connection with the
Mergers and this Offering. See "Management--1997 Long-Term Incentive Plan,"
"Certain Transactions--Organization of the Company," "Description of Capital
Stock" and "Shares Eligible for Future Sale."
19
<PAGE>
DILUTION
As of September 30, 1997, the Company had a pro forma combined net tangible
book value of ($39.7) million, or ($9.46) per share of Common Stock. Pro forma
combined net tangible book value per share represents the Company's pro forma
combined total tangible assets less its total liabilities, divided by the number
of shares of Common Stock to be outstanding after giving effect to the Mergers.
After giving effect to the sale of the 5,900,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $14.00, and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company, the Company's as adjusted pro forma combined net
tangible book value as of September 30, 1997 would have been $33.4 million, or
$3.31 per share. This represents an immediate increase in pro forma combined net
tangible book value of approximately $12.77 per share to existing stockholders
and an immediate dilution of approximately $10.69 per share to new investors
purchasing the shares in this Offering. The following table illustrates this pro
forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 14.00
Pro forma combined net tangible book value per share before Offering...... (9.46)
Increase in pro forma combined net tangible book value per share
attributable to Offering.................................................. 12.77
---------
As adjusted pro forma combined net tangible book value per share after
Offering.................................................................. 3.31
---------
Dilution per share to new investors......................................... $ 10.69
---------
---------
</TABLE>
The following table summarizes, on a pro forma combined basis to give effect
to the Mergers as of September 30, 1997, the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and the new investors purchasing shares
of Common Stock from the Company in this Offering:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION (1) AVERAGE
------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders (2)............................ 4,200,000 41.6% $ (31,237,000) (60.8)% $ (7.44 )
New investors........................................ 5,900,000 58.4 82,600,000 160.8 $ 14.00
------------ ----- -------------- -----
Total.............................................. 10,100,000 100.0% $ 51,363,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
- ------------------------
(1) Total consideration for existing stockholders represents the combined
stockholders' equity, including the stockholders' equity of the Founding
Companies, before this Offering, adjusted to reflect the payment of $48.2
million in cash to the stockholders of the Founding Companies as part of the
consideration for the Mergers. See "Use of Proceeds" and "Capitalization."
(2) Excludes up to an aggregate of 2,475,952 shares (assuming a stock price of
$14.00 per share at the time the additional shares are issued) that may be
issued in connection with the Mergers of six Founding Companies pursuant to
certain earn-out provisions if such Founding Companies achieve specified
earnings thresholds. See "Certain Transactions--Organization of the
Company."
The foregoing tables assume no exercise of stock options. As of the closing
of this Offering, the Company will have outstanding 559,663 options issued to
stockholders of the Founding Companies and 352,500 options issued to directors,
employees and consultants of the Company, each of which will be exercisable at a
price per share equal to the initial public offering price.
20
<PAGE>
SELECTED FINANCIAL DATA
Condor will acquire the Founding Companies simultaneously with and as a
condition to the closing of this Offering. In July 1996, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 97 relating to business
combinations immediately prior to an initial public offering. SAB 97 requires
that these combinations be accounted for using the purchase method of
accounting. In accordance with SAB 97, Condor has been identified as the
"accounting acquiror" for financial statement presentation purposes.
The pro forma combined table below presents unaudited pro forma combined
financial data for the Company that give effect to the completion of the Mergers
and certain pro forma adjustments to the historical financial statements
described below and as adjusted to reflect the closing of this Offering and the
application of the estimated net proceeds therefrom. The summary pro forma
combined financial data are not necessarily indicative of the operating results
or financial position that would have been achieved had the events described
been consummated during the periods presented and should not be construed as
representative of the future operating results or financial position of the
Company. See the Unaudited Pro Forma Combined Financial Statements and the
related Notes thereto and the Founding Companies' Historical Financial
Statements and the related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED ----------------------
DECEMBER 31, 1996 1996 1997
----------------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
PRO FORMA COMBINED
STATEMENT OF OPERATIONS DATA (1):
Revenues........................................................ $ 103,202 $ 73,627 $ 105,723
Cost of revenues................................................ 76,384 54,081 80,151
Gross profit.................................................... 26,818 19,546 25,572
Selling, general and administrative expenses (2)................ 19,063 13,177 16,291
Goodwill amortization (3)....................................... 1,827 1,370 1,370
Income from operations.......................................... 5,928 4,999 7,911
Interest and other income, net.................................. 1,119 763 631
Income before income taxes...................................... 7,047 5,762 8,542
Net income (4).................................................. $ 3,393 $ 2,872 $ 4,530
Net income per share............................................ $ 0.42 $ 0.35 $ 0.55
Shares used in computing pro forma net income
per share (5)................................................. 8,171,043 8,171,043 8,171,043
</TABLE>
<TABLE>
<CAPTION>
COMBINED COMPANIES
------------------------
SEPTEMBER 30, 1997
------------------------
PRO FORMA AS
COMBINED ADJUSTED
(6) (7)
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 4,343 $ 28,064
Working capital...................................................... (38,911)(8) 33,007
Total assets......................................................... 91,530 114,012
Long-term debt, net of current maturities............................ 96 96
Stockholders' equity................................................. 19,334 91,252
</TABLE>
- ------------------------
(1) The pro forma combined statement of operations data assume that the Mergers
and this Offering were consummated on January 1, 1996.
(2) The pro forma combined statement of operations data reflect pro forma
reductions in salaries, bonuses and benefits to the stockholders and
management of the Founding Companies that have been agreed to prospectively.
The Compensation Differential amounted to approximately $1,896,000,
21
<PAGE>
$1,422,000 and $3,091,000 for the year ended December 31, 1996 and the nine
months ended September 30, 1996 and 1997, respectively. Additionally, the
pro forma combined statement of operations data reflect the elimination of
the non-recurring compensation charge of $692,000 associated with the
issuance of shares to management of Condor. The Company will record a
non-recurring non-cash compensation charge of approximately $1,639,000 in
the quarter ending December 31, 1997, related to the issuance of common
stock to management, representing the difference between the amount paid for
the shares and the estimated fair value of the shares on date of grant.
(3) Consists of amortization of $57,821,000 of identifiable intangibles and
goodwill to be recorded as a result of the Mergers over a five to 35-year
period and computed on the basis described in the Notes to the Unaudited Pro
Forma Combined Financial Statements.
(4) Assumes all income is subject to an effective corporate income tax rate of
40% and all goodwill is not tax-deductible.
(5) Includes (i) 2,153,355 shares to be issued to the stockholders of the
Founding Companies; (ii) 2,046,645 shares issued to founders, consultants
and management of Condor; and (iii) 3,971,043 of the 5,900,000 shares sold
in this Offering necessary to pay the cash portion of the Merger
consideration, S corporation distributions, underwriting discounts and
commissions and estimated expenses of this Offering.
(6) The pro forma combined and as adjusted balance sheet data assume that the
Mergers were consummated on September 30, 1997.
(7) Adjusted to reflect the sale of the 5,900,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
(8) Includes $48,155,000 payable to the stockholders of the Founding Companies,
representing the cash portion of the Merger consideration to be paid from a
portion of the net proceeds of this Offering.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements of the
Company and the related Notes thereto and the Founding Companies' Historical
Financial Statements and the related Notes thereto appearing elsewhere in this
Prospectus. A number of statements in this Prospectus address activities, events
or developments which the Company anticipates may occur in the future, including
such matters as the Company's strategy for internal growth, additional capital
expenditures (including the amount and nature thereof), acquisitions of assets
and businesses, industry trends and other such matters. These statements are
based on certain assumptions and analyses made by the Company in light of its
perception of historical trends, current business and economic conditions and
expected future developments, as well as other factors the Company believes are
reasonable or appropriate. However, whether actual results and developments will
conform with the Company's expectations and predictions is subject to a number
of risks and uncertainties, including those set forth in "Risk Factors"; general
economic, market or business conditions; the business opportunities (or lack
thereof) that may be presented to and pursued by the Company; changes in laws or
regulations; and other factors, many of which are beyond the control of the
Company. Consequently, there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
INTRODUCTION
Condor 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 has conducted no operations to
date. The Founding Companies will become wholly-owned subsidiaries of the
Company upon the closing of this Offering.
The Company earns revenues from the provision of consulting services, system
services and desktop services. Historically, the Company has generated a
significant portion of its revenues through the resale of third-party hardware
and software as part of its desktop services. The Company's management believes,
however, that consulting and system services will generate an increasing
percentage of its revenues. Revenues from certain desktop services, such as the
procurement and provision of computer hardware and software, are recognized upon
shipment or acceptance of the equipment. The Company recognizes consulting and
system service revenues using formulas based on time and materials, whereby
revenues are recognized as costs are incurred at agreed-upon billing rates. 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.
23
<PAGE>
Selling, general and administrative costs include salaries, benefits,
commissions payable to the Company's sales personnel, marketing and advertising
expenses and administrative costs. The Company expects to incur additional
selling, general and administrative expenses after this Offering, reflecting the
costs of being a public company, increased marketing activities and costs
associated with the Company's acquisition program. The Company expects that such
additional selling, general and administrative expenses will relate primarily to
salaries and benefits payable to senior management, which are expected to
represent over 50% of such incremental costs. Additionally, the incremental
expenses after this Offering are expected to include travel, fees for
professional services, including audit and legal fees, and expenses related to
the Company's Board of Directors. Such incremental expenses are expected to be
offset, however, by reductions in operating expenses primarily as the result of
a consolidation of purchasing relationships among the Founding Companies and
from savings realized by combining insurance, treasury, legal and risk
management functions.
The Founding Companies have been managed throughout the periods presented as
independent private companies and, as such, their results of operations reflect
different corporate and tax structures (S corporations and C corporations) which
have influenced, among other things, their historical levels of owners'
compensation. The owners and key employees of the Founding Companies have agreed
to certain reductions in their salaries, bonuses and benefits in connection with
the organization of the Company. The Compensation Differentials for 1996 and for
the nine months ended September 30, 1997 were $1.9 million and $3.1 million
respectively, and have been reflected as pro forma adjustments in the Unaudited
Pro Forma Combined Statements of Operations. The Unaudited Pro Forma Combined
Statements of Operations include a provision for income tax as if the Company
were taxed as a C corporation.
The Company anticipates that following the Mergers it will realize savings
from (i) greater volume discounts from suppliers; (ii) consolidation of
insurance programs and treasury functions; and (iii) other general and
administrative areas, such as training and advertising. This integration process
may also present opportunities to reduce costs through the elimination of
duplicative functions and through economies of scale, but may necessitate
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration and
facilities expansion. These various costs and possible cost savings may make
historical operating results not comparable to, or indicative of, future
performance. Accordingly, neither the anticipated savings nor the anticipated
costs have been included in the unaudited pro forma financial data presented
herein. There can be no assurance, however, that the Company will achieve any
cost savings.
In July 1996, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 97 relating to business combinations immediately prior to an
initial public offering. SAB 97 requires that these combinations be accounted
for using the purchase method of acquisition accounting. 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 to be acquired totals
approximately $55.3 million and is recorded as goodwill on the Company's balance
sheet. Goodwill will be amortized as a non-cash charge to the income statement
over a period ranging from seven to 35 years. The pro forma impact of this
amortization expense, none of which is deductible for tax purposes, is
approximately $2.3 million per year. See the Notes to the Unaudited Pro Forma
Combined Financial Statements. A total of $5.0 million of the purchase price has
been allocated to in-process research and development and will be expensed upon
the closing of the Mergers. Approximately $2.5 million of the purchase price has
been allocated to internally developed software at a Founding Company and will
be amortized over a period of five years.
24
<PAGE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
The pro forma combined results of operations of the Founding Companies for
the periods presented do not represent combined results of operations presented
in accordance with generally accepted accounting principles, but are only a
summation of the revenues, operating expenses and general and administrative
expenses of the individual Founding Companies on a pro forma basis. The pro
forma combined results may not be comparable to, and may not be indicative of,
the Company's post-combination results of operations because (i) the Founding
Companies were not under common control or management during the periods
presented; (ii) the Company will incur incremental costs related to its new
corporate management and the costs of being a public company; and (iii) the
combined data do not reflect potential benefits and cost savings the Company
expects to realize when operating as a combined entity. The following discussion
should be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements and the related Notes thereto and the Founding Companies' Historical
Financial Statements and the related Notes thereto appearing elsewhere in this
Prospectus.
The following table sets forth the combined results of operations of the
Founding Companies on a pro forma basis and as a percentage of revenues for the
periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1997
-------------------- ---------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues......................................... $ 73,627 100.0% $ 105,723 100.0%
Cost of revenues................................. 54,081 73.5 80,151 75.8
--------- --------- ---------- ---------
Gross profit..................................... 19,546 26.5 25,572 24.2
Selling, general and administrative expenses..... 13,177 17.9 16,291 15.4
Goodwill amortization............................ 1,370 1.9 1,370 1.3
--------- --------- ---------- ---------
Income from operations........................... $ 4,999 6.7% $ 7,911 7.5%
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES. Revenues increased approximately $32.1 million, or 43.7%, from
$73.6 million for the nine months ended September 30, 1996 to $105.7 million for
the nine months ended September 30, 1997. This increase was primarily
attributable to growth in revenues from the provision of IT services and
solutions, predominantly from Federal and CHMC with revenue increases of $20.2
million and $6.8 million, respectively. Revenues from both of these Founding
Companies increased as a result of increased procurement revenues ($22.5
million) and expanded maintenance programs ($3.9 million). Additional increases
in revenues from procurement services of approximately $3.9 million were
generated at two other Founding Companies. Two additional Founding Companies
reported an increase in revenues from the nine months ended September 30, 1996
to the same period in 1997, which were partially offset by a decline in revenues
at MST and InVenture.
COST OF REVENUES. Cost of revenues increased approximately $26.1 million,
or 48.2%, from $54.1 million for the nine months ended September 30, 1996 to
$80.2 million for the nine months ended September 30, 1997, primarily as a
result of the net increase in revenues described above. As a percentage of
revenues, cost of revenues increased from 73.5% for the nine months ended
September 30, 1996 to 75.8% for the nine months ended September 30, 1997,
primarily as a result of lower gross profit margins at Federal resulting from
the deferred recognition of certain revenue to match expected warranty costs
with respect to one of its new hardware contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.1 million, or 23.5%, from $13.2 million for
the nine months ended September 30, 1996 to $16.3 million
25
<PAGE>
for the nine months ended September 30, 1997, due primarily to an increase in
infrastructure needed to support increased volume. As a percentage of revenues,
selling, general and administrative expenses decreased from 17.9% for the nine
months ended September 30, 1996 to 15.4% for the nine months ended September 30,
1997 as the infrastructure costs increased less rapidly than revenues.
INCOME FROM OPERATIONS. Income from operations increased $2.9 million, or
58.3%, from $5.0 million for the nine months ended September 30, 1996 to $7.9
million for the nine months ended September 30, 1997. As a percentage of
revenues, operating income increased from 6.7% for the nine months ended
September 30, 1996 to 7.5% for the nine months ended September 30, 1997. This
change was attributable to the factors discussed above.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that will conduct its operations through
its subsidiaries. Accordingly, the Company's principal sources of liquidity are
the cash flow of its subsidiaries, cash available from lines of credit it may
establish and the unallocated net proceeds of this Offering. After the closing
of the Mergers and this Offering, the Company will have approximately $27.9
million in cash and cash equivalents, approximately $1.3 million in marketable
securities and approximately $1.3 million of indebtedness outstanding (on a pro
forma basis), other than the line of credit discussed below.
The Company has obtained a commitment from a major commercial bank, subject
to a diligence review, for a $30.0 million line of credit. It is anticipated
that the line of credit will require the Company to comply with various loan
covenants including: (i) maintenance of certain financial ratios; (ii)
restrictions on additional indebtedness; (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
and general corporate purposes, including future acquisitions. There can be no
assurance that the Company will obtain such credit facility.
The Company made capital expenditures of approximately $800,000 in 1996 and
approximately $639,000 for the nine months ended September 30, 1997, primarily
for office equipment and computers and facility upgrades. The Company expects to
expend capital to install or upgrade its accounting and management information
systems, to install an internal network and communications system integrating
the Founding Companies and subsequently acquired businesses and to install a
client call center. Management presently anticipates that such expenditures will
total approximately $5.0 million over the next two years; however, no assurance
can be made with respect to the actual timing and amount of such expenditures.
The Company intends to pursue acquisition opportunities. The timing, size or
success of any acquisition effort and the associated potential capital
commitments are unpredictable. The Company expects to fund future acquisitions
primarily through a combination of a portion of the unallocated net proceeds of
this Offering, cash flow from operations and borrowings, including borrowings
under the proposed line of credit, as well as issuances of additional shares of
Common Stock. The Company plans to register an additional 5,000,000 shares of
its Common Stock under the Securities Act after the completion of this Offering
for use as consideration for future acquisitions.
The Company believes that cash flow from operations, borrowings under the
proposed line of credit and the unallocated net proceeds of this Offering will
be sufficient to fund its capital requirements for at least the next 12 months.
To the extent that the Company is successful in consummating acquisitions, it
may be necessary to finance such acquisitions through the issuance of additional
equity securities, incurrence of indebtedness or both.
26
<PAGE>
SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS
The Company has experienced and expects to continue to experience
variability in revenues and net income from quarter to quarter as a result of
seasonality that may accompany private or governmental sector budget cycles.
Sales of the Company's IT products and related services have historically been
concentrated in the third and fourth calendar quarters as a result of patterns
of capital spending by clients, principally 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."
MST--RESULTS OF OPERATIONS
MST provides strategic IT management consulting, systems integration and
project management services to major U.S., European and Asia-Pacific 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
----------------- ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenue..................... $ 3,669 100.0% $ 6,193 100.0% $ 8,211 100.0% $6,452 100.0% $5,509 100.0%
Cost of revenue............. 1,463 39.9 2,415 39.0 3,783 46.1 2,895 44.9 2,934 53.3
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Gross profit................ 2,206 60.1 3,778 61.0 4,428 53.9 3,557 55.1 2,575 46.7
General and administrative
expenses.................. 1,113 30.3 1,606 25.9 2,188 26.6 1,684 26.1 1,453 26.4
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Income from operations...... $ 1,093 29.8% $ 2,172 35.1% $ 2,240 27.3% $1,873 29.0% $1,122 20.4%
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
------- ------- ------- ------- ------- ------- ------ ------ ------ ------
</TABLE>
MST--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUE. Revenue decreased approximately $943,000, or 14.6%, from $6.5
million for the nine months ended September 30, 1996 to $5.5 million for the
same period in 1997. This decrease resulted primarily from the completion of
short term consulting contracts in 1996 that were not renewed or replaced during
the nine months ended September 30, 1997. For the nine months ended September
30,
27
<PAGE>
1996, revenue from CIGNA Property & Casualty (including revenue from The CSN
Company ("CSN"), which was acquired in 1996) ("CIGNA") and Reinsurance Solutions
International ("RSI") accounted for 61% and 24%, respectively, of total revenue.
For the nine months ended September 30, 1997, revenue from CIGNA and RSI
accounted for 64% and 26%, respectively, of total revenue. No other client
accounted for 10% or more of MST's revenue in these periods.
COST OF REVENUE. Cost of revenue increased approximately $39,000, or 1.3%,
from $2.9 million for the nine months ended September 30, 1996 to $2.9 million
for the same period in 1997. The increase resulted from increases in
non-stockholder compensation and consulting fees, partially offset by a
reduction in compensation to MST's chief executive officer (who is also MST's
sole stockholder (see Note 2 to the Notes to MST's Historical Financial
Statements)). Cost of revenue as a percentage of revenue increased from 44.9% in
1996 to 53.3% in 1997, substantially due to the decrease in revenue from the
completion of short term consulting contracts while a portion of MST's fixed
employment and consulting expenses remained stable. Fixed costs primarily
consist of costs related to the employment of consulting professionals, which do
not vary significantly with the profitability of engagements.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by approximately $231,000, or 13.7%, from $1.7 million for the nine
months ended September 30, 1996 as compared to $1.5 million for the same period
in 1997. The decrease resulted from a decrease in MST's discretionary profit
sharing contribution and a reduction in travel related expenses. General and
administrative expenses as a percentage of revenue increased from 26.1% for the
nine months ended September 30, 1996 to 26.4% for the nine months ended
September 30, 1997.
MST--1996 COMPARED TO 1995
REVENUE. Revenue increased approximately $2.0 million, or 32.6%, from $6.2
million in 1995 to $8.2 million in 1996. This increase resulted from contracts
with several new clients as well as from expansion of the work performed at RSI.
In 1995, revenue from CIGNA accounted for 89% of total revenue. In 1996, revenue
from CIGNA and RSI accounted for 61% and 25%, respectively, of total revenue. No
other client accounted for 10% or more of MST's revenue in 1996 or 1995.
COST OF REVENUE. Cost of revenue increased approximately $1.4 million, or
56.6%, from $2.4 million in 1995 to $3.8 million in 1996. Cost of revenue as a
percentage of revenue increased from 39.0% in 1995 to 46.1% in 1996. This
increase was due to a combination of the direct costs associated with increased
revenue, salary increases to attract and retain technical personnel and the
investment associated with hiring additional employees to support the growth in
the level of activity at MST.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $582,000, or 36.2%, from $1.6 million in 1995 to $2.2
million in 1996. This increase was due to additional costs associated with the
growth in MST's business, staff and facilities. General and administrative
expenses as a percentage of revenue increased from 25.9% in 1995 to 26.6% in
1996.
MST--1995 COMPARED TO 1994
REVENUE. Revenue increased approximately $2.5 million, or 68.8%, from $3.7
million in 1994 to $6.2 million in 1995, due to new relationships with
significant clients. Included in the new clients for 1995 were an international
financial services group, an environmental controls group, a gas distribution
company and a number of other clients in the financial services, healthcare and
governmental markets. In 1994, revenue from CIGNA accounted for 93%, of total
revenue. In 1995, revenue from CIGNA accounted for 89% of total revenue. No
other client accounted for 10% or more of MST's revenue in these years.
COST OF REVENUE. Cost of revenue increased approximately $952,000, or
65.1%, from $1.5 million in 1994 to $2.4 million in 1995. This increase was due
to a combination of the direct costs associated with increased revenue, salary
increases to attract and retain technical personnel and the investment
associated
28
<PAGE>
with hiring additional employees to support the growth in the level of activity
at MST. Cost of revenue as a percentage of revenue decreased slightly from 39.9%
in 1994 to 39.0% in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $493,000, or 44.3%, from $1.1 million in 1994 to $1.6
million in 1995. Selling expenses increased with the additional revenue. General
and administrative expenses as a percentage of revenue decreased from 30.3% in
1994 to 25.9% in December 31, 1995. MST was able to generate operating leverage
by maintaining relatively consistent general and administrative expenses with
the increased activity.
CHMC--RESULTS OF OPERATIONS
CHMC provides tailored, value-added computer technology products and
services to Fortune 1000 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:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------------------------------------------- AUGUST 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, --------------------
1995 1996 1997 1996
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues.............................. $ 33,201 100.0% $ 30,808 100.0% $ 44,718 100.0% $ 21,259 100.0%
Cost of revenues...................... 28,044 84.5 26,223 85.1 38,403 85.9 18,438 86.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.......................... 5,157 15.5 4,585 14.9 6,315 14.1 2,821 13.3
Selling, general and administrative
expenses............................ 3,910 11.8 3,844 12.5 4,784 10.7 1,761 8.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations................ $ 1,247 3.8% $ 741 2.4% $ 1,531 3.4% $ 1,060 5.0%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1997
--------------------
<S> <C> <C>
Revenues.............................. $ 24,065 100.0%
Cost of revenues...................... 18,890 78.5
--------- ---------
Gross profit.......................... 5,175 21.5
Selling, general and administrative
expenses............................ 3,794 15.8
--------- ---------
Income from operations................ $ 1,381 5.8%
--------- ---------
--------- ---------
</TABLE>
CHMC--SIX MONTHS ENDED AUGUST 31, 1997 COMPARED TO SIX MONTHS ENDED AUGUST 31,
1996
REVENUES. Revenues increased approximately $2.8 million, or 13.2%, from
$21.3 million for the six months ended August 31, 1996 to $24.1 million for the
six months ended August 31, 1997, respectively. This increase was primarily
attributable to continued expansion of CHMC's services, including procurement,
on-site services, help-desk and project management and other support programs.
Project management work increased over 350% as CHMC was able to introduce and
successfully sell this new service offering to existing clients. CHMC's
help-desk services expanded 74% through the addition of new clients and growth
in the existing client base while procurement services increased as a result of
additional product and service sales to several state governments.
COST OF REVENUES. Cost of revenues increased approximately $452,000, or
2.5%, from $18.4 million for the six months ended August 31, 1996 to $18.9
million for the six months ended August 31, 1997. Cost of revenues as a
percentage of revenues decreased from 86.7% for the six months ended August 31,
1996 to 78.5% for the six months ended August 31, 1997, respectively. This
reduction in costs as a percentage of revenues resulted from expansion of CHMC's
service and project management businesses and product sales to higher margin
clients through targeted sales and marketing programs. CHMC took advantage of
increased competition among suppliers by increasing purchase discounts and also
using suppliers' drop-ship programs to end users. Through enhancements to its
help-desk call accounting system, CHMC was able to increase productivity without
corresponding increases in direct labor costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $2.0 million, or 115.2%, from
$1.8 million for the six months ended August 31, 1996 to $3.8 million for the
six months ended August 31, 1997. These expenses as a percentage of revenues
increased from 8.3% to 15.8% in these periods, primarily as a result of
increases in discretionary management bonuses due to improved earnings, as well
as from increased selling and training costs.
29
<PAGE>
CHMC--1997 COMPARED TO 1996
REVENUES. Revenues increased approximately $13.9 million, or 45.2%, from
$30.8 million for the year ended February 29, 1996 to $44.7 million for the year
ended February 28, 1997. This resulted from increased sales of all services
offered by CHMC, including expansion in maintenance, help-desk and other support
programs, in addition to growth in procurement revenues. CHMC's overall growth
during this period was attributable to additional procurement contracts and
continued development of telesales and on-line configuration and ordering
capabilities.
COST OF REVENUES. Cost of revenues increased approximately $12.2 million,
or 46.4%, from $26.2 million for the year ended February 29, 1996 to $38.4
million for the year ended February 28, 1997. Cost of revenues as a percentage
of revenues remained relatively stable at 85.1% in fiscal 1996 versus 85.9% in
fiscal 1997 . Several factors, all related to CHMC's ongoing efforts in 1997 to
further develop and expand its IT services, increased costs of revenues.
Specifically, CHMC hired additional engineers to support the further development
of its services and increased salaries in order to attract and retain personnel
who can provide the larger scope of services CHMC is offering its clients. The
efficiencies gained through this strategy partially offset the investment made
in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $940,000, or 24.5%, from $3.8
million for the year ended February 29, 1996 to $4.8 million for the year ended
February 28, 1997. This increase was primarily related to additional
discretionary bonuses due to the improved performance of CHMC, increased sales
commissions resulting from CHMC's growth in sales and an overall increase in
management, both in the number of employees and base compensation, in order to
support the increased organization. These expenses as a percentage of revenues
decreased from 12.5% for the year ended February 29, 1996 to 10.7% for the year
ended February 28, 1997.
CHMC--1996 COMPARED TO 1995
REVENUES. Revenues decreased approximately $2.4 million, or 7.2%, from
$33.2 million for the year ended February 28, 1995 to $30.8 million for the year
ended February 29, 1996. This decline was primarily due to a decrease in sales
of desktop support procurement services resulting from the loss of certain
contracts. As described above, CHMC has been transitioning its business toward a
more complete spectrum of desktop support services and chose to establish new
service offerings rather than seek additional procurement contracts.
COST OF REVENUES. Cost of revenues declined approximately $1.8 million, or
6.5%, from $28.0 million for the year ended February 28, 1995 to $26.2 million
for the year ended February 29, 1996, primarily as a result of the decrease in
revenues described above. Cost of revenues as a percentage of revenues was
relatively unchanged at 84.5% for the year ended February 28, 1995 compared to
85.1% for the year ended February 29, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were relatively unchanged at $3.9 million for the year
ended February 28, 1995 compared to $3.8 million for the year ended February 29,
1996. These expenses as a percentage of revenues increased from 11.8% for the
year ended February 28, 1995 to 12.5% for the year ended February 29, 1996.
FEDERAL--RESULTS OF OPERATIONS
Federal 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.
30
<PAGE>
The following table sets forth certain selected financial data for Federal
on an historical basis and as a percentage of revenues for the periods
indicated. The table below includes revenues and related costs generated from
sales of hardware and software as well as sale of maintenance services. Federal
additionally generates revenues through certain agency contracts, consulting
fees from affiliates and other revenues, including interest and dividends. These
other types of revenues are not considered part of Federal's core operations
and, therefore, have not been included in the table.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
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)%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
FEDERAL--1997 COMPARED TO 1996
REVENUES. Revenues increased approximately $6.9 million, or 26.0%, from
$26.4 million for 1996 to $33.3 million for 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 for 1996 to $27.1 million for 1997. Cost of revenues
as a percentage of revenues increased from 72.6% for 1996 to 81.4% for 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 for 1996 to $7.3 million for 1997. As a percentage of revenues,
selling, general and administrative expenses have remained flat at 21.9% for
1996 and 1997. The primary reason for this increase was the incentive
compensation of $2,400,000 paid to Federal's principal shareholders in
accordance with its merger agreement with Condor (see Note 17 to the Federal
Consolidated Financial Statements).
FEDERAL--1996 COMPARED TO 1995
REVENUES. Revenues decreased approximately $19.8 million, or 42.8%, from
$46.2 million in 1995 to $26.4 million in 1996. This decrease was caused
primarily by significant mainframe purchases under unusually large contracts
which ended in 1995.
COST OF REVENUES. Cost of revenues decreased approximately $19.6 million,
or 50.5%, from $38.7 million in 1995 to $19.2 million in 1996. Cost of revenues
as a percentage of revenues decreased from 83.9% in 1995 to 72.6% in 1996. The
overall decrease in costs was caused primarily by the decrease in revenues as
described above. The decrease in cost of revenues as a percentage of revenues
was due to a decrease in the costs of mainframe computers in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $1.8 million, or 24.0%, from
$7.6 million in 1995 to $5.8 million in 1996, due mainly to the decrease in
revenues discussed above. As a percentage of revenues, selling, general and
administrative expenses increased from 16.5% in 1995 to 21.9% in 1996. This
percentage increase resulted from significant bid and proposal expenses incurred
by Federal during 1996 in an effort to win new business.
31
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1996 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues.................................................... $ 3,931 100.0% $ 4,747 100.0%
Cost of revenues............................................ 3,311 84.2% 4,118 86.7%
--------- --------- --------- ---------
Gross profit................................................ 620 15.8% 629 13.3%
Selling, general and administrative expenses................ 387 9.8% 466 9.8%
--------- --------- --------- ---------
Income (loss) from operations............................... $ 233 5.9% $ 163 3.4%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Corporate Access recognizes revenues from product sales when the related
product is shipped. There are no post-sales support obligations related to
Corporate Access's product sales. Cost of revenues is comprised of purchased
materials, inventory adjustments, purchase discounts and direct labor and
benefits. Selling, general and administrative expenses include salaries,
benefits, commissions payable to Corporate Access's sales personnel, marketing
and advertising expenses and administrative costs.
CORPORATE ACCESS--THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER
30, 1996
REVENUES. Revenues increased approximately $816,000, or 20.8%, from $3.9
million for the three months ended September 30, 1996 to $4.7 million for the
three months ended September 30, 1997, primarily due to an increase in volume
which can be attributed to greater market penetration through a larger sales
force.
COST OF REVENUES. Cost of revenues increased approximately $807,000, or
24.4%, from $3.3 million for the three months ended September 30, 1996 to $4.1
million for the three months ended September 30, 1997. As a percentage of
revenues, cost of revenues increased from 84.2% in the 1996 period to 86.7% in
the 1997 period. The overall increase in cost of revenues was attributable to an
increase in sales volume. The increase in cost of revenues as a percentage of
revenues from the 1996 period to the 1997 period was the result of a lower
margin sales mix in the 1997 period compared to the same period in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $79,000, or 20.4%, from $387,000
for the three months ended September 30, 1996 to $466,000 for the three months
ended September 30, 1997. As a percentage of revenues, selling, general and
administrative expenses remained constant at 9.8%. The change was primarily due
to increased sales volume coupled with costs associated with hiring and training
additional salespersons.
ISSI--RESULTS OF OPERATIONS
ISSI develops end-user software solutions and tools for information access,
data management and report writing.
32
<PAGE>
The following table sets forth certain selected financial data for ISSI on
an historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPT. 30,
---------------------------------------------------------------- ---------
1994 1995 1996 1996
-------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues..................................... $ 5,729 100.0% $ 6,610 100.0% $ 9,028 100.0% $ 6,655
Cost of revenues............................. 1,297 22.6 2,010 30.4 1,482 16.4 1,120
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................. 4,432 77.4 4,600 69.6 7,546 83.6 5,535
Selling, general and administrative
expenses................................... 3,315 57.9 4,453 67.4 4,557 50.5 3,144
Research and development..................... 1,018 17.8 804 12.2 766 8.5 522
--------- --------- --------- --------- --------- --------- ---------
Income from operations....................... $ 99 1.7% $ (657) -9.9% $ 2,223 24.6% $ 1,869
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1997
--------------------
<S> <C> <C> <C>
Revenues..................................... 100.0% $ 8,360 100.0%
Cost of revenues............................. 16.8 1,224 14.6
--------- --------- ---------
Gross profit................................. 83.2 7,136 85.4
Selling, general and administrative
expenses................................... 47.2 3,979 47.6
Research and development..................... 7.8 933 11.2
--------- --------- ---------
Income from operations....................... 28.2% $ 2,224 26.6%
--------- --------- ---------
--------- --------- ---------
</TABLE>
ISSI--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues increased approximately $1.7 million, or 25.6%, from
$6.7 million for the nine months ended September 30, 1996 to $8.4 million for
the nine months ended September 30, 1997. This increase reflected the impact of
ISSI's continuing maintenance revenues as well as an approximately 43% increase
in revenues from the sale of licenses for ISSI's products and related "first
year" maintenance. The maintenance revenues increase annually as ISSI retains
approximately 85% of its maintenance clients and begins maintenance contracts
for those clients who purchased software during the year. The increases in
license revenues resulted primarily from increased sales at ISSI's European
subsidiary and through additional sales to a major value added reseller.
COST OF REVENUES. Cost of revenues increased approximately $104,000, or
9.3%, from $1.1 million for the nine months ended September 30, 1996 to $1.2
million for the nine months ended September 30, 1997. Cost of revenues as a
percentage of revenues decreased from 16.8% for the nine months ended September
30, 1996 to 14.6% for the same period in 1997. This decrease was primarily due
to increased average selling prices for software licenses sold to a major value
added reseller.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $835,000, or 26.6%, from $3.1
million for the nine months ended September 30, 1996 to $4.0 million for the
nine months ended September 30, 1997. This increase in total costs resulted from
increased levels of business, although a portion of the additional business
resulted from maintenance income, which has a relatively lower level of
associated selling expenses. In addition, ISSI has had higher costs associated
with travel to client sites with value-added resellers to obtain new work.
Selling, general and administrative expenses remained relatively consistent as a
percentage of revenues at 47.2% for the nine months ended September 30, 1996 and
47.6% for the nine months ended September 30, 1997.
RESEARCH AND DEVELOPMENT. Research and development costs increased
approximately $411,000, or 78.7%, from $522,000 for the nine months ended
September 30, 1996 to $933,000 for the nine months ended September 30, 1997.
This increase was primarily due to expenditures, including the addition of 11
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
33
<PAGE>
remaining increase was attributable primarily to the impact of a larger
installed base on maintenance revenues.
COST OF REVENUES. Cost of revenues decreased $528,000, or 26.3%, from $2.0
million in 1995 to $1.5 million in 1996. Cost of revenues as a percentage of
revenues was 30.4% in 1995 and 16.4% in 1996. This decrease was caused primarily
by a non-recurring charge in 1995, when management determined that there was no
future value to be obtained from certain capitalized software costs. These costs
were written off in 1995, thereby increasing cost of sales. The decrease in cost
of revenues as a percentage of revenues was caused primarily by lower costs
associated with the portion of the increased revenues in 1996 that consisted of
maintenance revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $104,000, or 2.3%, from $4.5
million in 1995 to $4.6 million in 1996. This increase in total costs reflected
the increased level of revenues.
RESEARCH AND DEVELOPMENT. Research and development costs were relatively
unchanged at $804,000 in 1995 and $766,000 in 1996.
ISSI--1995 COMPARED TO 1994
REVENUES. Revenues increased approximately $881,000, or 15.4%, from $5.7
million in 1994 to $6.6 million in 1995. This revenue growth was primarily the
result of expansion of ISSI's client base through development of relationships
with new value added resellers.
COST OF REVENUES. Cost of revenues increased approximately $713,000, or
55.0%, from $1.3 million in 1994 to $2.0 million in 1995. Cost of revenues as a
percentage of revenues increased from 22.6% in 1994 to 30.4% in 1995. This
change was caused primarily by the unusual charge related to the write-off of
software development costs in 1995 described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $1.1 million, or 34.3%, from
$3.3 million in 1994 to $4.5 million in 1995. A portion of this increase was
consistent with selling costs associated with a higher level of revenues.
Additionally, ISSI added staff in anticipation of engineering, support and sales
requests from its new value added resellers and expensed all of its investment
in its new European subsidiary in its first year of existence. As a percentage
of revenues, selling, general and administrative expenses increased from 57.9%
in 1994 to 67.4% in 1995.
RESEARCH AND DEVELOPMENT. Research and development costs decreased
approximately $214,000, or 21%, from $1.0 million in 1994 to $804,000 in 1995.
This decrease was due to the the termination by ISSI of in-house development of
a graphical user interface tool in light of its purchase of base technology for
the same purpose, allowing for a quicker and more complete roll-out of the
product. The total number of engineers working on this technology decreased from
1994 to 1995.
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.
34
<PAGE>
The following table sets forth certain selected financial data for USComm on
an historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues.............................................. $ 7,215 100.0% $ 4,740 100.0% $ 6,024 100.0%
Cost of revenues...................................... 6,574 91.1 4,293 90.6 5,611 93.1
--------- --------- --------- --------- --------- ---------
Gross profit.......................................... 641 8.9 447 9.4 413 6.9
Selling, general and administrative expenses.......... 475 6.6 336 7.1 367 6.1
--------- --------- --------- --------- --------- ---------
Income from operations................................ $ 166 2.3% $ 111 2.3% $ 46 .8%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
USCOMM--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues increased approximately $1.3 million, or 27.1%, from
$4.7 million for the nine months ended September 30, 1996 to $6.0 million for
the nine months ended September 30, 1997, primarily due to significant new
contracts that enabled USComm to qualify as a general vendor for municipalities
in Maryland, thereby facilitating additional direct sales to local, state and
federal agencies and departments.
COST OF REVENUES. Cost of revenues increased approximately $1.3 million, or
30.7%, from $4.3 million for the nine months ended September 30, 1996 to $5.6
million for the nine months ended September 30, 1997. As a percentage of
revenues, cost of revenues increased from 90.6% to 93.1%. This overall increase
in cost of revenues was caused primarily by increased sales volume. Several
other factors related to USComm's ongoing efforts to further develop and expand
IT service offerings, such as increased hiring of additional technical
engineers, contributed to the increase in cost of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $31,000, or 9.2%, from $336,000
for the nine months ended September 30, 1996 to $367,000 for the nine months
ended September 30, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 7.1% to 6.1% in these periods. USComm was
able to generate operating leverage by maintaining relatively consistent general
and administrative expenses despite the increased activity.
INVENTURE--RESULTS OF OPERATIONS
InVenture 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:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues....................................................... $ 5,416 100.0% $ 4,253 100.0% $ 3,210 100.0%
Cost of revenues............................................... 3,948 72.9 3,165 74.4 1,603 49.8
--------- --------- --------- --------- --------- ---------
Gross profit................................................... 1,468 27.1 1,088 25.6 1,607 50.1
Selling, general and administrative expenses................... 1,464 27.0 1,028 24.2 1,378 42.9
--------- --------- --------- --------- --------- ---------
Income from operations......................................... $ 4 0.1% $ 60 1.4% $ 229 7.1%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
35
<PAGE>
INVENTURE--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
REVENUES. Revenues decreased approximately $1.0 million, or 24.5%, from
$4.3 million for the nine months ended September 30, 1996 to $3.2 million for
the nine months ended September 30, 1997, primarily due to InVenture's intended
reduction in the provision of collateral marketing services and materials to a
business mix containing a higher level of marketing and strategic planning
services. This strategy generated a lower revenue stream, but a higher gross
margin for InVenture.
COST OF REVENUES. Cost of revenues decreased approximately $1.6 million, or
49.4%, from $3.2 million for the first nine months ended September 30, 1996 to
$1.6 million for the nine months ended September 30, 1997. As a percentage of
revenues, cost of revenues decreased from 74.4% in the 1996 period to 49.8% in
the 1997 period. The decrease in cost of revenues was primarily attributable to
decreased sales volume in addition to a change in the mix of services as
described above. The decrease in cost of revenues as a percentage of revenues
resulted from a higher level of strategic planning services relative to lower
margin service lines in the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $350,000, or 34%, from $1.0
million for the nine months ended September 30, 1996 to $1.4 million for the
nine months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 24.2% in the 1996 period to
42.9% in the 1997 period. This increase was due to salary increases resulting
from the hiring of additional and/or different skill type employees to support
the expansion of services provided by InVenture to a wider range of clients. In
addition, the diversification of clients and services resulted in much higher
travel and telecommunications costs related to the sales effort.
MIS--RESULTS OF OPERATIONS
MIS recruits highly skilled IT consultants and professionals on both a
permanent and contract staffing basis.
The following table sets forth certain selected financial data for MIS on an
historical basis and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------------------------
1996 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues....................................................... $ 2,582 100.0% $ 1,895 100.0% $ 3,387 100.0%
Cost of revenues............................................... 1,426 55.2 1,213 64.0 1,841 54.4
--------- --------- --------- --------- --------- ---------
Gross profit................................................... 1,156 44.8 682 36.0 1,546 45.6
Selling, general and administrative expenses................... 1,150 44.6 592 31.2 1,347 39.8
--------- --------- --------- --------- --------- ---------
Income from operations......................................... $ 6 0.2% $ 90 4.8% $ 199 5.8%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
36
<PAGE>
MIS TECHNOLOGIES, INC.--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
SEPTEMBER 30, 1996
REVENUES. Revenues increased approximately $1.4 million, or 78.7%, from
$1.9 million for the nine months ended September 30, 1996 to $3.3 million for
the nine months ended September 30, 1997, primarily due to MIS expanding its
client base and volume for both temporary and permanent placements.
COST OF REVENUES. Cost of revenues increased approximately $628,000, or
51.8%, from $1.2 million for the nine months ended September 30, 1996 to $1.8
million for the nine months ended September 30, 1997. As a percentage of
revenues, cost of revenues decreased from 64.0% to 54.4%, which was attributable
to MIS utilizing a greater number of higher cost outsourced contract personnel
during the 1996 period compared to the 1997 period, during which time MIS was
able to staff projects with its own employees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $755,000, or 127.5%, from
$592,000 for the nine months ended September 30, 1996 to $1.3 million for the
nine months ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expenses increased from 31.2% to 39.8% during these
periods. This increase in selling, general and administrative expenses as a
percentage of revenues was due to the expansion of MIS's infrastructure in order
to support the continued growth of the business.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," provides a new fair-value-based method of
accounting for employee stock options or similar equity instruments; however,
this statement allows companies to continue to utilize the intrinsic-value-based
measure of accounting prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"). Companies electing to remain with the accounting method provided
in APB No. 25 must make pro forma disclosures of net income and net earnings per
share as if the fair value method of accounting had been applied. In the future,
the Company will provide pro forma disclosure of net income and net income per
share, as applicable, in its notes to consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which will be effective for fiscal periods ending
after December 15, 1997. SFAS No. 128 simplifies the standards required under
current accounting rules for computing earnings per share and replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share ("basic EPS") and diluted
earnings per share ("diluted EPS"). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted EPS under current accounting
principles. The Company will implement SFAS 128 during the fourth quarter of
1997.
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.
37
<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 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 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. In addition, the Company will seek to
deliver comprehensive IT offerings to the financial services, healthcare,
technology and governmental markets. These markets are typically characterized
by (i) reliance on legacy systems; (ii) platform migration to client/server
architectures; (iii) changing competitive dynamics, such as globalization and
deregulation; and (iv) heavy dependency on database and proprietary
applications. The Company believes that middle market organizations in these
industry groups have been underserved by large IT vendors which, due to economic
and high cost structures, cannot address the requirements of the middle market
adequately. The Company intends to market its services through each of the sales
forces at the Founding Companies as well as through the Company's corporate
sales force. This approach will allow the Company to market its services
independently or in combination to provide a solution to a client's specific IT
needs.
The Company provides IT services through 24 offices located in 11 states
across the United States and in two foreign countries. As of September 30, 1997,
the Company had approximately 532 employees, including approximately 345
technical professionals. 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.
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
38
<PAGE>
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 offerings, from planning and consulting to development, integration and
installation of IT systems to desktop services. This broad range of offerings
will enable clients to use 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 offerings. The Company
believes that its expertise in providing IT services, industry experience,
client relationships, geographic reach and size will enable it to capitalize on
the anticipated continued growth of the IT needs of middle market organizations.
STRATEGY
The Company's objective is to be a leading provider of IT offerings to
middle market organizations with a focus on select vertical markets. Key
elements of the Company's strategy are presented below.
LEVERAGE CONSULTING SERVICES. The Company intends to leverage its
high-level planning and strategic consulting services to 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
39
<PAGE>
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 can increase its
revenues from existing clients by cross-selling its services. Each of the
Founding Companies specializes in certain areas of the IT service market.
Consolidation of these companies enables the Company to offer a single source
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 offerings to existing
clients.
SECURE FULL-SERVICE CONTRACTS. The Company believes the broader range of IT
services and geographic coverage available from the combination of the Founding
Companies will allow it to become a single-source provider of IT services. 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 SERVICE OFFERINGS AND GEOGRAPHIC REACH. The Company plans to expand
its service offerings and add new businesses in order to offer new and existing
clients access to a more complete range of services. The Company intends to
expand its service offerings by addressing emerging technologies, including
web-based systems, Internet, intranet and object-oriented development systems.
The Company also plans to expand its geographic reach based on its clients'
needs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
IMPLEMENT DECENTRALIZED MANAGEMENT PHILOSOPHY; ACHIEVE CENTRAL OPERATING
EFFICIENCIES. The Company intends to operate with a decentralized management
structure to provide superior client service and a motivating environment for
its various subsidiaries. The Company anticipates that finance, accounting,
management information systems, treasury, employee benefits and certain
purchasing arrangements will be managed or provided on a centralized basis. The
Founding Companies and 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 will offer owners of acquisition
candidates significant opportunities to enhance the growth of their businesses;
(ii) its decentralized operating strategy; (iii) the Company's increased
visibility and access to financial resources as a public company; and (iv) the
potential for the owners of the business being acquired to participate in
40
<PAGE>
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.
<TABLE>
<S> <C> <C> <C> <C>
Consulting Services System Services Desktop Services
- IT NEEDS ANALYSIS - CLIENT/SERVER - HARDWARE AND
- TECHNOLOGY DEVELOPMENT AND SOFTWARE PROCUREMENT
INFRASTRUCTURE DESIGN INTEGRATION - SYSTEMS MAINTENANCE
- FUTURE TECHNOLOGY - LAN/WAN DESIGN AND AND SUPPORT
PLANNING AND REFRESHMENT IMPLEMENTATION - HARDWARE AND
- SYSTEMS ARCHITECTURE - PROJECT MANAGEMENT AND SOFTWARE MAINTENANCE
DEVELOPMENT RESOURCE PLANNING - HELP-DESK OPERATIONS
- DECISION SUPPORT - HARDWARE AND SOFTWARE - SYSTEMS TESTING AND
PLANNING AND ANALYSIS SELECTION ENGINEERING
- BUSINESS PROCESS - INFORMATION ACCESS
REENGINEERING SOFTWARE DESIGN AND
- YEAR 2000 PLANNING AND IMPLEMENTATION
CONSULTING - SOFTWARE APPLICATION
- STRATEGIC MARKETING DESIGN AND DEVELOPMENT
SERVICES - CONTRACT STAFFING AND
RECRUITING
- TRAINING AND CONTINUING
EDUCATION
- CONFIGURATION, TESTING
AND INSTALLATION
</TABLE>
CONSULTING SERVICES
STRATEGIC PLANNING AND MANAGEMENT CONSULTING. The Company's technical
professionals provide strategic planning and management consulting to senior
management, typically through a client's chief executive officer, chief
financial officer or chief information officer. These services involve the
development of long-term technology plans that help the client to achieve
specific strategic business objectives and include IT needs analysis, technology
infrastructure design, future technology planning and refreshment, systems
architecture development, decision support planning and analysis, business
process automation and Year 2000 planning and consulting. The Company's ability
to perform such strategic consulting services gives it the opportunity to
deliver "follow-on" services to implement its recommended technology strategies.
STRATEGIC MARKETING PROGRAM DEVELOPMENT AND IMPLEMENTATION. The Company
also creates and executes strategic marketing programs for resellers and
manufacturers of software and hardware products. These programs include a wide
range of marketing related services, including marketing strategies,
41
<PAGE>
corporate identity programs, creative development, merchandising programs,
publications, web site development, direct mail, advertising and event planning.
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
uses these recruiting services to fulfill its internal personnel requirements.
TRAINING AND CONTINUING EDUCATION. The Company offers IT training through
its training facility in Annapolis, Maryland. The facility, a Microsoft
Authorized Technical Education Center, focuses on Microsoft NT certification
courses. The Company's services also include skills assessment, interactive
learning solutions at the desktop and courseware. The Company intends to expand
its training capabilities, using the Annapolis facility and programs as a model.
The Company also will use these training facilities to fulfill its internal
training requirements.
DESKTOP SERVICES
SYSTEMS MAINTENANCE AND SUPPORT. The Company provides a complete array of
desktop systems maintenance and support services to its clients, including
hardware and software maintenance, help-desk operations and systems testing and
engineering. These services, which are provided both on-site and on a remote
basis, allow clients to make efficient use of their technology tools by
minimizing network disruptions and downtime through the Company's rapid response
to applications inquiries.
PROCUREMENT. The Company resells hardware and software as part of its
desktop services. The Company maintains a dedicated procurement infrastructure
to manage the acquisition process through purchasing arrangements with
distributors, aggregators and manufacturers. The Company 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: 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.
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<PAGE>
The following table shows selected clients, categorized by industry group,
and Alliance Partners for which the Company has provided services in the past 12
months. The clients listed below are intended to convey the breadth and depth of
the Company's client relationships, and represent a sampling of the primary
industries in which the Company has a strong client base. While these clients
generally represent the largest of the Company's clients, the Company has over
200 active clients.
<TABLE>
<CAPTION>
TECHNOLOGY FINANCIAL SERVICES ALLIANCE PARTNERS
- -------------------------------- -------------------------------- ------------------------
<S> <C> <C>
CIC Systems CIGNA Property & Baan
Digital Equipment Casualty Computer Associates
Hewlett-Packard Fidelity Investments EDS
Hyperion Software Reinsurance Solutions IBM Executive
IBM International Services ISSC
PictureTel State Street Bank OTHER
Texas Instruments GOVERNMENT Mack Truck
XLSource Internal Revenue Service Town & Country
HEALTHCARE U.S. Customs Service Wheelabrator
Boston University Hospital U.S. Department of Defense
CIGNA Property & Casualty U.S. Department of Justice
McNeil Consumer Products
US Healthcare
</TABLE>
For the year ended December 31, 1996, the Company's top 10 clients accounted
for 46.4% of the Company's pro forma combined revenues. No single client
accounted for 10% of the Company's pro forma combined revenues, except for the
U.S. Customs Service, which accounted for 10.8% of the Company's pro forma
combined revenues. On a pro forma combined basis, the Company generated revenues
of over $1 million from approximately 20 of its clients in 1996.
SALES AND MARKETING
The Company's marketing efforts focus on middle market organizations, which
the Company believes typically spend from $2 million to $30 million annually on
their IT needs. In addition, the Company targets the financial services,
healthcare, technology and governmental markets.
The Company intends to focus its sales and marketing efforts around four
principal goals: (i) continuing to expand the existing sales and marketing
efforts of the Founding Companies; (ii) cross-selling the complementary service
capabilities of the Founding Companies and any subsequently acquired companies
across the Company's client base; (iii) leveraging the experience and reputation
of the Company's senior management to secure middle market, IT service contracts
in the $10 million to $50 million range; and (iv) establishing Condor as a
nationally recognized, full-service provider of IT services.
As of September 30, 1997, the Company had approximately 85 sales and
marketing personnel. The Company intends to market its services through each of
the sales forces at the Founding Companies as well as through the Company's
corporate sales force. This approach will allow the Company to market its
services independently or in combination to provide a solution to a client's
specific IT needs. The senior executives of the Founding Companies have
historically been the primary sales and marketing leaders at such companies and
will continue to provide this leadership. The Company intends to add sales and
marketing personnel to assist senior executives in increasing the number of new
clients and the amount of business generated from existing clients.
The Company generates sales leads through referrals from clients and
management consultants, responses to requests for proposals, strategic alliances
with complementary companies, the Company's Internet web sites and associated
links, industry seminars, trade shows, direct telephone and mail campaigns and
advertisements in trade journals. In addition, the Company intends to leverage
the experience and reputation of its senior management team within the IT
service industry. The Company
43
<PAGE>
also intends to retain senior industry consultants to assist in identifying,
marketing and securing large IT service contracts with middle market
organizations.
The Company intends to expand its marketing efforts by coordinating the
Founding Companies' responses to requests for proposals from current clients. In
addition, the Company believes it has a significant opportunity to cross-sell
its IT offerings to its existing client base. Historically, MST, which provides
strategic planning and management consulting at the most senior levels of an
organization, outsourced or partnered with other IT service providers in order
to provide the resources to implement the technology programs it had developed.
The implementation of such technology programs has generated revenues for other
IT service providers that generally exceeded the revenues derived by MST in
providing its services. As a result of the formation of the Company, MST will be
able to offer its clients a wider range of IT services and solutions and capture
revenue opportunities created by its strategic planning and consulting practice.
The Company's senior management intends to work directly with the Founding
Companies to assist them in identifying and coordinating opportunities to
cross-sell additional services.
The Company intends to implement marketing and advertising campaigns to
establish the Company as a leading provider of IT offerings to middle market
organizations. The Company believes these efforts will help it obtain new
clients and attract and retain employees.
COMPETITION
The market for the Company's services is highly competitive. The Company's
competitors vary in size and in the scope of the products and services that they
offer. Primary competitors generally include consulting and systems 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 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.
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<PAGE>
HUMAN RESOURCES
The Company's success depends in large part upon its ability to attract,
develop, motivate and retain highly-skilled technical employees. The Company
dedicates significant resources to employee recruitment and employs multiple
recruiting methods, such as maintaining a presence at local and regional
technical colleges, newspaper and technical periodical classified advertising,
participation in national and regional job fair networks and the establishment
of employee referral incentive programs. The Company maintains a staff of 10
full-time recruiters. The Company plans to supplement its internal recruiting
efforts by using the resources of its contract staffing business, including
access to a database of qualified technical professionals. Qualified technical
employees are in great demand and are likely to remain a limited resource for
the foreseeable future. Candidates are typically screened through detailed
interviews by the Company's recruiting personnel, technical interviews by
consultants and an appraisal by the Company's managers.
The Company has developed programs to help train, motivate and retain its
employees. For example, the Company intends to implement a performance-based
incentive compensation program. The Company also intends to develop training
programs to guide technical personnel continually through a progression of skill
and competency development programs. As another incentive measure, the Company
plans to issue options to its employees under the Plan. Most importantly, in
addition to formal programs, the Company plans to maintain an environment that
fosters creativity and recognizes technical excellence.
The Company is dependent upon its ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet the
staffing requirements of its clients and the Company's own personnel needs.
Competition for individuals with proven technical skills is intense. There can
be no assurance the Company will be able to recruit or retain the technical
personnel necessary to execute its business and growth strategy.
As of September 30, 1997, the Company employed approximately 532 employees,
of whom approximately 345 were technical personnel. None of the Company's
employees is represented by a collective bargaining agreement. Although most
consultants are Company employees, the Company does engage consultants as
independent contractors from time to time. The Company considers relations with
its employees to be good.
FACILITIES
The Company's headquarters are located in McLean, Virginia. In addition to
its headquarters, the Company leases office space and warehouse space as
follows:
<TABLE>
<CAPTION>
LOCATION TYPE
- ----------------------------- --------------------------------------
<S> <C>
Allentown, PA Warehouses
Annapolis, MD Office/Training Center/Warehouse
Andover, MA Office/Warehouse
Boston, MA Office
Dallas, TX Office
Denver, CO Office
Falls Church, VA Office
Framingham, MA Office
Hanover, Germany Office
Joplin, MO Office
Langhorne, PA Office/Warehouse
Lincoln, NE Office
Oklahoma City, OK Office
Pittsburgh, PA Office
San Jose, CA Office
Scottsdale, AZ Office
Seal Beach, CA Office
St. Louis, MO Office
Tulsa, OK Office
Utrecht, The Netherlands Office
Vienna, VA Warehouse
</TABLE>
45
<PAGE>
The leases expire at various times between 1997 and 2004. The aggregate
square footage for all of the Company's offices and warehouses is 113,677 square
feet.
Corporate Access leases property in Andover, Massachusetts that is owned by
Corpac II Realty Trust, of which Richard T. Marino, the President of Corporate
Access, is a trustee. The lease provides for monthly rentals of approximately
$7,600. The Company believes that the rent for such property does not exceed the
fair market rental thereof. See "Certain Transactions" and the Notes to the
Founding Companies' Historical Financial Statements for information regarding
lease obligations.
The Company has entered into a lease agreement, dated August 1, 1997 and as
amended on December 12, 1997, with Tysons II Development Co. Limited Partnership
for 4,121 square feet of leased space at its corporate headquarters located at
1650 Tysons Boulevard, Suite 600, McLean, Virginia. Under the agreement, which
expires on July 31, 2007, subject to a five-year renewal option, the Company is
responsible for annual rental payments totaling approximately $144,600.
LEGAL PROCEEDINGS
In the course of Condor's consolidation efforts, Condor negotiated with
Emtec, Inc. ("Emtec"), an IT service company based in Pennsylvania, with a view
to Emtec becoming one of the Founding Companies. As part of this process,
Emtec's investment banker and Commonwealth executed two confidentiality
agreements pursuant to which each agreed, among other things, not to disclose
certain confidential information and Commonwealth agreed that Condor would not
acquire two companies to be introduced to it by Emtec's investment banker for a
period of two years without such investment banker's prior written consent. On
October 28, 1997, Emtec filed a Complaint in the United States District Court
for the Eastern District of Pennsylvania against Condor, Commonwealth, J.
Marshall Coleman and Kennard F. Hill alleging breach of contract, tortious
interference with Emtec's business relationship with Corporate Access and CHMC
and misappropriation of a trade secret arising out of the participation of CHMC
and Corporate Access in the consolidation and initial public offering without
Emtec's consent. In connection with the three causes of action, Emtec seeks an
injunction restraining Condor and Commonwealth from engaging in any business
transaction with CHMC or Corporate Access through May 13, 1999, demands that the
defendants disgorge the financial benefits that they have and will obtain as a
result of their breach of contract and seeks compensatory and punitive damages.
On December 31, 1997, the defendants filed an Answer, denying the allegations
and asserting various affirmative defenses. 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 condition 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.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and other information
concerning those persons who currently are or who will be directors and
executive officers of the Company upon the closing of this Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------- --------- -----------------------------------------------------
<S> <C> <C>
Kennard F. Hill.................................. 57 Chairman of the Board (1) and Chief Executive Officer
C. Lawrence Meador............................... 51 Vice Chairman of the Board (1)
Daniel J. Roche.................................. 35 President (1) and Chief Operating Officer
William J. Caragol, Jr........................... 30 Vice President-Finance
J. Marshall Coleman.............................. 55 Director (2)
Peter T. Garahan................................. 51 Director (1)
William E. Hummel................................ 35 Director (1)
Edward J. Mathias................................ 56 Director (1)
William M. Newport............................... 62 Director (1)
</TABLE>
- ------------------------
(1) Appointment will become effective upon the closing of this Offering.
(2) Effective upon the closing of this Offering, Mr. Coleman will resign as a
director of the Company.
Kennard F. Hill has been President, Chief Executive Officer and a director
of the Company since January 1997. He will resign as President and become
Chairman of the Board of the Company effective upon the closing of this
Offering. Mr. Hill was Group President at I-NET, Inc., a network computing and
systems integration services company, from September 1995 to December 1996. From
June 1993 to June 1995, Mr. Hill was President and Chief Executive Officer of
Insource Technology, Inc., an IT consulting firm. From June 1992 to June 1993,
Mr. Hill was a private consultant on client/server acquisition strategy in the
healthcare industry. From 1988 to July 1992, Mr. Hill was Chief Executive
Officer of DataLine Inc., a data processing and IT firm. From 1968 to 1988, Mr.
Hill was employed by Electronic Data Systems Corporation, a full-service IT
provider ("EDS"). He served as President of General Motors-EDS for North America
from 1985 to 1988. At EDS, Mr. Hill also served as chief of the Healthcare
Division, having previously served as its Director of Sales. Mr. Hill also was
an officer of EDS's Federal Corp. subsidiary and a director of its National
Heritage Insurance Corp. subsidiary, which provides healthcare underwriting for
lower-income policyholders. In December 1994, Mr. Hill filed a voluntary
petition in bankruptcy in order to discharge indebtedness arising out of his
divorce and several partnerships in which he was a limited partner. The
bankruptcy was discharged in January 1996. Mr. Hill attended the University of
Texas and served two tours of duty as a United States Army pilot in Vietnam.
C. Lawrence Meador will become Vice Chairman of the Board of Directors of
the Company and Chief Executive Officer of MST effective upon the closing of
this Offering. Mr. Meador is the founder and has been the President of MST, a
Founding Company, since 1992. Since January 1996, Mr. Meador has served, under
an MST contract, as the Chief Information Officer of CIGNA Property and
Casualty, an insurance company. All fees payable by CIGNA Property and Casualty
in connection with Mr. Meador's services as the Chief Information Officer of
CIGNA Property and Casualty are payable to MST. Mr. Meador has also been on the
academic staff of the Massachusetts Institute of Technology for over 20 years,
during which period he was a consultant to numerous international Fortune 1000
companies, governmental bodies and other organizations. Mr. Meador received a
bachelor of science degree from the University of Texas and masters degrees in
management and mechanical engineering from the Massachusetts Institute of
Technology.
Daniel J. Roche became Chief Operating Officer of the Company effective
October 27, 1997 and will become President of the Company effective upon the
closing of this Offering. Mr. Roche previously served as the Chief Operating
Officer and Executive Vice President of BSG, an IT service division of Medaphis
47
<PAGE>
Corp. that focuses on client/server and network technologies. From 1991 to May
1996, Mr. Roche was the 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' 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. has been Vice President-Finance of the Company and
Chief Financial Officer of MST since October 1997. Prior to joining Condor, he
was a Senior Manager in the High Technology Service Group of Deloitte & Touche
LLP, which he joined in 1989. As a member of the High Technology Service Group,
Mr. Caragol provided comprehensive accounting services to publicly-held U.S.
corporations in the technology sector. Mr. Caragol is a Certified Public
Accountant and is a member of the American Institute of Certified Public
Accountants. He received a bachelor of science degree in accounting and business
administration from Washington & Lee University.
J. Marshall Coleman has been Chairman of the Board and a director of the
Company since August 1996. He will resign as Chairman of the Board and as a
director of the Company effective upon the closing of this Offering. Mr. Coleman
is also currently Chairman of the Board of Fortress Group, a public U.S.
homebuilding company. Mr. Coleman also serves as Managing Director of
Commonwealth, a Virginia-based merchant banking firm. From August 1992 through
April 1996, Mr. Coleman was an attorney with Katten Muchin & Zavis, a national
law firm, and was the Managing Partner of its Washington office from 1994 until
April 1996. From 1985 until 1992, Mr. Coleman was an attorney at the Washington,
D.C. law firm of Arent, Fox, Kintner, Plotkin and Kahn. Mr. Coleman was Attorney
General of Virginia from 1978 to 1982. In 1975, Mr. Coleman was elected to the
Virginia State Senate. In 1972, Mr. Coleman was elected to the Virginia House of
Delegates and also served as a United States Magistrate from 1970 to 1972. Mr.
Coleman received bachelor of arts and juris doctor degrees from the University
of Virginia. He is a veteran of the United States Marine Corps, having served as
an officer in Vietnam.
Peter T. Garahan will become a director of the Company effective upon the
closing of this Offering. Mr. Garahan has been a principal of The Ryegate Group,
a strategic and financing consulting firm, since January 1997. From March 1995
to December 1996, Mr. Garahan was Executive Vice President - Sales and Marketing
of Mitchell International, an IT company servicing the automotive industry and a
subsidiary of the Thomson Corporation, a major publishing and information
company. 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.
William E. Hummel will become a director of the Company effective upon the
closing of this Offering. 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.
Edward J. Mathias will become a director of the Company effective upon the
closing of this Offering. Mr. Mathias has been a Managing Director of The
Carlyle Group, a Washington, D.C.-based merchant
48
<PAGE>
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, Sirrom Capital and PathoGenesis.
William M. Newport will become a director of the Company effective upon the
closing of this Offering. Mr. Newport has been a Director and Chairman of the
Audit Committee of the Corporation for National Research Initiatives, an
independent non-profit research and development organization, since 1990. Mr.
Newport has also been a non-executive Director of Ovum Holdings plc, a privately
held London based consulting firm specializing in communications and IT, since
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 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
Effective upon the closing of this Offering, the Board of Directors will be
divided into three classes of two directors each, with directors serving
staggered three-year terms, expiring at the annual meeting of stockholders in
1998, 1999 and 2000, respectively. See "Description of Capital Stock." At each
annual meeting of stockholders, one class of directors will be elected for a
full term of three years to succeed that class of directors whose terms are
expiring. Directors whose terms expire in 1998 are Messrs. Garahan and Meador;
the directors whose terms expire in 1999 are Messrs. Mathias and Hummel; and the
directors whose terms expire in 2000 are Messrs. Newport and Hill.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee, effective upon the closing of this Offering. The Audit Committee will
review the results and scope of the audit and other services provided by the
Company's independent accountants and will consist of Messrs. Newport and
Mathias. The Compensation Committee will approve salaries and certain incentive
compensation for management and key employees of the Company, will administer
the 1997 Long-Term Incentive Plan and will consist of Messrs. Garahan and
Mathias.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries will receive an
annual retainer fee of $5,000. In addition, under the Company's 1997 Long-Term
Incentive Plan, each person serving or who has agreed to serve as a non-employee
director at the commencement of this Offering will be granted automatically an
option to acquire 10,000 shares of Common Stock, and thereafter each person who
becomes a non-employee director will be granted automatically an initial option
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.
49
<PAGE>
EXECUTIVE COMPENSATION
Condor was incorporated in August 1996 and has conducted no operations and
did not pay any of its executive officers compensation during 1996. 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 $0
</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 this Offering and $300,000 after the closing of this
Offering. Mr. Hill also will participate in the bonus program to be established
by the Company in the same manner as the other executives as described below. A
trust, of which Mr. Hill is a trustee, acquired 190,032 shares of the Common
Stock and Mr. Hill will be granted options to purchase 100,000 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 after January 2, 1998 (Renewal Periods included), he will
receive severance pay equal to 100% of his base salary for the period of time
that would have been remaining in the initial term or any Renewal Period of his
employment agreement, as the case may be.
Each of Messrs. Meador, Roche and Caragol will enter or has entered into an
employment agreement with the Company providing for an annual base salary of
$431,815, $220,000 and $110,000, respectively, and a bonus to be determined
annually in accordance with an annual bonus program of the Company for senior
executives, which bonus shall be contingent upon the achievement of certain
corporate and/or individual performance goals established by the Compensation
Committee. Mr. Meador's agreement provides that he shall be paid a special bonus
equal to 1% of the total purchase price or total investment for any acquisition
or joint venture by the Company that Mr. Meador identifies and in which he
assists in the closing thereof. Mr. Meador's employment agreement will be
effective as of the closing of this Offering for a term of three years. Mr.
Caragol's employment agreement was effective as of November 1, 1997 for a term
of three years. Mr. Roche's employment agreement was effective as of October 27,
1997 for a term of three years. Effective as of the expiration of each such
initial term and as of each anniversary date thereof, the term shall be extended
automatically for an additional 12-month period on the same terms and conditions
existing at the time of renewal unless, not later than two months prior to each
such respective date, either party shall have given notice to the other party
that the term shall not be so extended.
Each of these agreements will provide that, in the event of a termination of
employment by the Company without cause (other than upon the death or disability
of the employee) or by the employee for good reason (including (i) a material
breach by the Company of the compensation and benefits provisions set forth in
the agreement; (ii) a material breach by the Company of any other term of the
agreement; (iii) except in the case of Mr. Hill, a notice of termination by such
employee following a Change of Control of the Company, as defined in the
agreement; (iv) except in the case of Mr. Hill, a material diminution in the
employee's duties or responsibilities, as defined under the agreement; or (v) in
the case of Mr. Meador,
50
<PAGE>
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 108,402 shares of
the Company's Common Stock. In addition, options to purchase 75,000 shares of
the Company's Common Stock will be granted to Mr. Roche. See "--1997 Long-Term
Incentive Plan."
Each of the aforementioned employees will also be entitled to coverage under
the group medical care, disability and life insurance benefit plans or
arrangements in which such employee is participating at the time of termination,
for the continuation of the Severance Period, provided such employee does not
have comparable substitute coverage from another employer. Each employment
agreement contains a covenant-not-to-compete with the Company without the prior
approval of the Board of Directors of the Company. The covenant-not-to-compete
is in effect during the period of employment, as well as during the Severance
Period, if applicable. In the case of Mr. Meador, the covenant-not-to-compete is
in effect initially for a period of four years from the closing of this Offering
and remains in effect thereafter during his employment period. In the event Mr.
Meador is terminated by the Company without cause or he resigns for good reason,
the Company must continue to pay him his base salary in order to keep the
covenant-not-to-compete in effect beyond the Severance Period.
1997 LONG-TERM INCENTIVE PLAN
In July 1997, the Board of Directors and the Company's stockholders approved
the Company's 1997 Long-Term Incentive Plan, which was amended in November 1997
(as amended, the "Plan"). The purpose of the Plan is to provide a means by which
the Company can attract and retain executive officers, key employees, directors,
consultants and other service providers and to compensate such persons in a way
that provides additional incentives and enables such persons to increase their
ownership interests in the Company. Individual awards under the Plan may take
the form of one or more of: (i) either incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs");
(iii) restricted or deferred stock; (iv) dividend equivalents; (v) bonus shares
and awards in lieu of Company obligations to pay cash compensation; and (vi)
other awards the value of which is based in whole or in part upon the value of
the Common Stock.
The Plan will generally be administered by a committee (the "Committee"),
which will initially be the Compensation Committee of the Board, except that the
Board will itself perform the Committee's functions under the Plan for purposes
of grants of awards to non-employee directors, and may perform any other
function of the Committee as well. The Committee generally is empowered to
select the individuals who will receive awards and the terms and conditions of
those awards, including exercise prices for options and other exercisable
awards, vesting and forfeiture conditions (if any), performance conditions, the
extent to which awards may be transferable and periods during which awards will
remain outstanding. Awards may be settled in cash, shares, other awards or other
property, as determined by the Committee.
The maximum number of shares of Common Stock that may be subject to
outstanding awards under the Plan at any time may not exceed 12% of the
aggregate number of shares of Common Stock outstanding, minus the number of
shares previously issued pursuant to awards granted under the Plan. The number
of shares deliverable upon exercise of ISOs is limited to 1,000,000. The Plan
also provides that no participant may be granted in any calendar year (i)
options or SARs exercisable for more than 400,000 shares; or (ii) other awards
that may be settled by delivery of more than 200,000 shares, and limits payments
under cash-settled awards in any calendar year to an amount equal to the fair
market value of that number of shares as of the date of grant or the date of
settlement of the award, whichever is greater.
In addition to authorizing grants of awards to any eligible person in the
discretion of the Committee, the Plan authorizes automatic grants of NQSOs to
non-employee directors. Under these provisions, each
51
<PAGE>
person serving or who has agreed to serve as a non-employee director at the
commencement of this Offering will be granted an initial option to acquire
10,000 shares, and thereafter each person who 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 this 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 this Offering
may be altered by the Board of Directors. These options will have an exercise
price equal to the fair market value of Common Stock on the date of grant (in
the case of options granted in connection with this Offering, the exercise price
will be the initial public offering price per share in this Offering), and the
options will expire at the earlier of 10 years after the date of grant or one
year after the date the participant ceases to serve as a director of the Company
for any reason, and generally will become exercisable one year after the date of
grant, except that an option may be forfeited upon a participant's termination
of service as a director for reasons other than death or disability if the date
of termination is less than 11 months after the date of grant.
In connection with this Offering, in addition to the options to be
automatically granted to non-employee directors, options in the form of NQSOs to
purchase a total of 262,500 shares of Common Stock of the Company will be
granted to executive officers of the Company as follows: 100,000 shares to Mr.
Hill, 75,000 shares to Mr. Roche and 37,500 shares to Mr. Caragol. In addition,
options to purchase 649,663 shares will be granted to directors of the Company
and other employees of the Company and to employees of the Founding Companies in
connection with this Offering. Each of the foregoing options will have an
exercise price equal to the initial public offering price per share in this
Offering, and will vest as to 33% each on the date that is 12 months, 24 months
and 36 months after the date of closing of this Offering. Unvested options
generally will be forfeited upon a 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.
In connection with the Mergers, the Company will assume options to acquire
shares of common stock of certain of the Founding Companies which, following the
Mergers, will constitute options to purchase an aggregate of 64,970 shares of
Common Stock at an exercise price equal to the initial public offering price per
share. The other terms of such options will be the same as the terms of the
options described in the preceding paragraph.
The Company generally will be entitled to a tax deduction equal to the
amount of compensation realized by a participant through awards under the Plan,
except (i) no deduction is permitted in connection with ISOs if the participant
holds the shares acquired upon exercise for the required holding periods; and
(ii) deductions for some awards could be limited under the $1.0 million
deductibility cap of Section 162(m) of the Internal Revenue Code. This
limitation, however, should not apply to awards granted under the Plan during a
grace period of approximately three years following this Offering, and should
not apply to certain options, SARs and performance-based awards granted
thereafter if the Company complies with certain requirements under Section
162(m).
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted. The
number of shares reserved or deliverable under the Plan, the annual
per-participant limits, the number of shares subject to options automatically
granted to non-employee directors and the number of shares subject to
outstanding awards are subject to adjustment in the event of stock splits, stock
dividends and other extraordinary corporate events.
52
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Condor was formed in August 1996. Condor was initially capitalized by
Commonwealth, a Virginia-based merchant banking firm, of which J. Marshall
Coleman, currently a director of the Company, is a Managing Director. In
connection with the organization of the Company, Commonwealth acquired 1,310,271
shares of Common Stock in exchange for consulting, financial advisory and
capital raising services provided by Commonwealth to Condor and Commonwealth's
commitment to provide the funds necessary to effect the Mergers and this
Offering. These shares were distributed to the members of Commonwealth, Mr.
Coleman, James J. Martell, Jr. and Charles F. Smith, in November 1997.
Commonwealth will be reimbursed for the funds advanced by it to the Company out
of the proceeds of this Offering, together with interest on such advances at the
prime rate. Such advances aggregated approximately $1.0 million as of September
30, 1997, and the Company expects such advances will aggregate approximately
$2.2 million as of the closing of this Offering.
Simultaneously with the closing of this Offering, Condor will acquire by
merger all of the issued and outstanding stock of the eight Founding Companies,
at which time each Founding Company will become a wholly owned subsidiary of the
Company. The aggregate consideration to be paid by Condor in the Mergers
consists of (i) approximately $48.2 million in cash; (ii) 2,153,355 shares
(based on an assumed initial public offering price of $14.00 per share) of
Common Stock, for an aggregate value of approximately $30.1 million; and (iii)
approximately $1.3 million of indebtedness of the Founding Companies to be
assumed by the Company. The Company also will assume options to purchase shares
of common stock of certain of the Founding Companies which, following the
Mergers, will constitute options to purchase an aggregate of 64,970 shares of
Common Stock of the Company. See "Management--1997 Long-Term Incentive Plan."
The consideration to be paid for the Founding Companies was determined
through arm's-length negotiations between Condor and the representatives of each
Founding Company. The factors considered by the Company in determining the
consideration to be paid included, among others, the historical operating
results, the net worth, the amount and type of indebtedness and the future
prospects of the Founding Companies. Each Founding Company was represented by
independent counsel in the negotiation of the terms and conditions of the
Mergers. Immediately prior to the Mergers, one of the Founding Companies will
repurchase certain shares held by a minority stockholder for $2.0 million and
distribute $1.0 million to its stockholders and another Founding Company will
distribute $4.0 million to certain stockholders.
The aggregate consideration to be paid by Condor for each of the Founding
Companies is as follows:
<TABLE>
<CAPTION>
COMMON STOCK(1)
--------------------------- DEBT
FOUNDING COMPANY NUMBER DOLLAR VALUE CASH ASSUMED TOTAL
- --------------------------------------- ------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
MST (2)................................ 560,714 $ 7,850,000 $ 9,750,000 $ 550,000 $ 18,150,000
CHMC (3)............................... 135,714 1,900,000 17,861,000 200,000 19,961,000
Federal (4)............................ 535,714 7,500,000 7,500,000 15,000,000
Corporate Access (5)................... 196,214 2,747,000 5,494,000 8,241,000
ISSI (6)............................... 500,000 7,000,000 5,000,000 28,000 12,028,000
USComm (7)............................. 42,857 600,000 600,000 130,000 1,330,000
InVenture (8).......................... 53,571 750,000 750,000 1,500,000
MIS (9)................................ 128,571 1,800,000 1,200,000 371,000 3,371,000
------------ ------------- ------------- ------------ -------------
Total.................................. 2,153,355 $ 30,147,000 $ 48,155,000 $ 1,279,000 $ 79,581,000
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
</TABLE>
- ------------------------
(1) Based on an assumed initial public offering price of $14.00 per share. In
order to maintain the dollar value of the stock consideration as of the
closing of this Offering, the total shares issuable in the Mergers will
increase or decrease to the extent the initial public offering price differs
from $14.00 per share.
53
<PAGE>
(2) Pursuant to an earn-out, contingent consideration of up to $8,400,000 may be
paid, $2,520,000 of which would be paid in cash and the remainder of which
would be paid in Common Stock, depending on MST's pre-tax income in 1998,
1999 and 2000.
(3) Includes an estimated $761,000 of additional cash consideration pursuant to
an agreed book value at closing as set forth in the Merger Agreement.
(4) Pursuant to an earn-out, contingent consideration of up to $9,000,000 may be
paid, $3,150,000 of which would be paid in cash and the remainder of which
would be paid in Common Stock, depending on Federal's pre-tax income in 1998
and 1999.
(5) Includes an estimated $441,000 of additional consideration apportioned
two-thirds cash and one-third stock pursuant to the purchase price
adjustment set forth in the Merger Agreement.
(6) Pursuant to an earn-out, contingent consideration of up to $14,000,000 may
be paid, $4,200,000 of which would be paid in cash and the remainder of
which would be paid in Common Stock, depending on ISSI's pre-tax income in
1998 and 1999.
(7) Pursuant to an earn-out, contingent consideration of up to $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.
(8) 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.
(9) Pursuant to an earn-out, contingent consideration of up to $5,500,000 may be
paid, $2,200,000 of which would be paid in cash and the remainder of which
would be paid in Common Stock, depending on MIS's pre-tax income in 1998 and
1999.
The closing of the Mergers is subject to customary conditions. These
conditions include, among others, the simultaneous closing of this Offering and
the transactions contemplated by the Merger Agreements; the accuracy on the
closing date of the Mergers of the representations and warranties made by the
Founding Companies, their principal stockholders and Condor; the performance of
each of the parties' respective covenants included in the Merger Agreements; the
nonexistence of a material adverse change in the results of operations,
financial condition or business of any of the Founding Companies; and the
execution of employment agreements between the principal executive officers of
each of the Founding Companies and the Company or such Founding Company. There
can be no assurance that the conditions to the Mergers will be satisfied or
waived or that the Merger Agreements will not be terminated prior to
consummation. If any of the Merger Agreements is terminated for any reason, it
is likely that the Company will not close this Offering on the terms described
herein.
Each of the stockholders of the Founding Companies has agreed not to compete
with the Company for four years, commencing on the date of the closing of this
Offering.
In connection with the Merger of MST into the Company, and as consideration
for his interest in MST, Mr. Meador, who will be an executive officer, director
and holder of more than 5% of the outstanding shares of Common Stock of the
Company upon the closing of this Offering, will receive 560,714 shares of Common
Stock and approximately $9.8 million in cash.
OTHER TRANSACTIONS
One of the Founding Companies, CHMC, has a financing arrangement that has
been personally guaranteed by certain of its stockholders. At September 30,
1997, the aggregate amount of CHMC's current financing that was subject to
personal guarantees was approximately $2.2 million. The Company intends to use
its best efforts to have the personal guarantees on such financing arrangements
released within 120 days after the closing of this Offering.
During 1995 and 1996, MST paid approximately $86,000 and $245,000 in
consulting fees to two companies that have directors in common with MST under
arm's-length terms. During the nine months
54
<PAGE>
ended September 30, 1996 and 1997, MST paid approximately $154,000 and $61,000,
respectively, to these companies.
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 Condor. In addition, in November 1996, Messrs.
Horner and Wright acquired 54,201 and 13,550 shares of Common Stock,
respectively, subject to a repurchase option, as further consideration for
consulting, financial advisory and related services provided by each of them to
Condor, and Condor agreed to grant each options to purchase 40,651 shares of
Common Stock (each, an "Option") upon the successful completion of this
Offering. On August 21, 1997, Mr. Horner and Commonwealth agreed to modify Mr.
Horner's arrangement as follows: (i) Mr. Horner resigned from the Board of
Directors effective as of July 31, 1997; (ii) the parties agreed that the
$15,000 monthly payments will continue until the closing of this Offering and
that, after the closing, the Company will enter into a consulting agreement with
Mr. Horner at a rate of $15,000 per month for a one-year term; and (iii) Mr.
Horner relinquished his Option in exchange for a cash payment of $50,000 at the
closing of this Offering. Also on August 21, 1997, Commonwealth and Mr. Wright
agreed to modify his arrangement as follows: (i) Mr. Wright resigned from the
Board of Directors effective as of July 31, 1997; (ii) the $10,000 monthly
payments will continue until the closing of this Offering; (iii) Mr. Wright
relinquished his Option; and (iv) Mr. Wright acquired an additional 20,325
shares of Common Stock as consideration for the foregoing and additional
consulting, financial advisory and related services provided by him.
COMPANY POLICY
The Company expects that, in the future, any transactions between officers,
directors or holders of more than 5% of the Common Stock will be minimal and
will be approved by a majority of the disinterested members of the Board of
Directors.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company, after giving effect to the Mergers
and this Offering, by (i) each person known to beneficially own more than 5% of
the outstanding shares of Common Stock; (ii) each of the Company's directors and
persons who have consented to be named as directors ("named directors"); (iii)
each named executive officer; and (iv) all executive officers, directors and
named directors as a group. All persons listed have an address in care of the
Company's principal executive offices and have sole voting and investment power
with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES TO BE
BENEFICIALLY
OWNED AFTER OFFERING
-----------------------
<S> <C> <C>
NAME NUMBER PERCENT
- ----------------------------------------------------------------------------------------- ---------- -----------
Kennard F. Hill (1)(2)................................................................... 190,032 1.9%
C. Lawrence Meador (3)................................................................... 560,714 5.6
Daniel J. Roche (1)(4)................................................................... 152,025 1.5
William J. Caragol, Jr. (1)(5)........................................................... 9,502 *
J. Marshall Coleman (1)(6)(7)............................................................ 408,253 4.0
Peter T. Garahan (7)..................................................................... -- *
William E. Hummel (3).................................................................... 89,286 *
Edward J. Mathias (1)(7)................................................................. 28,505 *
William M. Newport (7)................................................................... -- *
All executive officers, directors and
named directors as a group (9 persons)................................................. 1,415,542 14.0%
</TABLE>
- ------------------------
* less than 1.0%
(1) All of these shares are shares of Restricted Common Stock having 0.2 of a
vote per share. See "Description of Capital Stock."
(2) All of these shares are owned of record by the Hill-Craft Irrevocable Family
Trust, of which Mr. Hill and his spouse, Shirley Craft, are trustees and
share voting power and investment power with respect to such shares. Does
not include 100,000 shares issuable in connection with options that are not
exercisable within 60 days of the date hereof.
(3) Based on an assumed initial public offering price of $14.00 per share.
(4) Does not include 75,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(5) Does not include 37,500 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
(6) An aggregate of 58,221 of these shares are owned of record by Mr. Coleman's
spouse.
(7) Does not include 10,000 shares issuable in connection with options that are
not exercisable within 60 days of the date hereof.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 49,000,000 shares of
Common Stock, par value $.01 per share, of which 5,000,000 are shares of
Restricted Common Stock, par value $.01 per share, and 1,000,000 shares of
undesignated preferred stock, par value $.01 per share ("Preferred Stock").
After giving effect to the Mergers and this Offering, the Company will have
10,100,000 outstanding shares of Common Stock (including 2,046,645 shares of
Restricted Common Stock) and no shares of Preferred Stock. See "Shares Eligible
for Future Sale."
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and By-Laws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following is
qualified in its entirety by reference thereto.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Except
as otherwise required by law, upon the closing of the initial public offering of
the Common Stock, holders of shares of Restricted Common Stock shall be entitled
to 0.9 of a vote for each share held on matters on which holders of Common Stock
are entitled to vote. The holders of Restricted Common Stock shall have no right
to vote separately as a class except as specifically required by law. Subject to
the rights of any then outstanding shares of Preferred Stock, the holders of
Common Stock and Restricted Common Stock are entitled to share ratably such
dividends as may be declared in the discretion of the Board of Directors out of
funds legally available therefor. See "Dividend Policy." The holders of Common
Stock and the holders of Restricted Common Stock are entitled to share ratably
in the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of any Preferred Stock
then outstanding. The holders of Common Stock and the holders of Restricted
Common Stock have no preemptive rights to purchase shares of stock of the
Company. Shares of Common Stock and Restricted Common Stock are not subject to
any redemption provisions and are not convertible into any other securities of
the Company, except as provided in the following paragraph. All outstanding
shares of Common Stock and Restricted Common Stock are, and the shares of Common
Stock to be issued pursuant to this Offering will be upon payment therefor,
fully-paid and non-assessable.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of a share of
Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners or a transfer to a related party of
such holder (as defined in Sections 267, 707, 318 and/or 4946 of the Internal
Revenue Code of 1986)); (ii) in the event following the closing of this
Offering, any person acquires beneficial ownership of 15% or more of the
outstanding shares of Common Stock of the Company; or (iii) in the event
following the closing of this Offering, any person or group of persons acting in
concert offers to acquire 15% or more of the outstanding shares of Common Stock
of the Company. After December 1, 1998, the Company may elect to convert any
outstanding shares of Restricted Common Stock into shares of Common Stock in the
event 80% or more of the outstanding shares of Restricted Stock have been
previously converted into shares of Common Stock.
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "CNDR." The
Restricted Common Stock will not be quoted on the Nasdaq National Market.
57
<PAGE>
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Certificate of
Incorporation and limitations prescribed by law, the Board of Directors is
expressly authorized to adopt resolutions to issue the shares, to fix the number
of shares and to change the number of shares constituting any series and to
provide for or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, including dividend rights (and whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any series of the Preferred Stock, in each case without
any further action or vote by the stockholders. The Company has no current plans
to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
Upon consummation of this Offering, the Company will be subject to the
provisions of Section 203 ("Section 203") of the DGCL. Section 203 provides,
with certain exceptions, that a Delaware corporation may not engage in any of a
broad range of business combinations with a person or an affiliate or associate
of such person, who is an "interested stockholder" for a period of three years
from the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction is commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (a) by persons who are directors and officers and (b) by employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (x) the owner of 15% or
more of the outstanding voting stock of the corporation or (y) an affiliate or
associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
The provisions of Section 203 could delay or frustrate a change in control
of the Company, deny stockholders the receipt of a premium on their Common Stock
and have an adverse effect on the Common Stock. The provisions also could
discourage, impede or prevent a merger or tender offer, even if such event would
be favorable to the interests of stockholders. The Company's stockholders, by
adopting an amendment to the Certificate of Incorporation, may elect not to be
governed by Section 203, which election would be effective 12 months after such
adoption.
58
<PAGE>
LIMITATION ON DIRECTORS' LIABILITIES
LIMITATION ON LIABILITY. Pursuant to the Certificate of Incorporation and
as permitted by Section 102(b)(7) of the DGCL, directors of the Company are not
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty, except for liability in connection with a breach of duty of
loyalty, for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, for dividend payments or stock
repurchases that are illegal under Delaware law or for any transaction in which
a director has derived an improper personal benefit.
INDEMNIFICATION. To the maximum extent permitted by law, the Certificate of
Incorporation 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 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.
59
<PAGE>
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must be accompanied by each proposed
nominee's written consent and contain the name, address and principal occupation
of each proposed nominee. Such notice must also contain the total number of
shares of capital stock of the Company that will be voted for each of the
proposed nominees, the number of shares of each class of capital stock of the
Company beneficially owned by such person and other information that may be
required under the proxy rules of the Commission. Such notice must also contain
the name and address of the notifying stockholder and the number of shares of
capital stock of the Company owned by the notifying stockholder.
Although the Company's By-Laws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's By-Laws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular meeting if the proper procedures are not followed; or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Mergers and completion of this Offering, the
Company will have outstanding 10,100,000 shares of Common Stock. The 5,900,000
shares sold in this Offering (plus any additional shares sold upon exercise of
the Underwriters' over-allotment option) will be freely tradable without
restriction unless acquired by affiliates of the Company. Upon completion of
this Offering, the holders of Common Stock who did not purchase shares in this
Offering will own 4,200,000 shares of Common Stock, including (i) the
stockholders of the Founding Companies, who will receive, in the aggregate,
2,153,355 shares of Common Stock (assuming a $14.00 initial public offering
price) as a portion of the consideration for the sale of their businesses to
Condor; and (ii) founders, consultants and management of Condor, who will own
2,046,645 shares. These shares have not been registered under the Securities
Act, which means that they may be resold publicly only upon registration under
the Securities Act or in compliance with an exemption from the registration
requirements of the Securities Act, including the exemption provided by Rule 144
thereunder.
In general, under Rule 144, if one year has elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
from any affiliate of the Company, the acquiror or subsequent holder thereof may
sell, within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of the Common Stock, or the average weekly trading
volume of the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of the proposed sale is sent
to the Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
any affiliate of the Company, a person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements.
Subject to the following paragraph, the Company's executive officers and
directors and existing stockholders have agreed not to offer, sell, contract to
sell, make any short sale or otherwise dispose of any shares of Common Stock,
options to acquire shares of Common Stock or securities convertible into or
exchangeable for, or any rights to purchase or acquire, shares of Common Stock
during the one-year period following the date of this Prospectus, without the
prior written consent of Volpe Brown Whelan & Company, LLC. The Company also has
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exchangeable for, or any
rights to purchase or acquire, any shares of Common Stock during the one-year
period following the date of this Prospectus without the prior written consent
of Volpe Brown Whelan & Company, LLC, except for the granting of options
pursuant to the Plan or the issuance of shares of Common Stock upon the exercise
of outstanding options, in connection with acquisitions or in connection with
any conversion of the Restricted Common Stock. Volpe Brown Whelan & Company,
LLC, in its discretion, may waive the foregoing restrictions in whole or in
part, with or without a public announcement of such action.
In connection with the Mergers, the Company has agreed to provide piggyback
registration rights with respect to the Common Stock issued to the stockholders
of the Founding Companies and 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 stockholders.
Within 90 days after the closing of this Offering, the Company intends to
register 5,000,000 shares of its Common Stock under the Securities Act for use
by the Company in connection with future acquisitions. Upon such registration,
these shares will generally be freely tradable after their issuance unless
acquired by
61
<PAGE>
parties to the transaction or affiliates thereof, other than the issuer, in
which case they may be sold pursuant to Rule 145 under the Securities Act. Rule
145 permits, in part, such persons to resell immediately securities acquired in
transactions covered under the Rule, provided such securities are resold in
accordance with the public information requirements, volume limitations and
manner of sale requirements of Rule 144. If a period of one year has elapsed
since the date such securities were acquired in such transaction and if the
issuer meets the public information requirements of Rule 144, Rule 145 permits a
person who is not an affiliate of the issuer to freely resell such securities.
In some instances, the Company may contractually restrict the sale of shares
issued in connection with future acquisitions. The piggyback registration rights
described above do not apply to the registration statement relating to these
5,000,000 shares.
In addition to the shares described above, 12% of the aggregate shares of
Common Stock outstanding from time to time have been reserved for issuance upon
exercise of options that may be granted under the Plan. The Company intends to
file one or more registration statements on Form S-8 under the Securities Act
with respect to such shares of Common Stock, including shares of Common Stock
underlying options to be assumed by the Company in connection with the Mergers.
Shares of Common Stock covered by such registration statements will be freely
tradable by holders who are not affiliates of the Company and, subject to the
volume and other limitations of Rule 144, by holders who are affiliates of the
Company.
Prior to this Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price for
the Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale, of substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the ability of the
Company to raise equity capital in the future.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the underwriters named below (the
"Underwriters"), and each of such Underwriters, for whom Volpe Brown Whelan &
Company, LLC, Furman Selz LLC and Wheat, First Securities, Inc. (collectively,
the "Representatives") are acting as representatives, have agreed severally to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below. The Underwriters are committed to purchase and
pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Volpe Brown Whelan & Company, LLC .........................................................
Furman Selz LLC ...........................................................................
Wheat, First Securities, Inc. .............................................................
----------
Total...................................................................................... 5,900,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share, of which $ per
share may be reallocated to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option for 45 days after the
date of this Prospectus to purchase, at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus, up to 885,000 additional shares of Common Stock at the same price
per share as the Company receives for the 5,900,000 shares of Common Stock
offered hereby, solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by each of
them, as shown in the foregoing table, bears to the 5,900,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
the over-allotments in connection with the sale of the 5,900,000 shares of
Common Stock offered hereby.
The Company's executive officers and directors and existing stockholders
have agreed not to offer, pledge, sell, contract to sell, make any short sale or
otherwise dispose of any shares of Common Stock, options to acquire shares of
Common Stock or securities convertible into or exchangeable for shares of Common
Stock, or any rights to purchase or acquire shares of Common Stock, during the
one-year period following the date of this Prospectus, without the prior written
consent of Volpe Brown Whelan & Company, LLC. The Company also has agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities convertible into or exchangeable for shares of Common Stock,
or any rights to purchase or acquire shares of Common Stock, during the one-year
period following the date of this Prospectus without the prior written consent
of Volpe Brown Whelan & Company, LLC, except for the granting of options
pursuant to the Plan or the issuance of shares of Common Stock upon the exercise
of outstanding options, in connection with acquisitions or in connection with
any conversion of the Restricted Common Stock. Volpe Brown Whelan & Company,
LLC, in its discretion, may waive the foregoing restrictions in whole or in
part, with or without a public announcement of such action. In recent offerings
in which it has served as lead manager of underwriters, Volpe Brown Whelan &
Company, LLC has consented to early releases from lock-up agreements only in a
limited number of circumstances, after
63
<PAGE>
considering all circumstances that it deemed to be relevant. Volpe Brown Whelan
& Company, LLC will have, however, complete discretion in determining whether to
consent to early releases from the lock-up agreements delivered in connection
with this Offering, and no assurance can be given that it will not consent to
the early release of all or a portion of the shares of Common Stock and options
covered by such lock-up agreements.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which the Underwriters have
discretionary authority.
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock will be determined by negotiations between the Company and the
Representatives. Among the factors to be considered in such negotiations are
expected to be the results of operations of the Founding Companies in recent
periods, the prospects for the Company and the industry in which the Company
competes, an assessment of the Company's management, its financial condition,
the prospects for future earnings of the Company, the present state of the
Company's development, the general condition of the economy and the securities
markets at the time of this Offering and the market prices of and demand for
publicly traded stock of comparable companies in recent periods.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with this Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of this Offering to cover
all or a portion of such short position. The Underwriters also may cover all or
a portion of such short position, up to 885,000 shares, by exercising the
Underwriters' over-allotment option referred to above. In addition, Volpe Brown
Whelan & Company, LLC, on behalf of the Underwriters, may impose "penalty bids"
under the contractual arrangements with the Underwriters whereby it may reclaim
from an Underwriter (or dealer participating in this Offering), for the account
of the other Underwriters, the selling concession with respect to Common Stock
that is distributed in this Offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Common Stock at
a level above that which otherwise might prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with this Offering, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
The foregoing contains a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Morgan, Lewis & Bockius LLP,
New York, New York. Certain legal matters related to this Offering will be
passed upon for the Underwriters by Sachnoff & Weaver, Ltd., Chicago, Illinois.
64
<PAGE>
EXPERTS
The Condor financial statements as of December 31, 1996 and September 30,
1997 and for the period from inception to December 31, 1996 and the nine months
ended September 30, 1997; the CHMC financial statements as of February 28, 1997
and September 30, 1997 and for each of the three years in the period ended
February 28, 1997 and the nine months ended September 30, 1997; the ISSI
financial statements as of December 31, 1996 and September 30, 1997 and for each
of the three years in the period ended December 31, 1996 and for the nine months
ended September 30, 1997; the Corporate Access financial statements as of June
30, 1997 and for the year then ended; the USComm and MIS financial statements as
of December 31, 1996 and September 30, 1997 and for the year ended December 31,
1996 and the nine months ended September 30, 1997; and the InVenture financial
statements as of December 31, 1996 and for the year then ended included
elsewhere in this Prospectus have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of MST as of December 31, 1995, December 31, 1996
and September 30, 1997, for each of the three years in the period ended December
31, 1996 and for the nine months ended September 30, 1997 included elsewhere in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the chief
executive officer/sole stockholder's compensation being at his sole discretion),
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated balance sheets of Federal as of October 31, 1996 and 1997
and the consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended October 31, 1997 included
elsewhere in this Prospectus have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form S-1 with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information pertaining to the Company and the
shares of Common Stock offered hereby, reference is made to such Registration
Statement, including the exhibits, financial statements and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or any other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials can be obtained from the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically.
The address of such Internet web site is http://www.sec.gov.
As a result of this Offering, the Company will be subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). So long as the Company is subject to the periodic reporting requirements
of the Exchange Act, it will continue to furnish the reports and other
information required thereby to the Securities and Exchange Commission. The
Company will furnish to its stockholders annual reports containing financial
statements audited by its independent auditors and will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
65
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements.................................... F-3
Unaudited Pro Forma Combined Balance Sheet........................................................... F-4
Unaudited Pro Forma Combined Statements of Operations................................................ F-5
Notes to Unaudited Pro Forma Combined Financial Statements........................................... F-8
CONDOR TECHNOLOGY SOLUTIONS, INC.
Report of Independent Accountants.................................................................... F-12
Balance Sheets....................................................................................... F-13
Notes to Financial Statements........................................................................ F-14
FOUNDING COMPANIES
MANAGEMENT SUPPORT TECHNOLOGY CORP.
Independent Auditors' Report......................................................................... F-19
Balance Sheets....................................................................................... F-20
Statements of Income and Retained Earnings........................................................... F-21
Statements of Cash Flows............................................................................. F-22
Notes to Financial Statements........................................................................ F-23
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
Report of Independent Accountants.................................................................... F-28
Balance Sheets....................................................................................... F-29
Statements of Operations............................................................................. F-30
Statements of Changes in Stockholders' Equity........................................................ F-31
Statements of Cash Flows............................................................................. F-32
Notes to Financial Statements........................................................................ F-33
FEDERAL COMPUTER CORPORATION
Report of Independent Accountants.................................................................... F-41
Consolidated Balance Sheets.......................................................................... F-42
Consolidated Statements of Operations................................................................ F-43
Consolidated Statements of Changes in Shareholders' Equity........................................... F-44
Consolidated Statements of Cash Flows................................................................ F-45
Notes to Consolidated Financial Statements........................................................... F-46
CORPORATE ACCESS, INC.
Report of Independent Accountants.................................................................... F-57
Balance Sheet........................................................................................ F-58
Statement of Operations.............................................................................. F-59
Statement of Changes in Stockholders' Equity......................................................... F-60
Statement of Cash Flows.............................................................................. F-61
Notes to Financial Statements........................................................................ F-62
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
Report of Independent Accountants.................................................................... F-66
Consolidated Balance Sheets.......................................................................... F-67
Consolidated Statements of Operations................................................................ F-68
Consolidated Statements of Changes in Stockholders' Equity........................................... F-69
Consolidated Statements of Cash Flows................................................................ F-70
Notes to Consolidated Financial Statements........................................................... F-71
U.S. COMMUNICATIONS, INC.
Report of Independent Accountants.................................................................... F-78
Balance Sheets....................................................................................... F-79
Statements of Operations............................................................................. F-80
Statements of Changes in Stockholder's Equity........................................................ F-81
Statements of Cash Flows............................................................................. F-82
Notes to Financial Statements........................................................................ F-83
INVENTURE GROUP, INC.
Report of Independent Accountants.................................................................... F-88
Balance Sheets....................................................................................... F-89
Statements of Operations............................................................................. F-90
Statements of Changes in Stockholder's Equity........................................................ F-91
Statements of Cash Flows............................................................................. F-92
Notes to Financial Statements........................................................................ F-93
MIS TECHNOLOGIES, INC.
Report of Independent Accountants.................................................................... F-98
Balance Sheets....................................................................................... F-99
Statements of Operations............................................................................. F-100
Statements of Changes in Stockholder's Equity........................................................ F-101
Statements of Cash Flows............................................................................. F-102
Notes to Financial Statements........................................................................ F-103
</TABLE>
F-2
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Condor Technology Solutions, Inc. of the outstanding
capital stock of Management Support Technology Corp., Computer Hardware
Maintenance Company, Inc., Federal Computer Corporation, Corporate Access, Inc.,
Interactive Software Systems Incorporated, U.S. Communications, Inc., InVenture
Group, Inc. and MIS Technologies, Inc. (including Kinnaird Technical Resources,
Inc.). These acquisitions will occur simultaneously with the closing of Condor's
initial public offering and will be accounted for using the purchase method of
accounting. Condor has been identified as the "accounting acquiror" in
accordance with the provisions of SAB 97, which states that the combining
company that receives the largest portion of voting rights in the combined
corporation is presumed to be the "accounting acquiror" for financial statement
presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the Mergers
and the Offering as if they had occurred on September 30, 1997. The unaudited
pro forma combined statements of operations give effect to these transactions as
if they had occurred on January 1, 1996.
Condor has preliminarily analyzed the savings that it expects to be realized
from reductions in salaries and certain benefits to the stockholders and
management of the Founding Companies. To the extent the stockholders and
management of the Founding Companies have agreed prospectively to reductions in
salary, bonuses and benefits, these reductions have been reflected in the pro
forma combined statements of operations. With respect to other potential cost
savings, Condor has not and cannot quantify these savings until completion of
the combination of the Founding Companies. It is anticipated that these savings
will be partially offset by the costs of being a publicly held company and the
incremental increase in costs related to the Company's new management. However,
these costs, like the savings that they offset, cannot be quantified accurately.
Neither the anticipated savings nor the anticipated costs have been included in
the pro forma combined financial statements of Condor.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
Condor's financial position or results of operations would actually have been if
such transactions in fact had occurred on those dates and are not necessarily
representative of Condor's financial position or results of operations for any
future period. Since the Founding Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. See "Risk Factors" included
elsewhere in this Prospectus.
F-3
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CORPORATE
ASSETS CONDOR MST CHMC FEDERAL ACCESS ISSI USCOMM
----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 13 $ 71 $ 1,560 $ 4,671 $ 612 $ 4,230 $ 22
Marketable securities.................... 1,178
Accounts receivable, trade............... 1,110 6,929 6,247 2,496 3,296 1,243
Inventory................................ 626 71 60
Prepaid expenses and other current
assets................................. 1,239 44 47 464 23 473 2
----------- --------- ----------- --------- ----------- --------- -----------
Total current assets................... 1,252 1,225 9,162 12,560 3,202 7,999 1,327
Property and equipment, net................ 618 339 55 121 450 157
Other assets............................... 15 88 154 111 4
Goodwill...................................
----------- --------- ----------- --------- ----------- --------- -----------
Total assets........................... $ 1,252 $ 1,858 $ 9,589 $ 12,769 $ 3,323 $ 8,560 $ 1,488
----------- --------- ----------- --------- ----------- --------- -----------
----------- --------- ----------- --------- ----------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................... $ $ 550 $ 169 $ $ $ 8 $ 85
Accounts payable and accruals............ 359 2,634 4,552 2,200 1,808 1,175
Payable to stockholders..................
Deferred revenue......................... 2,530 2,412 17
Other current liabilities................ 1,031 472 412 34
----------- --------- ----------- --------- ----------- --------- -----------
Total current liabilities.............. 1,031 909 5,805 4,964 2,200 4,228 1,311
Long-term debt............................. 31 20 45
Deferred revenue........................... 1,741
Deferred income taxes...................... 6 37
----------- --------- ----------- --------- ----------- --------- -----------
Total liabilities...................... 1,031 909 5,836 6,711 2,200 4,285 1,356
Stockholders' equity:
Common stock............................. 19 2 1 4 26 1
Additional paid-in capital............... 1,033 171 1,089 180 2,602
Stock subscription receivable............
Treasury stock, at cost.................. (401)
Retained earnings........................ (831) 947 3,983 4,968 939 1,647 131
----------- --------- ----------- --------- ----------- --------- -----------
Total stockholders' equity............. 221 949 3,753 6,058 1,123 4,275 132
----------- --------- ----------- --------- ----------- --------- -----------
Total liabilities and stockholders'
equity............................... $ 1,252 $ 1,858 $ 9,589 $ 12,769 $ 3,323 $ 8,560 $ 1,488
----------- --------- ----------- --------- ----------- --------- -----------
----------- --------- ----------- --------- ----------- --------- -----------
<CAPTION>
PRO FORMA
MERGER PRO FORMA OFFERING
ASSETS INVENTURE MIS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 13 $ 151 $ (7,000) $ 4,343 $ 23,721 $ 28,064
Marketable securities.................... 75 1,253 1,253
Accounts receivable, trade............... 740 579 22,640 22,640
Inventory................................ 757 757
Prepaid expenses and other current
assets................................. 106 10 2,408 (1,239) 1,169
----------- --------- ----------- ----------- ----------- -----------
Total current assets................... 859 815 (7,000) 31,401 22,482 53,883
Property and equipment, net................ 153 21 2,500 4,414 4,414
Other assets............................... 22 394 394
Goodwill................................... 55,321 55,321 55,321
----------- --------- ----------- ----------- ----------- -----------
Total assets........................... $ 1,034 $ 836 $ 50,821 $ 91,530 $ 22,482 $ 114,012
----------- --------- ----------- ----------- ----------- -----------
----------- --------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................... $ $ 371 $ 1,183 $ 1,183
Accounts payable and accruals............ 663 226 13,617 13,617
Payable to stockholders.................. $ 48,405 48,405 (48,405) -
Deferred revenue......................... 4,959 4,959
Other current liabilities................ 199 2,148 (1,031) 1,117
----------- --------- ----------- ----------- ----------- -----------
Total current liabilities.............. 862 597 48,405 70,312 (49,436) 20,876
Long-term debt............................. 96 96
Deferred revenue........................... 1,741 1,741
Deferred income taxes...................... 4 47 47
----------- --------- ----------- ----------- ----------- -----------
Total liabilities...................... 866 597 48,405 72,196 (49,436) 22,760
Stockholders' equity:
Common stock............................. 11 2 (24) 42 59 101
Additional paid-in capital............... 15,048 20,123 71,859 91,982
Stock subscription receivable............ - - -
Treasury stock, at cost.................. 401 - -
Retained earnings........................ 157 237 (13,009) (831) (831)
----------- --------- ----------- ----------- ----------- -----------
Total stockholders' equity............. 168 239 2,416 19,334 71,918 91,252
----------- --------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity............................... $ 1,034 $ 836 $ 50,821 $ 91,530 $ 22,482 $ 114,012
----------- --------- ----------- ----------- ----------- -----------
----------- --------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-4
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CORPORATE
MST CHMC FEDERAL ACCESS ISSI
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................................ $ 8,211 $ 42,262 $ 12,661 $ 15,734 $ 9,028
Cost of revenues................................................ 3,783 36,395 9,287 13,464 1,482
--------- --------- --------- ----------- ---------
Gross profit.................................................... 4,428 5,867 3,374 2,270 7,546
Selling, general and administrative............................. 2,188 4,484 3,431 2,028 5,323
Goodwill amortization........................................... - - - - -
--------- --------- --------- ----------- ---------
Income from operations.......................................... 2,240 1,383 (57) 242 2,223
Other income (expense):
Interest income............................................... 3 -- 467 21 101
Interest expense.............................................. (29) (185) (16) - (199)
Other, net.................................................... - 114 844 10 8
--------- --------- --------- ----------- ---------
Income (loss) before income taxes............................... 2,214 1,312 1,238 273 2,133
Provision for income taxes...................................... - 528 -- 116 737
--------- --------- --------- ----------- ---------
Net income...................................................... $ 2,214 $ 784 $ 1,238 $ 157 $ 1,396
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Net income per share............................................
Shares used in computing pro forma net income per share (See
Note 5).......................................................
<CAPTION>
PRO FORMA PRO FORMA
USCOMM INVENTURE MIS ADJUSTMENTS COMBINED
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................................................ $ 7,215 $ 5,416 $ 2,675 $ - $ 103,202
Cost of revenues................................................ 6,574 3,948 1,451 - 76,384
----------- ----------- --------- ----------- -----------
Gross profit.................................................... 641 1,468 1,224 - 26,818
Selling, general and administrative............................. 475 1,464 1,066 (1,396) 19,063
Goodwill amortization........................................... - - - 1,827 1,827
----------- ----------- --------- ----------- -----------
Income from operations.......................................... 166 4 158 (431) 5,928
Other income (expense):
Interest income............................................... - 3 -- - 595
Interest expense.............................................. (21) - (18) - (468)
Other, net.................................................... - 16 - - 992
----------- ----------- --------- ----------- -----------
Income (loss) before income taxes............................... 145 23 140 (431) 7,047
Provision for income taxes...................................... 51 7 - 2,215 3,654
----------- ----------- --------- ----------- -----------
Net income...................................................... $ 94 $ 16 $ 140 $ (2,646) $ 3,393
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Net income per share............................................ $ 0.42
-----------
-----------
Shares used in computing pro forma net income per share (See
Note 5)....................................................... 8,171,043
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-5
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CORPORATE
CONDOR MST CHMC FEDERAL ACCESS ISSI
----------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................................. $ $ 5,509 $ 34,671 $ 30,442 $ 14,062 $ 8,360
Cost of revenues......................................... 2,934 28,082 26,783 12,073 1,224
----------- --------- --------- --------- ----------- ---------
Gross profit............................................. -- 2,575 6,589 3,659 1,989 7,136
Selling, general & administrative........................ 831 1,453 5,157 2,145 1,475 4,912
Goodwill amortization....................................
----------- --------- --------- --------- ----------- ---------
Income from operations................................... (831) 1,122 1,432 1,514 514 2,224
Other income (expense):
Interest income........................................ -- -- -- 213 11 107
Interest expense....................................... -- (11) (46) (21) -- --
Other, net............................................. -- 2 277 -- -- 15
----------- --------- --------- --------- ----------- ---------
Income before income taxes............................... (831) 1,113 1,663 1,706 525 2,346
Provision for income taxes............................... -- -- 658 1,016 34 795
----------- --------- --------- --------- ----------- ---------
Net income............................................... $ (831) $ 1,113 $ 1,005 $ 690 $ 491 $ 1,551
----------- --------- --------- --------- ----------- ---------
----------- --------- --------- --------- ----------- ---------
Net income per share.....................................
Shares used in computing pro forma net income per share
(See Note 5)...........................................
<CAPTION>
PRO FORMA PRO FORMA
USCOMM INVENTURE MIS ADJUSTMENTS COMBINED
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................................................. $ 6,024 $ 3,210 $ 3,445 $ $ 105,723
Cost of revenues......................................... 5,611 1,603 1,841 80,151
----------- ----------- --------- ----------- -----------
Gross profit............................................. 413 1,607 1,604 25,572
Selling, general & administrative........................ 367 1,378 1,289 (2,716) 16,291
Goodwill amortization.................................... 1,370 1,370
----------- ----------- --------- ----------- -----------
Income from operations................................... 46 229 315 1,346 7,911
Other income (expense):
Interest income........................................ -- -- -- -- 331
Interest expense....................................... (13) 0 (26) -- (117)
Other, net............................................. 0 123 -- 417
----------- ----------- --------- ----------- -----------
Income before income taxes............................... 33 352 289 1,346 8,542
Provision for income taxes............................... 15 141 69 1,284 4,012
----------- ----------- --------- ----------- -----------
Net income............................................... $ 18 $ 211 $ 220 $ 62 $ 4,530
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Net income per share..................................... $ 0.55
-----------
-----------
Shares used in computing pro forma net income per share
(See Note 5)........................................... 8,171,043
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
- ------------------------
F-6
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CORPORATE
MST CHMC FEDERAL ACCESS ISSI
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................................ $ 6,452 $ 27,885 $ 10,210 $ 11,462 $ 6,655
Cost of revenues................................................ 2,895 24,411 7,250 9,731 1,120
--------- --------- --------- ----------- ---------
Gross profit.................................................... 3,557 3,474 2,960 1,731 5,535
Selling, general and administrative............................. 1,684 2,760 2,645 1,569 3,666
Goodwill amortization........................................... -- -- -- -- --
--------- --------- --------- ----------- ---------
Income (loss) from operations................................... 1,873 714 315 162 1,869
Other income (expense):
Interest income............................................... 1 334 18 71
Interest expense.............................................. (27) (132) (16) -- (188)
Other, net.................................................... -- 142 597 (32) 7
--------- --------- --------- ----------- ---------
Income before income taxes...................................... 1,847 724 1,230 148 1,759
Provision for income taxes...................................... -- 276 -- 120 609
--------- --------- --------- ----------- ---------
Net income (loss)............................................... $ 1,847 $ 448 $ 1,230 $ 28 $ 1,150
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Net income per share............................................
Shares used in computing pro forma net income per share (See
Note 5).......................................................
<CAPTION>
PRO FORMA PRO FORMA
USCOMM INVENTURE MIS ADJUSTMENTS COMBINED
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................................................ $ 4,740 $ 4,253 $ 1,970 $ -- $ 73,627
Cost of revenues................................................ 4,293 3,165 1,216 -- 54,081
----------- ----------- --------- ----------- -----------
Gross profit.................................................... 447 1,088 754 -- 19,546
Selling, general and administrative............................. 336 1,028 536 (1,047) 13,177
Goodwill amortization........................................... -- -- -- 1,370 1,370
----------- ----------- --------- ----------- -----------
Income (loss) from operations................................... 111 60 218 (323) 4,999
Other income (expense):
Interest income............................................... -- -- -- -- 424
Interest expense.............................................. (17) -- (9) -- (389)
Other, net.................................................... -- 14 -- -- 728
----------- ----------- --------- ----------- -----------
Income before income taxes...................................... 94 74 209 (323) 5,762
Provision for income taxes...................................... 39 30 -- 1,816 2,890
----------- ----------- --------- ----------- -----------
Net income (loss)............................................... $ 55 $ 44 $ 209 $ (2,139) $ 2,872
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Net income per share............................................ $ 0.35
-----------
-----------
Shares used in computing pro forma net income per share (See
Note 5)....................................................... 8,171,043
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
- ------------------------
F-7
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL
Condor was established to create a leading single-source IT service company
that provides strategic IT business solutions to middle market organizations.
Condor has conducted no operations to date and will acquire the Founding
Companies concurrently with and as a condition to the closing of the Offering.
The historical financial statements reflect the financial position and
results of operations of Condor and the Founding Companies and were derived from
the respective Founding Companies' financial statements where indicated. The
periods included in these pro forma financial statements for the individual
Founding Companies are as of the respective periods, regardless of the fiscal
year end of such companies. The audited historical financial statements of
Condor and the Founding Companies included elsewhere in this Prospectus have
been included in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES
Concurrently with and as a condition to the closing of the Offering, Condor
will acquire all of the outstanding capital stock of the Founding Companies. The
acquisitions will be accounted for using the purchase method of accounting with
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 to be paid in cash and in
shares of Common Stock to the stockholders of each of the Founding Companies.
For purposes of computing the estimated purchase price for accounting purposes,
the value of shares is determined using an estimated fair value of $11.20 per
share, which represents a discount of 20 percent from the assumed initial public
offering price of $14.00 per share due to restrictions on the sale and
transferability of the shares issued. The estimated purchase prices for the
acquisitions are based upon preliminary estimates and are subject to certain
purchase price adjustments at and following the closing. The Company does not
anticipate that the final allocation of purchase price will differ significantly
from that presented.
<TABLE>
<CAPTION>
ALLOCATION
VALUE TOTAL ADJUSTED OF PURCHASE
CASH OF SHARES CONSIDERATION NET ASSETS PRICE GOODWILL LIFE
--------- ----------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
MST.............................. $ 9,750 $ 6,280 $ 16,030 $ 949 15,081 35
CHMC............................. 17,861 1,520 19,381 3,753 $ 15,628 35
Federal.......................... 7,500 6,000 13,500 2,058 11,442 35
Corporate Access................. 5,494 2,198 7,692 1,123 6,569 30
ISSI............................. 5,000 5,600 10,600 1,275 5,000a 1,825 7
2,500b 5
US Comm.......................... 600 480 1,080 132 948 30
InVenture........................ 750 600 1,350 168 1,182 35
MIS/KTR.......................... 1,200 1,440 2,640 (6) 2,646 35
--------- ----------- ------------- ----------- ----------- ---------
$ 48,155 $ 24,118 $ 72,273 $ 9,452 $ 7,500 $ 55,321
--------- ----------- ------------- ----------- ----------- ---------
--------- ----------- ------------- ----------- ----------- ---------
</TABLE>
a Represents amount allocated to in-process Research and Development.
b Represents amount allocated to existing technology.
F-8
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
MERGER ADJUSTMENTS
-------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
-------- -------- ----- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. (7,000) (7,000)
Prepaid and other current assets...........
-------- -------- ----- -------- ------- -----------
Total current assets..................... (7,000) (7,000)
Property and equipment, net.................. 2,500 2,500
Other assets................................. 5,000 (5,000) --
Goodwill, net................................ 55,321 55,321
-------- -------- ----- -------- ------- -----------
Total assets............................. (7,000) 62,821 (5,000) 50,821
-------- -------- ----- -------- ------- -----------
-------- -------- ----- -------- ------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to shareholders of founding co..... 48,155 250 48,405
Other current liabilities..................
-------- -------- ----- -------- ------- -----------
Total liabilities........................ 48,155 250 48,405
Stockholders' equity
Common Stock............................... (6) (18) (24)
Treasury stock............................. 401 401
Additional paid-in capital................. (48,155) (2,602) 65,805 15,048
Retained earnings.......................... (4,392) (250) (3,367) (5,000) (13,009)
-------- -------- ----- -------- ------- -----------
Total stockholders' equity............... (48,155) (7,000) (250) 62,821 (5,000) 2,416
Total liabilities and stockholders'
equity................................. (7,000) 62,821 (5,000) 50,821
-------- -------- ----- -------- ------- -----------
-------- -------- ----- -------- ------- -----------
<CAPTION>
OFFERING
ADJUSTMENTS POST
------------------ MERGER
(F) (G) ADJUSTMENTS
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. 72,126 (48,405) 23,721
Prepaid and other current assets........... (1,239) (1,239)
-------- -------- -----------
Total current assets..................... 70,887 (48,405) 22,482
Property and equipment, net..................
Other assets.................................
Goodwill, net................................
-------- -------- -----------
Total assets............................. 70,887 (48,405) 22,482
-------- -------- -----------
-------- -------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to shareholders of founding co..... (48,405) (48,405)
Other current liabilities.................. (1,031) (1,031)
-------- -------- -----------
Total liabilities........................ (1,031) (48,405) (49,436)
Stockholders' equity
Common Stock............................... 59 59
Treasury stock.............................
Additional paid-in capital................. 71,859 71,859
Retained earnings..........................
-------- -------- -----------
Total stockholders' equity............... 71,918 71,918
Total liabilities and stockholders'
equity................................. 70,887 (48,405) 22,482
-------- -------- -----------
-------- -------- -----------
</TABLE>
(A) Records the liability for the cash portion of the consideration to be
paid to the stockholders of the Founding Companies in connection with the
Mergers.
(B) Reflects the repurchase of shares from a minority stockholder for
$2,000,000 and distributions to stockholders of $1,000,000 at ISSI. Adjustment
also reflects distributions of $4,000,000 to stockholders at Federal,
simultaneously with the consummation of the Mergers.
(C) Establishment of liability for S corporation distribution to be paid to
the stockholder at one of the Founding Companies.
(D) Reflects the acquisitions of the Founding Companies, consisting of
$48,155,000 in cash and 2,153,355 shares of common stock valued at $11.20 per
share (or $24,118,000) for a total estimated purchase price of $72,273,000
resulting in excess purchase price over the fair value of the net assets
acquired of $55,321,000. Adjustment also reflects the allocation of $5,000,000
of the purchase price to acquired research and development activities
(in-process research and development) and $2,500,000 of acquired internally
developed software, at a Founding Company. The remaining excess purchase price
has been allocated to goodwill.
(E) Records the write-off of the acquired in-process research and
development from a Founding Company.
(F) Records the cash proceeds from the issuance of shares of Condor Common
Stock net of estimated Offering costs and the repayment of advances from a
shareholder (based on an assumed initial public offering price of $14.00 per
share). Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
F-9
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
(G) Records the cash portion of the consideration and the S corporation
distribution to be paid to the stockholder of one of the Founding Companies in
connection with the Mergers ($48,405,000) from proceeds of the Offering.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
The following tables summarize unaudited adjustments to the pro forma
combined statements of operations:
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling, general and administrative........................ $ (1,896) $ - $ 500 $ - $ (1,396)
Goodwill amortization...................................... 1,827 1,827
--------- --------- --------- --------- -----------
Income from operations..................................... 1,896 (1,827) (500) (431)
Other income (expense):
Interest expense...........................................
--------- --------- --------- --------- -----------
Income (loss) before income taxes.......................... 1,896 (1,827) (500) (431)
Provision for income taxes................................. 2,215 2,215
--------- --------- --------- --------- -----------
Net income (loss).......................................... $ 1,896 $ (1,827) $ (500) $ (2,215) $ (2,646)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
For the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Selling, general and administrative............... $ (2,399) $ - $ 375 $ - $ (692) $ (2,716)
Goodwill amortization............................. 1,370 1,370
--------- --------- --------- --------- --------- -----------
Income (loss) from operations..................... 2,399 (1,370) (375) 692 1,346
Other income (expense):
Interest expense..................................
--------- --------- --------- --------- --------- -----------
Income (loss) before income taxes................. 2,399 (1,370) (375) 692 1,346
Provision for income taxes........................ 1,284 1,284
--------- --------- --------- --------- --------- -----------
Net income (loss)................................. $ 2,399 $ (1,370) $ (375) $ (1,284) $ 692 $ 62
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
</TABLE>
F-10
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS (CONTINUED)
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling, general and administrative........................ $ (1,422) $ - $ 375 $ - $ (1,047)
Goodwill amortization...................................... 1,370 1,370
--------- --------- --------- --------- -----------
Income (loss) from operations.............................. 1,422 (1,370) (375) (323)
Other income (expense):
Interest expense...........................................
--------- --------- --------- --------- -----------
Income (loss) before income taxes.......................... 1,422 (1,370) (375) (323)
Provision for income taxes................................. 1,816 1,816
--------- --------- --------- --------- -----------
Net income (loss).......................................... $ 1,422 $ (1,370) $ (375) $ (1,816) $ (2,139)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
(A) Reflects the reductions in salaries, bonuses and benefits to the
stockholders and managers of the Founding Companies to which they have agreed
prospectively.
(B) Reflects the amortization of goodwill to be recorded as a result of
these Mergers over a period of seven- to 35-years. These amortization periods
were determined based on an analysis of the characteristics of the individual
Founding Companies.
(C) Reflects the amortization of internally developed software acquired as a
result of these Mergers over a five year estimated life.
(D) Reflects (i) the incremental provision for federal and state income
taxes assuming all entities were subject to federal and state income taxes; (ii)
federal and state income taxes relating to the other statements of operations'
adjustments; (iii) income taxes on S corporation income; and (iv) that goodwill
is not tax deductible.
(E) Reflects the reduction in compensation expense related to the
non-recurring, non-cash compensation charge of $692,000 recorded by Condor in
the third quarter of 1997 related to Common Stock issued to management of and
consultants to the Company. The issuances of Common Stock were made in
contemplation of the Mergers and the Offering, and no future issuances of this
nature are anticipated.
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
Includes (i) 2,046,645 shares issued to founders, consultants and management of
Condor; (ii) 2,153,355 shares issued to owners of the Founding Companies; and
(iii) 3,971,043 of the 5,900,000 shares sold in the Offering necessary to pay
the cash portion of the Merger consideration and to pay expenses of the
Offering.
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Condor Technology Solutions, Inc.
The reverse stock split described in Note 2 has not been consummated as of
November 24, 1997. When it has been consummated, we will be in a position to
furnish the following report on these financial statements.
"In our opinion, the accompanying balance sheets present fairly, in all
material respects, the financial position of Condor Technology Solutions,
Inc. at September 30, 1997 and December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above."
Price Waterhouse LLP
Philadelphia, PA
November 24, 1997
F-12
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- -------------
<S> <C> <C>
ASSETS
Cash................................................................................ $ - $ 13
Deferred offering costs............................................................. 265 1,239
----- ------
Total assets...................................................................... $ 265 $ 1,252
----- ------
----- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Amounts due to stockholder.......................................................... $ 178 $ 1,031
Stockholders' equity:
Preferred stock, $.01 par, 1,000,000 authorized, none outstanding.................
Common stock, $.01 par, 49,000,000 authorized, 1,538,310 and 1,900,321 outstanding
at December 31, 1996 and September 30, 1997, respectively....................... 15 19
Additional paid in capital.......................................................... 72 1,033
Accumulated deficit................................................................. ( 831)
----- ------
Total stockholders' equity........................................................ 87 221
----- ------
Total liabilities and stockholders' equity........................................ $ 265 $ 1,252
----- ------
----- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
Condor Technology Solutions, Inc., a Delaware Corporation ("Condor" or the
"Company"), was founded in August 1996 to create a leading single-source IT
service company that provides strategic IT business solutions to middle market
organizations. In order to become a single-source provider of a wide range of IT
services and solutions, Condor has entered into agreements to acquire (the
"Mergers") all of the common stock of eight established IT service providers
(the "Founding Companies") and concurrently complete an initial public offering
(this "Offering") of its common stock (the "Common Stock").
The Company has not conducted any operations, other than payment of salary
to one officer and some facility costs, and all activities to date have related
to this Offering and the Mergers. The Company's cash balances were provided from
the sale of stock to investors and advances from The Commonwealth Group
("Commonwealth"), a shareholder. Accordingly, statements of operations, cash
flows and changes in stockholders' equity for the period from inception to
December 31, 1996 and the period from January 1 to September 30, 1997 would not
provide meaningful information and have been omitted.
As of December 31, 1996 and September 30, 1997, costs of approximately
$265,000 and $1,239,000, respectively, have been incurred in connection with
this Offering. These costs will be recorded as a reduction of the proceeds of
this Offering. The Company is dependent upon this Offering to execute the
pending Mergers. There is no assurance that the pending Mergers or this Offering
will be completed or that the Company will be able to generate future operating
revenues.
2. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK
The Company intends to effect a one-for-5.26227 reverse stock split
effective on the day preceding the date of the final Prospectus for this
Offering. In addition, on October 1, 1997 the Company increased the number of
authorized shares of common stock to 49 million (including 5 million shares of
restricted common stock (the "restricted common stock") and authorized 1 million
shares of $.01 par value preferred stock. The effects of the common stock split
and the increase in the shares of authorized common stock have been
retroactively reflected in the balance sheet and the accompanying notes.
In connection with the organization of the Company, Condor issued 8,095,000
shares of common stock, before giving effect to the reverse stock split
described above, to Commonwealth and other founders in exchange for consulting,
financial advisory and related services provided to Condor and, with respect to
Commonwealth, its commitment to provide funds necessary to effect the Mergers
and this Offering. These non-monetary assets are considered to have an aggregate
value of $87,000. Amounts due to shareholder will be reimbursed out of the
proceeds of this Offering, together with interest on such advances at the prime
rate.
Between January and September 1997, 214,736 shares were issued in exchange
for services associated with the Offering that are considered to have an
aggregate value of $210,534. In the nine months ended September 30, 1997, 42,757
shares were sold to investors for $150,000.
In August and September 1997, the Company issued a total of 104,518 shares
of Common Stock to management. As a result, the Company recorded for financial
statement purposes a non-recurring non-cash compensation charge of approximately
$692,000 for the nine months ended September 30, 1997, representing the
estimated fair value of the shares on the date of issuance.
F-14
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
RESTRICTED COMMON STOCK
The common stock and the restricted common stock are identical except that
the holders of restricted common stock are only entitled to one-fifth of one
vote for each share on all matters. Immediately prior to the effectiveness of
the Company's registration statement, the founders and management of Condor will
exchange their shares of common stock for a equal number of shares of restricted
common stock.
3. DEFERRED COSTS
In connection with this Offering, the Company has incurred costs which are
directly attributable to this Offering. These costs, which include legal fees,
investment banking fees and other costs, have been deferred as of December 31,
1996 and September 30, 1997 and will be charged against the proceeds of this
Offering.
4. INCENTIVE COMPENSATION
In October 1997, the Board of Directors and the Company's stockholders
approved the Company's 1997 Long-Term Incentive Plan (the "Plan"). The purpose
of the Plan is to provide a means by which the Company can attract and retain
executive officers, key employees, directors, consultants and other service
providers and to compensate such persons in a way that provides additional
incentives and enables such persons to increase their ownership interests in the
Company. Individual awards under the Plan may take the form of one or more of:
(i) either incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or deferred
stock; (iv) dividend equivalents; (v) bonus shares and awards in lieu of Company
obligations to pay cash compensation, and (vi) other awards not otherwise
provided for, the value of which is based in whole or in part upon the value of
the common stock of the Company.
The maximum number of shares of common stock that may be subject to
outstanding awards under the Plan will not exceed 12% of the aggregate number of
shares of common stock outstanding, minus the number of shares previously issued
pursuant to awards granted under the Plan. The number of shares deliverable upon
the exercise of ISOs is limited to 1,000,000. The Plan also provides that no
participant may be granted in any calendar year options or SARs for more than
400,000 shares or other awards settleable by delivery of more than 200,000
shares, and limits cash awards in any calendar year to an amount equal to the
fair market value of the number of shares at the date of grant or the date of
settlement, whichever is greater.
In addition to authorizing grants of awards to eligible persons, the Plan
authorizes automatic grants of NQSOs to non-employee directors. Under these
provisions, each person serving or who has agreed to serve as a non-employee
director at the commencement of the Offering will be granted an initial option
to purchase 10,000 shares, and thereafter each person who becomes a non-employee
director will be granted an initial option to purchase 10,000 shares upon such
person's initial election as a director. In addition, these provisions authorize
the automatic annual grant to each non-employee director of an option to
purchase 5,000 shares at each annual meeting of stockholders following this
Offering, provided, however, that a director will not be granted an annual
option if he or she was granted an initial option during the preceding three
months. These options will have an exercise price equal to the fair market value
of common stock on the date of grant and the options will expire at the earlier
of 10 years after the date of grant or one year after the date the participant
ceases to serve as a director of the Company. In addition,
F-15
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCENTIVE COMPENSATION (CONTINUED)
these options generally will become exercisable one year after the date of
grant, except that an option may be forfeited upon a participant's termination
of service as a director for reasons other than death or disability if the date
of termination is less than 11 months after the date of grant.
In connection with this Offering, in addition to the options to be
automatically granted to non-employee directors, options in the form of NQSOs to
purchase shares of common stock of the Company will be granted to the executive
officers of the Company, the employees of the Company and the Founding
Companies. Each of the foregoing options will have an exercise price equal to
the initial public offering price per share in this Offering, and will vest as
to 33% each on the date that is 12 months, 24 months and 36 months after the
date of closing of this Offering. These options will not be exercisable until
they are vested, and unvested options generally will be forfeited upon a
termination of employment that is voluntary by the participant. Upon a change of
control of the Company, vesting will be accelerated. The options generally will
expire on the earlier of 10 years after the date of grant or three months after
termination of employment.
5. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," provides a new fair value based method of
accounting for employee stock options or similar equity instruments, however
this statement allows companies to continue to utilize the intrinsic value based
measure of accounting prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25). Companies electing to remain with the accounting provided in APB
Opinion No. 25 must make pro forma disclosures of net income and net earnings
per share as if the fair value method of accounting had been applied. The
Company will account for stock based compensation pursuant to the requirements
of APB 25 and will provide pro forma disclosure of net income and net income per
share, pursuant to the requirements of SFAS No. 123 as applicable, in the notes
to future consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which will be effective for fiscal periods ending
after December 15, 1997. SFAS No. 128 simplifies the standards required under
current accounting rules for computing earnings per share and replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share ("basic EPS") and diluted
earnings per share ("diluted EPS"). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted earnings per share under
current accounting principles.
The Company will implement SFAS 128 during the fourth quarter of 1997.
6. SUBSEQUENT EVENTS
The Company has signed definitive agreements to acquire all of the common
stock and ownership interests of the Founding Companies to be consummated
simultaneously with the closing of the Offering. The companies to be acquired
are Management Support Technology Corp.; Computer Hardware Maintenance Company,
Inc.; Federal Computer Corporation; Corporate Access, Inc.; Interactive Software
Systems Incorporated; U.S. Communications, Inc.; InVenture Group, Inc. and MIS
Technologies, Inc.
F-16
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SUBSEQUENT EVENTS (CONTINUED)
The aggregate consideration that will be paid by Condor to acquire the
Founding Companies is approximately $48.2 million in cash and 2.2 million shares
of common stock. The number of shares of common stock is based on an assumed
offering price of $14.00 per share and is subject to change for the actual
offering price.
The following table reflects the consideration to be paid in cash and shares
of Common Stock, the allocation of the consideration to net assets and resulting
goodwill (in thousands).
<TABLE>
<CAPTION>
ALLOCATION
VALUE TOTAL ADJUSTED OF PURCHASE
CASH OF SHARES CONSIDERATION NET ASSETS PRICE GOODWILL LIFE
--------- ----------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
MST.............................. $ 9,750 $ 6,280 $ 16,030 $ 949 $ 15,081 35
CHMC............................. 17,861 1,520 19,381 3,753 15,628 35
Federal.......................... 7,500 6,000 13,500 2,058 11,442 35
Corporate Access................. 5,494 2,198 7,692 1,123 6,569 30
ISSI............................. 5,000 5,600 10,600 1,275 5,000a 1,825 7
2,500b 5
US Comm.......................... 600 480 1,080 132 948 30
InVenture........................ 750 600 1,350 168 1,182 35
MIS/KTR.......................... 1,200 1,440 2,640 (6) 2,646 35
--------- ----------- ------------- ----------- ----------- ---------
$ 48,155 $ 24,118 $ 72,273 $ 9,452 $ 7,500 $ 55,321
--------- ----------- ------------- ----------- ----------- ---------
--------- ----------- ------------- ----------- ----------- ---------
</TABLE>
- ------------------------
a Represents amount allocated to in-process Research and Development.
b Represents amount allocated to existing technology.
The total consideration does not reflect contingent consideration which may
be issued pursuant to earn out arrangements included in the definitive
agreements for the Founding Companies. These arrangements provide for the
Company to pay additional consideration of up to $16.9 million in cash and issue
up to $34.6 million in shares of Common Stock, based on earnings before interest
and taxes for 1998-2000. Contingent consideration, if earned, will be recorded
in a manner consistent with the consideration paid at closing for each Founding
Company. The shares associated with the contingent consideration will impact
earnings per share in the period in which the contingencies are resolved and the
stock is distributable.
The purchase price has been allocated to the Company's historical assets and
liabilities based on their respective carrying values, with the exception of
in-process research and development costs and existing technology at ISSI. The
fair market value of the in-process research and development costs and existing
technology was determined via an independent valuation by a third party. The
allocation of the purchase price is considered preliminary until such time as
the closing of the transaction and consummation of the Mergers. The Company does
not anticipate that the final allocation of purchase price will differ
significantly from that presented.
From October 1 to November 24, 1997 the Company issued a total of 146,324
shares of Common Stock to management of the Company. As a result, the Company
will record for financial statement purposes a non-recurring non-cash
compensation charge of approximately $1,639,000 (unaudited) in the quarter
ending December 31, 1997, representing the difference between the amount paid
for the shares and the estimated fair value of the shares on the date of grant.
F-17
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SUBSEQUENT EVENTS (CONTINUED)
On October 2, 1997, the Company filed a registration statement on Form S-1
for the sale of its Common Stock. An investment in shares of Common Stock
offered by this Prospectus involves a high degree of risk, including, among
others, absence of a combined operating history, risks relating to the Company's
acquisition strategy, risks relating to acquisition financing, reliance on key
personnel and a substantial portion of the proceeds from this Offering payable
to affiliates of the Founding Companies.
In the course of Condor's consolidation efforts, Condor negotiated with
Emtec, Inc. ("Emtec"), an IT service company based in Pennsylvania, with a view
to Emtec becoming one of the Founding Companies. As part of this process,
Emtec's investment banker and Commonwealth executed two confidentiality
agreements pursuant to which each agreed, among other things, not to disclose
certain confidential information and Commonwealth agreed that Condor would not
acquire two companies to be introduced to it by Emtec's investment banker for a
period of two years without such investment banker's prior written consent.
Neither Emtec nor Condor was a signatory to either agreement. Emtec's investment
bank then introduced representatives of Commonwealth and Condor to two of the
Founding Companies, CHMC and Corporate Access, and Condor and the three
companies then proceeded over the course of more than two months to negotiate
the terms and conditions pursuant to which each of those companies would be
acquired by Condor in connection with its consolidation efforts and this
Offering. On or about July 24, 1997, Condor informed Emtec that due to Emtec's
failure to resolve problems that were critical to ensuring Emtec's participation
in the consolidation and initial public offering, Condor could no longer
continue with its plans to acquire Emtec. On October 28, 1997, Emtec filed suit
in the United States District Court for the Eastern District of Pennsylvania
against Condor, Commonwealth, J. Marshall Coleman and Kennard F. Hill alleging
breach of contract, tortious interference with Emtec's business relationship
with Corporate Access and CHMC and misappropriation of a trade secret arising
out of the participation of CHMC and Corporate Access in the consolidation and
initial public offering without Emtec's consent. In connection with the three
causes of action, Emtec seeks an injunction restraining Condor and Commonwealth
from engaging in any business transaction with CHMC or Corporate Access through
May 13, 1999, demands that the defendants disgorge the financial benefits that
they have and will obtain as a result of their breach of contract and seeks
compensatory and punitive damages. Condor and the other defendants intend to
defend vigorously against this action. Condor has agreed to indemnify CHMC's
directors, officers and stockholders against any liability such persons may
incur as a result of any claims brought by Emtec against any of them that
directly related to CHMC's participation as a Founding Company.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Management Support Technology Corp.
Framingham, Massachusetts
We have audited the accompanying balance sheets of Management Support
Technology Corp. (the "Company") as of December 31, 1995 and 1996 and September
30, 1997, and the related statements of income and retained earnings, and cash
flows for each of the three years in the period ended December 31, 1996 and for
the nine months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Management Support Technology Corp. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the nine months ended September 30, 1997 in conformity
with generally accepted accounting principles.
As discussed in Note 2 of the notes to financial statements, the Company's
chief executive officer is also the sole stockholder and his compensation is at
his sole discretion.
Deloitte & Touche LLP
Boston, Massachusetts
October 29, 1997
F-19
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents......................................................... $ 7 $ 102 $ 71
Accounts receivable (net of allowance for doubtful accounts of $7 in 1995,
1996 and 1997)............................................................. 1,184 1,451 1,110
Prepaid expenses and other current assets.................................... 126 169 44
--------- --------- ------
Total current assets................................................... 1,317 1,722 1,225
--------- --------- ------
Property and equipment:
Equipment.................................................................... 589 822 914
Vehicles..................................................................... 36 36 -
Furniture and fixtures....................................................... 164 177 179
Leasehold improvements....................................................... 20 34 41
--------- --------- ------
Total.................................................................. 809 1,069 1,134
Less accumulated depreciation................................................ (194) (381) (516)
--------- --------- ------
Property and equipment--net............................................ 615 688 618
--------- --------- ------
Investment..................................................................... 600 - -
--------- --------- ------
Deposits and other............................................................. 15 16 15
--------- --------- ------
Total assets........................................................... $ 2,547 $ 2,426 $ 1,858
--------- --------- ------
--------- --------- ------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Note payable to a bank....................................................... $ 500 $ 250 $ 550
Accrued compensation......................................................... - 280 -
Accounts payable and accrued expenses........................................ 208 95 359
Deferred revenue............................................................. 959 250 -
--------- --------- ------
Total current liabilities.............................................. 1,667 875 909
--------- --------- ------
Commitments (Note 4)
Stockholder's equity:
Common stock, $.01, $.002 and $.00025 par value in 1995, 1996 and 1997,
respectively; 20,000,000 shares authorized; 8,105,360 shares issued and
outstanding................................................................ 2 2 2
Retained earnings............................................................ 878 1,549 947
--------- --------- ------
Total stockholder's equity............................................. 880 1,551 949
--------- --------- ------
Total liabilities and stockholder's equity............................. $ 2,547 $ 2,426 $ 1,858
--------- --------- ------
--------- --------- ------
</TABLE>
See notes to financial statements.
F-20
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1994 1995 1996 1997
--------- --------- --------- 1996 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................................................... $ 3,669 $ 6,193 $ 8,211 $ 6,452 $ 5,509
Cost of revenue............................................. 1,463 2,415 3,783 2,895 2,934
--------- --------- --------- ----------- ---------
Gross profit................................................ 2,206 3,778 4,428 3,557 2,575
General and administrative expenses......................... 1,113 1,606 2,188 1,684 1,453
--------- --------- --------- ----------- ---------
Income from operations...................................... 1,093 2,172 2,240 1,873 1,122
Interest expense............................................ (2) (12) (29) (27) (11)
Interest income and other income (expense).................. - (3) 3 1 2
--------- --------- --------- ----------- ---------
Net income.................................................. 1,091 2,157 2,214 1,847 1,113
Retained earnings, beginning of period...................... 518 789 878 878 1,549
Distributions, net of contributions......................... (820) (2,068) (1,543) (1,459) (1,715)
--------- --------- --------- ----------- ---------
Retained earnings, end of period............................ $ 789 $ 878 $ 1,549 $ 1,266 $ 947
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See notes to financial statements.
F-21
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 1,091 $ 2,157 $ 2,214 $ 1,847 $ 1,113
--------- --------- --------- ----------- -----------
Adjustments to reconcile net income to cash provided
by operating activities:
Investment.......................................... (330) (270) - -
Compensation........................................ - - - - 150
Depreciation and amortization....................... 51 123 188 143 159
Provision for doubtful accounts..................... 7 - -
Changes in assets and liabilities:
Accounts receivable............................... (666) 102 (268) 109 342
Prepaid expenses and other current assets......... (41) (60) (43) 93 125
Deposits and other................................ - (5) - - -
Deferred revenue.................................. 776 103 (709) (760) (250)
Accounts payable and accrued expenses............. 43 112 166 536 (16)
--------- --------- --------- ----------- -----------
Total adjustments............................... (160) 105 (666) 121 510
--------- --------- --------- ----------- -----------
Cash provided by operating activities........... 931 2,262 1,548 1,968 1,623
--------- --------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (322) (393) (260) (223) (89)
Return of investment.................................. - - 600 600 -
--------- --------- --------- ----------- -----------
Cash provided by (used for) investing
activities.................................... (322) (393) 340 377 (89)
--------- --------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable.......................................... 200 200 (250) (500) 300
Distributions, net of contributions................... (820) (2,068) (1,543) (1,459) (1,865)
--------- --------- --------- ----------- -----------
Cash used for financing activities.............. (620) (1,868) (1,793) (1,959) (1,565)
--------- --------- --------- ----------- -----------
Increase (decrease) in cash and equivalents............. (11) 1 95 386 (31)
Cash and equivalents, beginning of period............... 17 6 7 7 102
--------- --------- --------- ----------- -----------
Cash and equivalents, end of period..................... $ 6 $ 7 $ 102 $ 393 $ 71
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
SUPPLEMENTAL INFORMATION--INTEREST PAID................. $ 2 $ 11 $ 31 $ 27 $ 10
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
Noncash Transactions--In 1994 and 1995, the Company received an equity position
in an investment in exchange for services with an assigned value at the date of
exchange of $330 and $270, respectively (see Note 6). In 1997, the chief
executive officer/sole stockholder received $150 as a distribution, which has
been recorded as compensation.
See notes to financial statements.
F-22
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS, PRINCIPAL PRODUCT AND MARKETS--Management Support
Technology Corp. (the "Company") is a consulting and systems integration firm
specializing in the use of corporate strategy and information technology to
improve organizational effectiveness, productivity, quality, flexibility and
speed. The Company consults with executive management in major United States and
European companies and governmental agencies to identify opportunities for using
technology to improve organizational performance. This includes business process
reengineering, organizational transformation planning, strategic information
technology initiatives in mission critical business processes, IT product
development, IT technology research and development of executive information
system and decision support applications. The Company provides development and
operational support for these information technology applications to its clients
throughout the entire life cycle of the applications. Its offices are located in
the Boston suburb of Framingham, Massachusetts, and near Los Angeles in Seal
Beach, California.
STOCK SPLITS AND RECAPITALIZATIONS--On June 1, 1996, the Board of Directors
and stockholder declared a five-for-one split of the Company's common stock,
approved an increase in the authorized common stock from 500,000 to 2,500,000
shares, and changed the par value of its common stock from $.01 per share to
$.002 per share. In June 1997, the Board of Directors and stockholder declared
an eight-for-one split of the Company's common stock, approved an increase in
the authorized common stock from 2,500,000 to 20,000,000 shares and changed the
par value of its common stock from $.002 per share to $.00025 per share. All
share data have been adjusted to reflect the splits of the Company's common
stock.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION (UNAUDITED)--The interim financial statements
for the nine months ended September 30, 1996 are unaudited and certain
information and disclosures normally included in annual financial statements
have been omitted. In the opinion of management, the accompanying interim
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows in accordance with generally
accepted accounting principles with respect to the interim financial statements
and have been prepared on the same basis as the audited financial statements.
The results of operations for the interim period is not necessarily indicative
of the results for the entire fiscal year.
USE OF ESTIMATES--The preparation of the Company's financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND EQUIVALENTS--The Company considers all highly liquid investments
purchased with remaining maturities of three months or less to be cash
equivalents.
EXPENSES OF STOCK OFFERING--As of September 30, 1997, the Company has
incurred $44,000 of expenses directly attributable to an offering of securities
(the "Offering") in connection with the Acquisition (see Note 9). These expenses
have been deferred as of September 30, 1997 and are included in prepaid expenses
and other current assets in the accompanying balance sheet. The expenses will be
charged against the gross proceeds of the Offering, which is expected to be
completed in early 1998.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets.
F-23
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leasehold improvements are recorded at cost and amortized using the
straight-line method over the lesser of the lease term or the estimated useful
life. Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever
circumstances indicate that the carrying value of an asset may not be
recoverable. The adoption of SFAS No. 121 did not have any effect on the
Company's financial position or results of operations for the year ended
December 31, 1996.
INVESTMENT--The investment was carried at cost (see Note 6).
REVENUE RECOGNITION, SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT
RISK--Substantially all revenue is generated from consulting contracts and is
recognized over specified performance periods using the percentage-of-completion
method. The Company records certain costs incurred under consulting contracts
which are billable to customers as revenue. The Company performs ongoing credit
evaluations of its customers, maintains allowances for potential credit losses
and generally requires no collateral from its customers. Substantially all of
the Company's revenue was earned from the Joint Venture and six independently
operated divisions of a large multinational holding company in 1994, 1995, 1996
and 1997 (Notes 6 and 7); an unrelated party in 1995; and an unrelated party in
1996 and 1997.
INCOME TAXES--The Company has elected to be taxed under Subchapter S of the
Internal Revenue Code. As a result, income of the Company is treated as
distributed to the stockholder and is reported on the personal income tax
returns of the stockholder. Accordingly, the Company makes no provision for
income taxes, and has not provided for deferred income taxes.
2. OFFICER SALARY
Mr. C. Lawrence Meador, the Company's chief executive officer and sole
stockholder, elected not to receive a salary for the nine months ended September
30, 1997 and to receive only distributions. The amount of any compensation or
any distribution is at Mr. Meador's sole discretion. In accordance with the
intent of Staff Accounting Bulletin No. 55, the Company has measured the value
of Mr. Meador's services as chief executive officer for the period and has
recorded compensation, with a corresponding reduction in stockholder
distributions, of $150,000, which has been recognized in the accompanying income
statement as a component of cost of revenue.
In measuring the value of Mr. Meador's services for the period, the Company
concluded that the value for such services for the full year is $200,000, as
this amount represents Mr. Meador's annual base salary for each calendar year
since 1992. The $150,000 represents a pro rata amount for the nine-month period.
In reaching this conclusion, the Company considered other information, including
(i) a one-time bonus of $280,000 paid to Mr. Meador for 1996, which brought the
officer/stockholder's total 1996 compensation to $480,000; (ii) a proposed
employment agreement between Mr. Meador and Condor (Note 9) which provides for a
minimum annual salary to be paid to Mr. Meador of $431,000 (unaudited) in his
dual role as the chief executive of the Company and as Vice Chairman of Condor's
board of directors subsequent to the Acquisition (Note 9) and (iii) total
distributions of $1,865,000 (prior to reclassification of salary) paid to Mr.
Meador during the nine-month period ended September 30, 1997 as compared to
distributions for the years ended December 31, 1992, 1993, 1994, 1995 and 1996
and for the nine months ended September 30, 1996 of $82,000 (unaudited),
$224,000 (unaudited), $820,000, $2,068,000, $1,543,000 and $1,459,000
(unaudited), respectively. Cost of revenue includes $200,000, $200,000,
$480,000, $360,000
F-24
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
2. OFFICER SALARY (CONTINUED)
(unaudited) and $150,000 of compensation to Mr. Meador for the years ended
December 31, 1994, 1995 and 1996 and for the nine months ended September 30,
1996 and 1997, respectively. Such compensation is at Mr. Meador's sole
discretion and, accordingly, the accompanying financial statements may not
necessarily be indicative of the conditions that would have existed if the
Company were not owned solely by Mr. Meador. Subsequent to September 30, 1997,
Mr. Meador received additional distributions aggregating $500,000 (unaudited).
3. NOTES PAYABLE TO BANK
At December 31, 1995, 1996 and September 30, 1997, the Company had a
line-of-credit agreement with Fleet Bank of Boston, N.A. (the "Bank") which
provided for borrowings of up to $500,000, $750,000 and $750,000, respectively.
Borrowings bear interest at the Bank's prime lending rate plus .75% (9% at
December 31, 1996 and 9.25% at September 30, 1997). The line-of-credit agreement
was renewed on October 2, 1997 (expiring October 2, 1998) under similar terms
and conditions and requires compensating balances equal to 5% ($37,500) of the
maximum amount of the loan be maintained at the Bank.
On October 2, 1997, the Company secured a second line-of-credit with the
Bank which provides for borrowings of up to $200,000. Borrowings bear interest
at the Bank's prime lending rate plus .75%. If the Bank has not made prior
demand, borrowings under this agreement shall convert on October 2, 1998 to a
term loan with equal monthly fixed principal payments plus interest due over
three years.
The two line-of-credit agreements are guaranteed by Mr. Meador (Note 2) and
include non-financial covenants and conditions which, among other things,
require the Company to maintain a zero balance for at least a thirty-day period
during the year. All amounts outstanding under the agreements (unless the
above-mentioned conversion occurs) are due on demand and are secured by all
assets of the Company.
4. COMMITMENTS
The Company leases certain equipment and office space under operating lease
arrangements expiring through 2000. Future minimum rental payments under
noncancelable operating leases at September 30, 1997 follow:
<TABLE>
<CAPTION>
Period ended December 31
<S> <C>
1997.............................................................. $ 35,000
1998.............................................................. 141,000
1999.............................................................. 74,000
2000.............................................................. 34,000
---------
$ 284,000
---------
---------
</TABLE>
Rent expense in 1994, 1995 and 1996 was $84,000, $115,000 and $136,000,
respectively. Rent expense for the nine months ended September 30, 1996 and 1997
was $107,000 and $119,000, respectively.
5. PROFIT-SHARING PLAN
The Company has a profit-sharing plan for its eligible employees. Employees
are eligible for participation upon attaining the age of 21 and completion of
one year of service. Contributions to the plan are made at the discretion of the
Board of Directors. Discretionary contributions aggregated $73,000,
F-25
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
5. PROFIT-SHARING PLAN (CONTINUED)
$93,000 and $131,000 in 1994, 1995 and 1996, respectively. Discretionary
contributions for the nine months ended September 30, 1996 and 1997 aggregated
$96,000 and $3,000, respectively.
The Company established a 401(k) plan in 1994 covering substantially all
full-time employees. Under the provisions of the plan, employees may contribute
a portion of their compensation within certain limitations. The Company matches
a percentage of employee contributions on a discretionary basis as determined by
the Board of Directors. For the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, the Board of Directors
elected to match 50% of employee contributions on the first 6% of the
participant's elective deferral, subject to certain limitations. The Company
contributed $18,000, $37,000 and $42,000 to the plan in 1994, 1995 and 1996,
respectively. The Company contributed approximately $33,000 and $36,000 for the
nine months ended September 30, 1996 and 1997, respectively.
6. INVESTMENT
In 1994, the Company entered into an agreement to purchase, prior to
December 7, 1995, for $600,000, a 10% equity interest in a recently formed
entity (the "Joint Venture") that is a significant client of the Company (Note
1). The Company's chief executive officer and stockholder served as a director
of the Joint Venture until May 30, 1996. Under the terms of the agreement, the
purchase price was withheld by the client from amounts payable to the Company
for services rendered under consulting agreements. At December 31, 1995, the
entire $600,000 had been withheld and was classified as an investment.
On May 30, 1996, the Joint Venture was acquired by a large multinational
holding company (Notes 1 and 7) and returned the Company's $600,000 investment
prior to consummation of the acquisition of the 10% interest and the Company
agreed to provide consulting services through October 31, 1996 to the Joint
Venture in exchange for $108,000, plus expenses. Revenue was recognized as
services were provided.
7. OTHER RELATED-PARTY TRANSACTIONS
Included in prepaid expenses and other current assets at December 31, 1995
is an advance of $15,000 to a director.
During 1995 and 1996, the Company paid approximately $86,000 and $245,000,
respectively, in consulting fees to two companies that have directors in common
with the Company under arms length terms. During the nine months ended September
30, 1996 and 1997, the Company paid approximately $154,000 and $61,000,
respectively, to these two companies.
During 1995, Mr. Meador (Note 2) became an officer, on an interim assignment
under contract, of a division of a large multinational holding company (Notes 1
and 6).
8. STOCK OPTION PLAN
In June 1997, the Board of Directors and shareholder adopted the 1997 Stock
Option Plan (the "Plan"), pursuant to which options to purchase up to 5,000,000
shares of common stock may be granted. Options granted under the Plan may be
designated as qualified and nonqualified stock options and are exercisable over
a term of not more than ten years (five years in the case of an incentive option
granted to a ten-percent stockholder). The exercise price of qualified stock
options will not be less than 100% (110%, in the case of an incentive option
granted to a ten-percent stockholder) of the fair market value at the time
F-26
<PAGE>
MANAGEMENT SUPPORT TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
8. STOCK OPTION PLAN (CONTINUED)
of grant. Options granted under the Plan vest over a period as determined by the
Board of Directors at the time of grant. No options have been granted under the
Plan. Effective November 28, 1997, the Board of Directors voted to terminate the
Plan.
9. SUBSEQUENT EVENT (UNAUDITED)
In October 1997, the Company entered into an agreement with Condor
Technology Solutions, Inc. ("Condor") for the acquisition of all of the
Company's outstanding common stock (the "Acquisition"). The consideration to be
paid by Condor for the Acquisition is approximately $17.6 million (unaudited),
$9.8 million (unaudited) of which would be paid in cash and $7.9 million
(unaudited) of which would be paid in Condor common stock. In addition, Mr.
Meador (Note 2) is eligible for an earn-out, resulting in contingent
consideration of up to $8.4 million (unaudited), up to $2.5 million (unaudited)
of which would be paid in cash and the remainder of which would be paid in
additional Condor common stock. Mr. Meador will also receive options to acquire
a number of shares of Condor common stock equal to 1.33% (unaudited) of Condor's
outstanding common stock at the Acquisition's close date which he may distribute
at his sole discretion. The consummation of the Acquisition is conditioned upon
Condor acquiring certain other companies and the availability of acceptable
financing.
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Computer Hardware Maintenance Company, Inc.
In our opinion, the accompanying balance sheets at February 29, 1996,
February 28, 1997 and August 31, 1997, the related statements of operations, of
changes in stockholders' equity and of cash flows for the years ended February
29, 1996 and February 28, 1997 and for the six month period ended August 31,
1997, and the related consolidated statement of operations, of changes in
stockholders' equity and of cash flows for the year ended February 28, 1995,
present fairly, in all material respects, the financial position of Computer
Hardware Maintenance Company, Inc. at February 29, 1996, February 28, 1997 and
August 31, 1997 and the results of its operations and its cash flows for the
years ended February 28, 1995, February 29, 1996 and February 28, 1997 and for
the six month period ended August 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, PA
October 31, 1997
F-28
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEB. 29, FEB. 28, AUG. 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 923 $ 928 $ 1,940
Accounts receivable, net of allowance of $30 in 1996 and 1997..................... 3,025 5,267 4,898
Inventory......................................................................... 2,885 1,378 946
Deferred income taxes............................................................. 13 11 11
Prepaid expenses and other current assets......................................... 10 171 93
--------- --------- -----------
Total current assets.......................................................... 6,856 7,755 7,888
Fixed assets, net................................................................... 265 307 342
Investment in partnership........................................................... 10 17
Other non-current assets............................................................ 40 47 44
--------- --------- -----------
Total assets.................................................................. $ 7,171 $ 8,126 $ 8,274
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................................... $ 1,531 $ - $ 134
Current portion of capital lease obligations...................................... 13 16 10
Current portion of long-term debt................................................. 48 34 30
Accounts payable.................................................................. 1,938 2,342 1,323
Accrued liabilities............................................................... 454 850 1,418
Deferred revenue.................................................................. 1,085 1,730 1,555
Other current liabilities......................................................... 262 262 92
--------- --------- -----------
Total current liabilities..................................................... 5,331 5,234 4,562
Long-term debt...................................................................... 19 28
Other long-term liabilities......................................................... 14 12
--------- --------- -----------
Total liabilities............................................................. 5,364 5,274 4,562
--------- --------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized; 5,980,000 shares issued
in 1996 and 1997; 4,200,000, 4,100,000 and 4,100,000 shares outstanding at
February 1996, February 1997 and May 1997, respectively.........................
Additional paid-in capital........................................................ 126 126 306
Deferred stock compensation....................................................... 174
Retained earnings................................................................. 2,036 2,930 3,807
--------- --------- -----------
2,162 3,230 4,113
Less: Treasury stock (1,780,000, shares at February 1996 and 1,880,000 shares at
February 1997 and May 1997, all at cost)........................................ (355) (378) (401)
--------- --------- -----------
Total stockholders' equity.................................................... 1,807 2,852 3,712
--------- --------- -----------
Total liabilities and stockholders' equity.................................... $ 7,171 $ 8,126 $ 8,274
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28,
1997,
AND FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND 1997
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------- AUGUST 31,
FEB. 28, FEB. 29, FEB. 28, --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Services................................................. $ 7,545 $ 7,997 $ 9,279 $ 4,290 $ 6,401
Hardware and software procurement........................ 25,656 22,811 35,439 16,969 17,664
--------- --------- --------- --------- ---------
Total revenues....................................... 33,201 30,808 44,718 21,259 24,065
--------- --------- --------- --------- ---------
Cost of revenues:
Services................................................. 4,623 5,187 6,061 3,097 3,648
Hardware and software procurement........................ 23,421 21,036 32,342 15,341 15,242
--------- --------- --------- --------- ---------
Total cost of revenues............................... 28,044 26,223 38,403 18,438 18,890
--------- --------- --------- --------- ---------
Gross profit............................................... 5,157 4,585 6,315 2,821 5,175
Selling, general and administrative expenses............... 3,910 3,844 4,784 1,761 3,794
--------- --------- --------- --------- ---------
Income from operations..................................... 1,247 741 1,531 1,060 1,381
--------- --------- --------- --------- ---------
Other income (expense):
Net interest expense..................................... (284) (175) (191) (94) (14)
Other income............................................. 79 107 152 14 95
--------- --------- --------- --------- ---------
Total other income (expense)......................... (205) (68) (39) (80) 81
--------- --------- --------- --------- ---------
Income before income taxes................................. 1,042 673 1,492 980 1,462
Provision for taxes........................................ 396 285 598 440 585
--------- --------- --------- --------- ---------
Net income................................................. $ 646 $ 388 $ 894 $ 540 $ 877
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED FEBRUARY 28,
1997
AND FEBRUARY 29, 1996 AND THE SIX MONTH PERIOD ENDED AUGUST 31, 1997
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED
FEBRUARY 28, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL TREASURY STOCK DEFERRED TOTAL
---------- PAID-IN ----------------------- STOCK RETAINED STOCKHOLDERS'
SHARES CAPITAL SHARES AMOUNT COMPENSATION EARNINGS EQUITY
---------- ------------- ---------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1994........ 4,450,000 $ 126 1,530,000 $ (292) $ - $ 1,002 $ 836
Stock repurchase.................. (100,000) 100,000 (22) (22)
Net Income........................ 646 646
---------- ----- ---------- ----- ----- ----------- ------
Balance, February 28, 1995........ 4,350,000 126 1,630,000 (314) 1,648 1,460
Stock repurchase.................. (150,000) 150,000 (41) (41)
Net Income........................ 388 388
---------- ----- ---------- ----- ----- ----------- ------
Balance, February 29, 1996........ 4,200,000 126 1,780,000 (355) 2,036 1,807
Stock repurchase.................. (100,000) 100,000 (23) (23)
Stock options vested.............. 174 174
Net income........................ 894 894
---------- ----- ---------- ----- ----- ----------- ------
Balance, February 28, 1997........ 4,100,000 126 1,880,000 (378) 174 2,930 2,852
Stock options exercised........... 90,000 180 (174) 6
Stock repurchase.................. (100,000) 100,000 (23) (23)
Net income........................ 877 877
---------- ----- ---------- ----- ----- ----------- ------
Balance, August 31, 1997.......... 4,090,000 $ 306 1,980,000 $ (401) $ - $ 3,807 $ 3,712
---------- ----- ---------- ----- ----- ----------- ------
---------- ----- ---------- ----- ----- ----------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28,
1997,
AND FOR THE SIX MONTHS ENDED AUGUST 31, 1996 AND 1997
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED FEBRUARY 28, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
------------------------------------- ENDED AUGUST 31,
FEB. 28, FEB. 29, FEB. 28, ----------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 646 $ 388 $ 894 $ 540 $ 877
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 148 117 95 43 48
Loss on sale of fixed assets.............................. 2
Gain on sale of partnership investment.................... (56)
Deferred compensation..................................... 174 6
Income from partnership................................... (4) (6) (7)
Increase (decrease) in cash from changes in operating
assets and liabilities:
Accounts receivable..................................... (629) 720 (2,242) (2,204) 369
Inventory............................................... 1,205 (883) 1,507 774 432
Prepaids and other current assets....................... 67 13 (168) 4 81
Deferred taxes.......................................... 35 10 8 13 -
Accounts payable and accruals........................... (1,488) 331 800 1,363 (621)
Deferred revenue........................................ 135 (741) 645 45 (175)
----------- ----- ----------- ----------- ---------
Net cash provided by (used in) operating activities... 115 (51) 1,708 578 961
----------- ----- ----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets................................... (95) (112) (139) (75) (83)
----------- ----- ----------- ----------- ---------
Net cash used in investing activities................. (95) (112) (139) (75) (83)
----------- ----- ----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases..... (5) (10) (37) (57) (50)
Net borrowings (payments) under line of credit.............. 67 624 (1,504) (962) 134
Treasury stock repurchases.................................. (22) (41) (23) (12) (23)
Proceeds from sale of investment in partnership............. 73
----------- ----- ----------- ----------- ---------
Net cash provided by (used in) financing activities... 40 573 (1,564) (1,031) 134
----------- ----- ----------- ----------- ---------
Net increase (decrease) in cash and cash equivalents.......... 60 410 5 (528) 1,012
Cash and cash equivalents at beginning of period.............. 453 513 923 923 928
----------- ----- ----------- ----------- ---------
Cash and cash equivalents at end of period.................... $ 513 $ 923 $ 928 $ 395 $ 1,940
----------- ----- ----------- ----------- ---------
----------- ----- ----------- ----------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 303 $ 217 $ 209 $ 93 $ 14
----------- ----- ----------- ----------- ---------
----------- ----- ----------- ----------- ---------
Cash paid for income taxes.................................. $ 250 $ 289 $ 859 $ 450 $ 760
----------- ----- ----------- ----------- ---------
----------- ----- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Computer Hardware Maintenance Company, Inc. ("CHMC"), a Pennsylvania
corporation founded in 1972, provides desktop computer systems, service and
support programs for a variety of commercial and federal, state and local
governmental entities in the Mid-Atlantic region. CHMC has sales and support
offices throughout its market region, and offers nationwide coverage through a
network of operating affiliations and alliances. CHMC's service offerings
include network management and support, desktop system procurement and
refreshment, migration consulting and support, help-desk, remedial and
preventive maintenance and asset management services. The Company is
headquartered in Langhorne, Pennsylvania and has significant operations in
Allentown, Pennsylvania.
The Company and its stockholders have entered into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The statements of operations, of changes in stockholders' equity and of cash
flows for the six months ended August 31, 1996 are unaudited, and certain
information and footnote disclosure related thereto, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CHMC and its
wholly-owned subsidiary, Computer Hardware Product Centers, Inc. ("CHPC"), in
1995. Effective February 28, 1995, CHMC and CHPC merged to form one legal
entity, under the name of Computer Hardware Maintenance Company, Inc. All
significant intercompany balances and transactions have been eliminated in 1995.
CASH AND CASH EQUIVALENTS
CHMC considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
CHMC maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. CHMC has not experienced any losses in such accounts.
CHMC believes it is not exposed to any significant credit risk on cash and cash
equivalents. In addition, the Company grants credit terms in the normal course
of business to its customers. As part of its ongoing procedures, the Company
monitors the credit worthiness of its customers. The Company does not believe
that it is subject to any unusual credit risk beyond the normal credit risk
attendant in its business.
F-33
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company's sales and services are provided primarily to large and
mid-size companies. One commercial client represented greater than 10% of total
revenues for the years ended February 28, 1995, February 29, 1996 and February
28, 1997. Total revenues for this client were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Hardware and software............................................ $ 7,500 $ 3,677 $ 7,571
Services......................................................... 1,453 1,402 1,876
--------- --------- ---------
$ 8,953 $ 5,079 $ 9,447
--------- --------- ---------
--------- --------- ---------
</TABLE>
At February 28, 1995 and February 29, 1996, accounts receivable from one
commercial client were 12% of accounts receivable. At February 28, 1997,
accounts receivable from a different commercial client were greater than 10% of
accounts receivable.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenues are recognized upon delivery of the equipment and/or related
services. Revenues on long-term service contracts are recognized ratably over
the term of the contract. The Company receives advance payment on certain
maintenance contracts. Such advance payments are deferred and are reflected in
income together with the related costs and expenses as the services are
performed. Accounts receivable are accounted for net of allowances for estimated
uncollectible amounts.
INVENTORY
Inventories are stated at the lower of cost or market using the average cost
method and at February 29, 1996 and February 28, 1997 were comprised of the
following (in thousands):
<TABLE>
<CAPTION>
FEB. 29, FEB. 28, AUG. 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
New computer products (held for resale)........................ $ 2,145 $ 578 $ 506
Maintenance supplies........................................... 275 348 33
Maintenance parts.............................................. 465 452 407
--------- --------- -----
$ 2,885 $ 1,378 $ 946
--------- --------- -----
--------- --------- -----
</TABLE>
FIXED ASSETS
Fixed assets are recorded at cost. Improvements which substantially increase
the useful lives of assets are capitalized. Maintenance and repairs are expensed
as incurred. Upon retirement or disposal, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is
recorded. Depreciation is computed on the straight-line method based on the
estimated useful lives of assets as indicated in Note 5.
F-34
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are provided in accordance with the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
deferred tax assets and liabilities are recognized at the applicable income tax
rates based upon future tax consequences of temporary differences between the
tax basis and financial reporting basis of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. GOVERNMENT CONTRACTS
The Company has contracts with two state governments to provide products and
services to any of their agencies. These contracts are not subject to
renegotiation nor do they guarantee minimum sales levels; rather they name the
Company as an approved vendor for the governmental agencies. All income under
the contracts is recognized in the same manner as income from other parties.
Sales to governmental agencies totaled $2,570,000 for the six month period ended
August 31, 1997, and $3,980,000, $3,791,000 and $9,063,000 for the years ended
February 28, 1995, February 29, 1996 and February 28, 1997, respectively.
Accounts receivable from such agencies at February 29, 1996 and February 28,
1997 were $349,000 and $1,215,000, respectively.
4. INVESTMENT IN PARTNERSHIP
The Company is a partner in Computer Hardware Investors, which owns real
estate in Southampton, Pennsylvania. The property is used by CHI Institute, a
technical school, operated by Computer Hardware Service Company, Inc. (a related
party, see Note 13). Under the Partnership Agreement, profits and losses
resulting from the partnership are allocated 30% to each of two general
partners, 34% to Computer Hardware Service Company, Inc. and 6% to CHMC. Income
from the partnership for the years ended February 28, 1995, February 29, 1996
and February 28, 1997 was $4,000, $6,000 and $7,000, respectively. The
investment is accounted for under the equity method with earnings included in
the other income line in the income statement. The Company sold this investment
in June 1997 for a gain of $56,000, which is reflected in other income in the
statement of operations for the six months ended August 31, 1997.
F-35
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FIXED ASSETS
Fixed assets at the dates indicated below consisted of the following (in
thousands):
<TABLE>
<CAPTION>
AVERAGE FEB. 29, FEB. 28, AUG. 31,
USEFUL LIFE 1996 1997 1997
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computer equipment............................ 3--5 years $ 105 $ 174 $ 184
Software...................................... 3 years 20 20 30
Furniture and equipment....................... 5--7 years 370 400 404
Motor vehicles................................ 5 years 132 124 124
Leasehold and building improvements........... 1--10 years 209 218 244
----- ----- -----
Total fixed assets at cost.............. 836 936 986
Less accumulated depreciation and
amortization................................ (571) (629) (644)
----- ----- -----
Total fixed assets, net................. $ 265 $ 307 $ 342
----- ----- -----
----- ----- -----
</TABLE>
Property held under capital leases were included in the respective fixed
asset accounts on the balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
FEB. 29, FEB. 28, AUG. 31,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Furniture and equipment....................................... $ 91 $ 77 $ 77
Less accumulated depreciation................................. (57) (69) (77)
--- --- ---
$ 34 $ 8 $ -
--- --- ---
--- --- ---
</TABLE>
Depreciation and amortization of capital leases totaled $48,000 for the six
month period ended August 31, 1997, and $100,000, $117,000, and $95,000 for the
years ended February 28, 1995, February 29, 1996 and February 28, 1997,
respectively.
6. LONG-TERM DEBT
Long-term debt at February 29, 1996 and February 28, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Notes payable on automobiles at varying interest rates ranging from 7.25%
to 11.90%; due at various times through February 2000; payable in
monthly installments of principal and interest......................... $ 52 $ 47
Capital leases due through September 2001................................ 27 22
Notes payable to stockholder; interest free; due October 1997............ 15 15
--- ---
94 84
Less current maturities of long-term debt................................ 61 50
--- ---
$ 33 $ 34
--- ---
--- ---
</TABLE>
F-36
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Minimum principal payments on long-term debt and capital leases for the
years subsequent to February 28, 1997 is as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------------
<S> <C>
(IN THOUSANDS)
1998........................................................................... $ 50
1999........................................................................... 21
2000........................................................................... 12
2001........................................................................... 1
---
$ 84
---
---
</TABLE>
7. LINE OF CREDIT
The Company has a revolving line of credit with IBM Credit Corp. The amount
available to be drawn from the line is primarily based on 85% of eligible
accounts receivable plus the value of any IBM inventory on hand. The maximum
available to be drawn cannot exceed $4.5 million, unless a temporary extension
of the line is granted. Extensions had been granted at February 29, 1996 and
February 28, 1997 to $6,700,000 and $6,750,000, respectively. The line of credit
is secured by accounts receivable, inventory, other assets of the Company and
the personal guarantees of the principal shareholders.
The interest rate on the line of credit is prime plus 1.875%. Additionally,
a service fee totaling $15,000 annually is charged on this line.
The line requires the maintenance of certain financial ratios, including
minimum revenue to working capital, minimum net income after tax to revenue and
maximum liabilities to tangible net worth. The Company was in compliance with
all such covenants at August 31, 1997.
8. FLOOR PLAN FINANCING
Certain inventory purchases are financed through floor plan arrangements.
These arrangements require the maintenance of certain financial levels and
ratios, including minimum net worth, minimum current ratio and minimum working
capital levels. Amounts outstanding under these agreements are interest free for
the first 30 days and bear interest at rates based on prime plus 1.25 to 2.125%
thereafter. At August 31, 1997, the Company was in compliance with all such
covenants. At August 31, 1997, February 28, 1997 and February 29, 1996, the
Company had outstanding balances of $1,018,000, $3,160,000 and $2,268,000,
respectively. These amounts are included in accounts payable on the balance
sheet.
9. COMMITMENT AND CONTINGENCIES
OPERATING LEASES
The Company leases various office buildings and a warehouse. Except for its
main office, none of the leases extend beyond one year. Under the terms of this
lease, the Company is required to pay minimum annual rent of $191,000 through
January 14, 1998. The Company has an option to renew the lease for an additional
five years based on the current market rental at the time of exercising such
option.
F-37
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENT AND CONTINGENCIES (CONTINUED)
Minimum future lease payments under the above-mentioned lease for the term
of the lease amount to $87,500 for the remainder of fiscal 1998, $207,000 for
fiscal 1999 and 2000, and $214,000 for fiscal 2001, 2002 and 2003.
Rent expense, including lease payments, approximated $140,000 for the six
month period ended August 31, 1997, and $315,000, $306,000 and $303,000 for the
years ended February 28, 1995, February 29, 1996 and February 28, 1997,
respectively.
LITIGATION
CHMC is a party to litigation arising in the ordinary course of business
which, in the opinion of management, will not have a material adverse effect on
CHMC's financial condition or results of operations.
10. EMPLOYEE BENEFITS DEFINED CONTRIBUTION PLAN
The Company has a 401(k) Savings Plan ("Plan") that covers substantially all
of its employees. Participants may make voluntary contributions to the Plan of
up to 15% of their compensation not to exceed Internal Revenue Service allowable
limits. The Company will contribute 50% of the amount contributed by an employee
that is not in excess of 3% of such employee's compensation.
During the six months ended August 31, 1997, and the years ended February
28, 1995, February 29, 1996 and February 28, 1997, employer contributions to the
Plan were $46,000, $41,000, $45,000 and $52,000, respectively.
11. INCOME TAXES
The provision for income taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
------------------------------------- -------------
FEB. 28, FEB. 29, FEB. 28, AUG. 31,
1995 1996 1997 1997
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Current expense:
Federal........................................... $ 272 $ 224 $ 452 $ 455
State............................................. 89 71 134 130
----- ----- ----- -----
361 295 586 585
Deferred expense (income):
Federal........................................... 25 (7) 9
State............................................. 10 (3) 3
----- ----- ----- -----
35 (10) 12
----- ----- ----- -----
Total......................................... $ 396 $ 285 $ 598 $ 585
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
F-38
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The components of net deferred taxes at the dates indicated below were as
follows (in thousands):
<TABLE>
<CAPTION>
FEB. 29 FEB. 28 AUG. 31
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax asset:
Accounts receivable............................................. $ 13 $ 11 $ 11
--- --- ---
Deferred tax liability:
Fixed assets.................................................... (18) (22) (22)
Other........................................................... (6) (6)
--- --- ---
(18) (28) (28)
--- --- ---
Net deferred tax liability........................................ $ (5) $ (17) $ (17)
--- --- ---
--- --- ---
</TABLE>
For the six months ended August 31, 1997 and the years ended February 28,
1995, February 29, 1996 and February 28, 1997, the effective tax rates of 40%,
38%, 42% and 40%, respectively, approximated the combined Federal and State
statutory tax rate.
The Company is affiliated with Computer Hardware Service Company, Inc. (see
Note 13) under Internal Revenue Regulations, and accordingly, they share one
surtax exemption which was allocated evenly between the two companies.
12. STOCK OPTIONS
Effective June 1, 1996, the Board of Directors authorized a Stock Purchase
Plan (the "Plan") for three employees. Under the terms of the Plan, each
individual has an option to purchase 75,000 shares of stock at $.50 per share.
These options vest in five increments of 15,000 shares. The vesting schedule in
aggregate for all options is as follows:
<TABLE>
<CAPTION>
OPTION PERIOD
------------------------
<S> <C> <C>
FIRST DAY LAST DAY
NUMBER OF SHARES TO EXERCISE TO EXERCISE
- --------------------------------------------------------------------- ----------- -----------
45,000 shares........................................................ 6/1/96 5/31/98
45,000 shares........................................................ 6/1/97 5/31/99
45,000 shares........................................................ 6/1/98 5/31/00
45,000 shares........................................................ 6/1/99 5/31/01
45,000 shares........................................................ 6/1/00 5/31/02
</TABLE>
No shares have been exercised through February 28, 1997.
CHMC adopted the intrinsic value method of accounting for stock options
under APB 25 which resulted in compensation expense of $174,000 for the year
ended February 28, 1997. During the six months ended August 31, 1997, the Plan
was amended to reduce the number of options for each individual from 75,000 to
30,000. All other provisions of the Plan were unchanged. These options were
exercised in August 1997. Upon exercise, the new shareholders issued promissory
notes to the Company in the amount of $45,000. The notes are to be repaid upon
the sale of the Company's stock to Condor (Note 1) and have no stated interest
rate. As a result of the Plan amendment, compensation expense for the shares was
$135,000. The Company reduced its selling, general and administrative expenses
by $39,000 during the six month
F-39
<PAGE>
COMPUTER HARDWARE MAINTENANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
period ended August 31, 1997 to offset the excess compensation expense recorded
during the year ended February 28, 1997.
FASB Statement No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION ("FAS 123"),
requires stock options to be valued using an approach such as the Black-Scholes
option pricing model. The Black-Scholes model calculates the fair value of the
grant based upon certain assumptions about the underlying stock. For this
calculation, CHMC has used an expected dividend yield of zero, an expected life
of the options of five years and an expected risk-free rate of return of 6%,
calculated as the rate offered on U.S. Government securities with the same term
as the expected life of the options. As permitted by FAS 123 for nonpublic
companies, no volatility factor has been used in this valuation. The weighted
average remaining contractual life of all options outstanding at February 28,
1997 was 4 years and 3 months. Using these assumptions, the weighted average
fair values of options granted during fiscal 1997 is $2 per share. No options
were granted in the six month period ended August 31, 1997 or in fiscal 1995.
Had compensation expense for CHMC's employee stock options been determined
on the fair value at the grant date for awards during the six months ended
August 31, 1997, or the year ended February 28, 1997, consistent with the
provisions of FAS 123, CHMC's net income would not have changed by a significant
amount.
13. RELATED PARTY TRANSACTIONS
The Company is affiliated with Computer Hardware Services Company, Inc.
("CHSC") through common ownership. There were no significant transactions
between the Company and CHSC during the six months ended August 31, 1997, and
the years ended February 28, 1995, February 29, 1996 and February 28, 1997.
The Company had guaranteed a mortgage of Computer Hardware Investors, in
which it is a partner. At February 29, 1996 and February 28, 1997, the
outstanding balance on this mortgage was $176,000 and $157,000, respectively.
Upon sale of the investment in Computer Hardware Investors (Note 4), the Company
withdrew its guarantee on the mortgage.
F-40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Federal Computer Corporation
We have audited the accompanying consolidated balance sheets of Federal
Computer Corporation and Subsidiaries as of October 31, 1996 and 1997, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended October 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Federal
Computer Corporation and Subsidiaries as of October 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Washington, D.C.
December 31, 1997
F-41
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 4,229 $ 5,454
Marketable securities..................................................................... 1,112 1,185
Accounts receivable....................................................................... 3,389 7,937
Other current assets...................................................................... 68 562
Income taxes receivable................................................................... 239 765
--------- ---------
Total current assets.................................................................. 9,037 15,903
Property and equipment, net................................................................. 82 64
Investment in joint venture................................................................. 49 49
Other assets................................................................................ 16 16
Goodwill, net............................................................................... 333 67
Investment in sales type lease.............................................................. - 492
--------- ---------
Total assets.......................................................................... $ 9,517 $ 16,591
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 1,920 $ 7,612
Accrued expenses.......................................................................... 230 285
Commission payable........................................................................ 1,608 -
Due to shareholders....................................................................... - 2,123
Deferred income taxes..................................................................... 418 104
--------- ---------
Total current liabilities............................................................... 4,176 10,124
Deferred revenue............................................................................ 255 1,724
Deferred income taxes....................................................................... 6 -
--------- ---------
Total liabilities..................................................................... 4,437 11,848
--------- ---------
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
Retained earnings......................................................................... 3,991 3,664
Net unrealized loss on marketable securities.............................................. - (10)
--------- ---------
Total shareholders' equity............................................................ 5,080 4,743
--------- ---------
Total liabilities and shareholders' equity............................................ $ 9,517 $ 16,591
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Equipment sales and installation............................................... $ 36,464 $ 18,223 $ 23,142
Maintenance.................................................................... 9,000 7,755 8,532
Net fee on agency contracts.................................................... 619 408 62
Equity in net earnings from joint venture less distributions/ commissions...... 722 439 1,624
Other, including interest and dividends........................................ 1,318 562 693
--------- --------- ---------
Total revenues........................................................... 48,123 27,387 34,053
--------- --------- ---------
Expenses:
Cost of equipment sales and installation....................................... 32,261 13,932 21,407
Maintenance.................................................................... 6,471 5,236 5,681
Selling, general and administrative............................................ 7,619 5,794 7,298
Interest and other............................................................. 211 49 21
--------- --------- ---------
Total expenses........................................................... 46,562 25,011 34,407
--------- --------- ---------
Income (loss) before income taxes................................................ 1,561 2,376 (354)
Income tax expense (benefit)..................................................... 673 1,073 (27)
--------- --------- ---------
Net income (loss)................................................................ $ 888 $ 1,303 $ (327)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
PREFERRED COMMON STOCK ADDITIONAL GAIN(LOSS) ON
STOCK -------------------------- PAID-IN RETAINED MARKETABLE
SHARES SHARES AMOUNT CAPITAL EARNINGS SECURITIES
----------- ----------- ------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1994................ 3,824 5,747 $ 1 $ 126 $ 7,778 $ (64)
REPURCHASE AND RETIREMENT OF
COMMON STOCK............................. - (5,512) (1) (126) (2,352) -
ISSUANCE OF COMMON STOCK
FOR BUSINESS COMBINATION................. - 3,060 - 1,300 - -
RETURN OF CAPITAL.......................... - - - (200) - -
CHANGE IN UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES, NET OF TAX........ - - - - - 67
RELEASE OF UNEARNED ESOP SHARES............ - - - (11) - -
PREFERRED STOCK DIVIDENDS.................. - - - - (35) -
NET INCOME................................. - - - - 888 -
--
----------- ----------- ----------- ----------- ---
BALANCE AT OCTOBER 31, 1995................ 3,824 3,295 - 1,089 6,279 3
REPURCHASE AND RETIREMENT OF
PREFERRED STOCK.......................... (3,824) - - - (3,591) -
CHANGE IN UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES, NET OF TAX........ - - - - - (3)
NET INCOME................................. - - - - 1,303 -
--
----------- ----------- ----------- ----------- ---
BALANCE AT OCTOBER 31, 1996................ - 3,295 - 1,089 3,991 -
CHANGE IN UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES, NET OF TAX........ - - - - - (10)
NET LOSS................................... - - - - (327) -
--
----------- ----------- ----------- ----------- ---
BALANCE AT OCTOBER 31, 1997................ - 3,295 - $ 1,089 $ 3,664 $ (10)
--
--
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
<CAPTION>
UNEARNED TOTAL
ESOP SHAREHOLDERS'
SHARES EQUITY
----------- -------------
<S> <C> <C>
BALANCE AT OCTOBER 31, 1994................ $ (2,816) $ 5,025
REPURCHASE AND RETIREMENT OF
COMMON STOCK............................. - (2,479)
ISSUANCE OF COMMON STOCK
FOR BUSINESS COMBINATION................. - 1,300
RETURN OF CAPITAL.......................... - (200)
CHANGE IN UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES, NET OF TAX........ - 67
RELEASE OF UNEARNED ESOP SHARES............ 352 341
PREFERRED STOCK DIVIDENDS.................. - (35)
NET INCOME................................. - 888
----------- -------------
BALANCE AT OCTOBER 31, 1995................ (2,464) 4,907
REPURCHASE AND RETIREMENT OF
PREFERRED STOCK.......................... 2,464 (1,127)
CHANGE IN UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES, NET OF TAX........ - (3)
NET INCOME................................. - 1,303
----------- -------------
BALANCE AT OCTOBER 31, 1996................ - 5,080
CHANGE IN UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES, NET OF TAX........ - (10)
NET LOSS................................... - (327)
----------- -------------
BALANCE AT OCTOBER 31, 1997................ - $ 4,743
----------- -------------
----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 888 $ 1,303 $ (327)
Adjustments to reconcile net income (net loss) to net cash provided by (used
in) operating activities:
Depreciation.............................................................. 66 52 39
Amortization of goodwill.................................................. 200 267 266
Release of unearned ESOP shares........................................... 306 - -
Deferred income tax provision (benefit)................................... 90 206 (316)
Undistributed equity in net earnings from joint ventures.................. (198) (249) -
Losses on disposition of property, equipment, and marketable securities,
net..................................................................... 192 1 -
Changes in assets and liabilities:
Accounts receivable..................................................... (6,306) 11,502 (4,548)
Due from affiliates..................................................... 577 - -
Other current assets.................................................... 876 (9) (108)
Income taxes receivable................................................. 282 (239) (526)
Other assets............................................................ 131 - -
Accounts payable........................................................ 1,514 (7,176) 4,814
Accrued expenses........................................................ (654) (79) 55
Due to affiliates....................................................... (1,332) - -
Commission payable...................................................... 1,941 (333) (1,608)
Due to shareholders..................................................... - - 2,123
Income taxes payable.................................................... 301 (301) -
Deferred revenue........................................................ 59 (831) 1,469
---------- ---------- ----------
Net cash (used in) provided by operating activities................... (1,067) 4,114 1,333
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................................... (45) (2) (21)
Purchase of marketable securities........................................... (46) (1,068) (87)
Sales of marketable securities.............................................. 3,331 - -
Proceeds on sale of property and equipment and investments.................. 10 - -
---------- ---------- ----------
Net cash provided by (used in) investing activities................... 3,250 (1,070) (108)
---------- ---------- ----------
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) - -
---------- ---------- ----------
Net cash (used in) provided by financing activities................... 745 (4,552) -
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 2,928 (1,508) 1,225
Cash and cash equivalents, beginning of year.................................. 2,809 5,737 4,229
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 5,737 $ 4,229 $ 5,454
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid, net of refunds........................................... $ - $ 1,408 $ 815
---------- ---------- ----------
---------- ---------- ----------
Interest paid............................................................... $ 211 $ 49 $ 21
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
Federal Computer Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS
Federal Computer Corporation and its subsidiaries (the "Company") are
engaged in the distribution, installation and maintenance of electronic data
processing equipment. The Company pursues this business as a systems integrator
combining data processing equipment obtained from one or more manufacturers into
a single systems configuration. The Company's principal clients are agencies of
the United States Government (the "Government").
The electronic data processing equipment is provided to the Government under
firm-fixed price contracts providing for, in certain cases, purchase options and
lease agency arrangements. Most contracts with the Government are subject to the
availability of annual funding. The Company's contracts provide the Government
with the option not to renew if funding is not received. The Company has never
experienced non-renewal of any significant contracts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company sells, installs and provides maintenance on electronic data
processing equipment. For equipment sales and installation, revenue is
recognized after all costs relevant to the sale have been incurred and the
related equipment has been shipped and accepted. Maintenance revenue is
recognized ratably over the maintenance contract period.
The Company enters into agency contracts between equipment vendors and the
Government when the Government leases electronic data processing equipment. The
Company simultaneously enters into agency contracts which provide for the lease
of equipment from vendors to satisfy the lease commitments with the Government.
The principal provisions of the agreements typically are: fixed contractual
payments between the Government, the Company and the vendor; Government payments
directly to an escrow agent who disburses the payment to the vendor and the
Company; no right of the Company to obtain ownership of the equipment; and the
return of the equipment to the vendor in the event of default. The net fee
earned under agency contracts is recognized ratably over the contract period.
Had the Company recognized revenue and the related costs from these
transactions, equipment sales and installation and maintenance revenue for the
years ended October 31, 1995, 1996 and 1997, would have been approximately
$52,838,000, $30,757,000 and $34,480,000, respectively. The related costs for
the years ended October 31, 1995, 1996, and 1997, would have been $43,984,000,
$25,762,000 and $29,894,000, 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
and 1997, the Company has considered all marketable securities as
F-46
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
available for sale and has recorded them at fair value, with unrealized gains
and losses, net of tax, reported as a separate component of shareholders'
equity. Net realized gains and losses are determined on the specific
identification cost basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful life.
Maintenance and repairs of property and equipment are charged to operations
and major improvements that extend the useful life are capitalized. Upon
retirement, sale or other disposition of property and equipment, the cost and
accumulated depreciation are eliminated from the accounts and any gain or loss
is included in operations.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method.
Deferred income taxes are recognized for the tax consequences in future years
for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes is the current tax expense for the period plus
the change during the period in deferred tax assets and liabilities.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, marketable securities
and accounts receivable. To date, the Company has not incurred significant
losses related to these financial instruments. The Company does not have a
formal policy regarding collateral to mitigate the concentrations of credit
risk. As of October 31, 1996, and 1997, two customers accounted for
approximately 67% and 61%, respectively, of billed and unbilled accounts
receivable.
INVESTMENT IN JOINT VENTURE
The investment in joint venture is accounted for under the equity method.
Under this method, the original investment is recorded at cost and adjusted by
the Company's share of undistributed earnings. Undistributed earnings expected
to be received in the next fiscal year are recorded as accounts receivable. The
Company's share of earnings is reflected in the consolidated statements of
operations, net of 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 a three year period.
At each balance sheet date, management evaluates the recoverability of the
goodwill based on the undiscounted cash flow projections of each business
acquired.
Accumulated amortization related to goodwill as of October 31, 1996 and 1997
was $466,667 and $733,333, respectively.
F-47
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
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. REDEMPTION AND ACQUISITION
During 1995, the Company entered into a series of transactions whereby the
Company reacquired all of its outstanding common stock from the former majority
shareholder and subsequently issued new common shares to acquire 100% of the
outstanding common stock of six affiliate companies (the Affiliates) (See Note
6).
The total consideration for the reacquisition of the outstanding common
stock on February 15, 1995 was $2,479,500, which included a $2,339,000 cash
payment to reacquire 5,512 shares of common stock outstanding and the transfer
of a life insurance policy covering the majority shareholder with a cash
surrender value of $140,500.
Following this reacquisition, the Company issued 3,060 shares of common
stock to acquire all of the outstanding common stock of six formerly affiliated
companies. The acquisition of these companies has been accounted for as a
purchase. The cost of this acquisition was $1,300,000 based on the negotiated
per
F-48
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REDEMPTION AND ACQUISITION (CONTINUED)
share price for the reacquisition of the previously outstanding common stock.
The acquisition cost has been allocated on the basis of the estimated fair value
of the assets acquired as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Accounts receivable.................................................................. $ 500
Goodwill............................................................................. 800
---------
Purchase price....................................................................... $ 1,300
---------
---------
</TABLE>
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 and $1,185,000 as of October 31, 1996 and 1997,
respectively. The cost of such securities was $1,113,000 and $1,201,000 as of
October 31, 1996 and 1997, respectively.
Gross unrealized holding gains were $5,000, $3,000 and $4,000 for the years
ended October 31, 1995, 1996, and 1997, respectively. Gross unrealized holding
losses were $1,000, $4,000 and $20,000 for the years ended October 31, 1995,
1996, and 1997, respectively. Proceeds from the sale of securities classified as
available for sale for the year ended October 31, 1995 were $3,331,000. For the
year ended October 31, 1995, gross realized gains and losses were $9,000 and
$71,000, respectively. There were no sales of such securities during the years
ended October 31, 1996 and 1997, 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).
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,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Billed................................................................... $ 1,750 $ 1,180
Unbilled................................................................. 600 4,930
Amount due from joint venture............................................ 1,039 1,827
--------- ---------
$ 3,389 $ 7,937
--------- ---------
--------- ---------
</TABLE>
F-49
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
The Company defines affiliated entities to include those entities that
conduct joint business activities with the Company. Prior to the acquisition of
the Affiliates on February 15, 1995 (See Note 3), the Company shared certain
common facilities and resources with these affiliates. Typical arrangements with
the Affiliates called for the Company to provide working capital advances with
interest rates ranging from 9% to 12% due on demand or other funding in exchange
for the right to share in future profits under specified contracts.
Additionally, the Affiliates received certain commissions related to contracts
awarded to the Company and for certain consulting services performed on the
Company's behalf.
Consulting fees earned from the Affiliates under agreements entitling the
Company to receive a portion of the Affiliates' contract profits approximated
$394,000 for the year ended October 31, 1995. 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. Subsequent to the
acquisition of the Affiliates, no consulting fees have been earned from or
incurred with the Affiliates. For the years ended October 31, 1995, 1996, and
1997 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 proposed acquisition of the Company by Condor Technology Solutions,
Inc., the Company has accrued $2.4 million in contractually determined
distributions to the shareholders of the Company. This amount is included in
selling, general and administrative expenses for the year ended October 31,
1997. Upon consummation of the acquisition, the Company will distribute an
additional $1.6 million to certain shareholders through a cash distribution or a
redemption of certain shares.
As of October 31, 1996, the commission payable amount is reflected net of
approximately $121,000 in amounts due from the shareholders. As of October 31,
1997, the amounts due to shareholders is reflected net of approximately $277,000
in amounts due from the shareholders. The Company has the contractual ability
and the intent to offset the amounts due from the shareholders against amounts
due to the shareholders.
The Company previously owned a 22% limited partnership interest which the
Company's former majority shareholder was a general partner. The partnership
owned the building that the Company occupies. The Company was leasing the office
space in this building from the partnership on a month to month basis, and a
portion of the Company's office space was being subleased to FMG and CMI. On
January 10, 1995, the partnership sold the building to a third party and was
dissolved, resulting in a loss to the Company of $128,000 for the year ended
October 31, 1995.
During 1995, the Company has entered into a long term lease with the third
party for the same office space (see Note 11). Included in rent expense for the
year ended October 31, 1995 was approximately $44,000 paid to the partnership
for rent prior to the sale of the building. Additionally, sublease income from
CMI and FMG of approximately $39,400 was recorded prior to the sale of the
building.
F-50
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1996 1997
--------- -----------
<S> <C> <C>
Owned assets:
Office equipment.......................................................................... $ 255 $ 276
Computer equipment........................................................................ 19 --
--------- -----
274 276
Less accumulated depreciation and amortization.............................................. (192) (212)
--------- -----
Property and equipment, net................................................................. $ 82 $ 64
--------- -----
--------- -----
</TABLE>
Depreciation expense for the years ended October 31, 1995, 1996 and 1997 was
$65,655, $51,989 and $38,870, 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
is included in other current assets. The components of the net investment in
sales-type lease are as follows (in thousands):
<TABLE>
<S> <C>
Minimum rentals receivable.......................................... $ 1,158
less: unearned interest income...................................... (280)
---------
Net investment in sales-type lease.................................. 878
---------
---------
</TABLE>
Minimum rentals receivable under this lease as of October 31, 1997 were as
follows (in thousands):
<TABLE>
<S> <C>
1998 ............................................................... 386
1999................................................................ 386
2000................................................................ 386
---------
1,158
---------
---------
</TABLE>
Subsequent to October 31, 1997, the Company entered into an arrangment with
a third party for the assignment of all of the Company's rights in the stream of
lease payments from the Government for a purchase price of $947,000.
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 October 31, 1997) plus
1% and is collateralized by a blanket lien on the Company's accounts receivable
and deposits with the lender. Additionally, an unused fee of .25% per annum is
charged on the unused line of credit. The Company had no outstanding borrowings
under this line of credit as of October 31, 1996 and 1997.
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
F-51
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. NOTE PAYABLE (CONTINUED)
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 and 1997.
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 October 31, 1997, deferred revenue related to
the Company's contracts was $1,724,000 with estimated future contractual revenue
and expenditures of approximately $585,000 and $2,294,000, respectively, as of
October 31, 1997.
11. INCOME TAXES
The components of the income tax expense (benefit) consist of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current expense:
Federal.......................................................................... $ 493 $ 677 $ 243
State............................................................................ 90 191 46
--------- --------- ---------
583 868 289
--------- --------- ---------
Deferred expense (benefit):
Federal.......................................................................... 76 164 (240)
State............................................................................ 14 41 (76)
--------- --------- ---------
90 205 (316)
--------- --------- ---------
Total.............................................................................. $ 673 $ 1,073 $ (27)
--------- --------- ---------
--------- --------- ---------
</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,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Provision (benefit) based upon federal statutory rate of 34%....... $ 531 $ 808 $ (120)
State taxes, net of federal benefit................................ 51 160 30
Amortization of assets not deductible.............................. 76 101 101
Other, net......................................................... 15 4 (38)
--------- --------- ---------
$ 673 $ 1,073 $ (27)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-52
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
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,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Current:
Net earnings from joint venture..................................... $ 443 $ 133
Accrued expenses.................................................... (25) (23)
Marketable securities............................................... - (6)
Other............................................................... - -
---------- ----------
Total current..................................................... 418 104
---------- ----------
Noncurrent:
Other............................................................... 6 -
---------- ----------
Total noncurrent.................................................. 6 -
---------- ----------
Total deferred tax liability.......................................... $ 424 $ 104
---------- ----------
---------- ----------
</TABLE>
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
are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
(IN
THOUSANDS)
Fiscal year ending October 31
1998......................................................................... $ 206
1999......................................................................... 206
2000......................................................................... 206
2001......................................................................... 206
2002......................................................................... 206
Thereafter................................................................... 34
------
$ 1,064
------
------
</TABLE>
The Company recorded rent expense of $243,000, $394,000 and $314,000 for the
fiscal years ended October 31, 1995, 1996, and 1997, respectively.
YEAR 2000
The Company has implemented a strategy to be fully compliant with the year
2000 issues related to its computer systems. Management does not believe that
the costs related to this strategy will have a material impact on the financial
statements.
F-53
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 statements.
13. MAJOR CUSTOMERS
The Company's primary customers are agencies or departments of the
Government. For the years ended October 31, 1995, 1996 and 1997, approximately
36%, 65% and 51%, 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 contributions are
discretionary. For the years ended October 31, 1995, 1996 and 1997, employer
contributions to the plan were $37,669, $56,708 and $88,688, 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 and 1997 were $0 and $15,000, 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
F-54
<PAGE>
FEDERAL COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SHAREHOLDERS' EQUITY (CONTINUED)
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 is a 38% partner in an unincorporated joint venture with INET,
Inc. (subsequently acquired by Wang Federal Systems) and International Data
Products Corporation. The purpose of the joint venture is to perform computer
integration, maintenance, contract management, product acquisition, and sales
and marketing under a contract with the Federal Bureau of Investigation. Under
the terms of the joint venture agreement, the Company paid $49,400 as a capital
contribution for its interest in the joint venture partnership. The joint
venture allocates and distributes income in proportion to the partners'
percentage of ownership. The Company's proportionate share of the joint venture
net earnings for the years ended October 31, 1995, 1996 and 1997 was $3,031,685,
$1,757,966 and $1,624,409, respectively. At October 31, 1996 and 1997, the
Company recorded accounts receivable of $345,222 and $0, respectively, from the
joint venture for undistributed net earnings.
Prior to the acquisition of the affiliates (See Note 3), in 1995 the Company
distributed a portion of its proportionate share of joint venture net earnings
to the affiliates. During the 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, the Company reduced its proportionate share of
the joint venture net earnings by $1,741,020, $1,318,474 and $0, respectively as
commissions paid to certain employees. As described in Note 6, the Company
entered into a contractual arrangement with the employees which waived their
right to receive commissions. Commissions payable related to unpaid
distributions from the joint venture as of October 31, 1996 and 1997 were
$186,611 and $0, respectively.
Under the terms of the joint venture agreement, the Company is required to
provide certain maintenance services to the joint venture. These services are
performed by the Company and certain third party subcontractors. For the years
ended October 31, 1995, 1996 and 1997, the Company recognized $4,438,852,
$5,098,600, and $5,450,351 of maintenance revenue for services provided to the
joint venture, of which $693,784 and $1,827,519, 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 and $3,426,674 for the years ended
October 31, 1995, 1996 and 1997, respectively.
F-55
<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 consists of
the following as of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Gross revenues............................................................... $ 43,282 $ 37,360 $ 25,838
Operating expenses........................................................... 35,304 32,736 21,564
--------- --------- ---------
Net earnings................................................................. $ 7,978 $ 4,624 $ 4,274
--------- --------- ---------
--------- --------- ---------
</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>
Subsequent to October 31, 1997, the Company entered into agreements with the
other partners to the joint venture to acquire the remaining 62% interest for
$1,958,000. Upon completion of this acquisition the Company will have a 100%
share in the venture and will consolidate the operations of the venture in the
financial statements. There have been no adjustments to reflect this transaction
in the consolidated financial statements as of October 31, 1997.
17. SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES (IN
THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <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 $ -
Accrued preferred stock dividends.................................................... $ - $ - $ -
Reclassification of ESOP note receivable............................................. $ - $ - $ -
</TABLE>
18. SUBSEQUENT EVENT-MERGER (UNAUDITED)
The Company has entered into an agreement with Condor for the acquisition of
all of the Company's outstanding common stock. This acquisition is subject to
the successful completion of an initial public offering of the common stock of
Condor. The consideration to be paid by Condor for this acquisition is
$15,000,000, $7,500,000 of which would be paid in cash and $7,500,000 of which
would be paid in common stock of Condor, plus an earn-out, resulting in
contingent consideration of up to $9,000,000.
F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Corporate Access, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Corporate Access, Inc. at
June 30, 1997, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Philadelphia, PA
July 18, 1997
F-57
<PAGE>
CORPORATE ACCESS, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
----------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 109 $ 532
Restricted cash........................................................................ 80 80
Accounts receivable, net of allowance for doubtful accounts of $10 and $18............. 2,030 2,496
Inventory.............................................................................. 97 71
Prepaid expenses and other current assets.............................................. 15 23
----------- ------
Total current assets............................................................... 2,331 3,202
Fixed assets, net........................................................................ 159 121
----------- ------
Total assets....................................................................... $ 2,490 $ 3,323
----------- ------
----------- ------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable....................................................................... $ 1,354 $ 2,051
Accrued expenses....................................................................... 162 149
----------- ------
Total current liabilities.......................................................... 1,516 2,200
----------- ------
----------- ------
Stockholders' equity:
Common stock, $1.00 par value; 300,000 shares authorized, 3,700 shares issued and
outstanding.......................................................................... 4 4
Additional paid-in capital............................................................. 180 180
Retained earnings...................................................................... 790 939
----------- ------
Total stockholders' equity......................................................... 974 1,123
----------- ------
Total liabilities and stockholders' equity......................................... $ 2,490 $ 3,323
----------- ------
----------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
CORPORATE ACCESS, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------
1997 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues.......................................................................... $ 17,518 $ 3,931 $ 4,747
Cost of revenues.................................................................. 14,999 3,311 4,118
----------- --------- ---------
Gross profit...................................................................... 2,519 620 629
Selling, general and administrative............................................... 1,855 387 466
----------- --------- ---------
Income from operations............................................................ 664 233 163
Other income (expense)............................................................ 30 (29) 1
----------- --------- ---------
Income before income taxes........................................................ 694 204 164
Provision for state income taxes.................................................. 34 14 11
----------- --------- ---------
Net income........................................................................ $ 660 $ 190 $ 153
----------- --------- ---------
----------- --------- ---------
Unaudited pro forma information:
Pro forma net income before provision for income taxes.......................... $ 694 $ 204 $ 164
Provision for income taxes...................................................... 273 82 66
----------- --------- ---------
Pro forma income (see Note 2)..................................................... $ 421 $ 122 $ 98
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
CORPORATE ACCESS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ ADDITIONAL PAID- RETAINED STOCKHOLDERS'
SHARES AMOUNT IN CAPITAL EARNINGS EQUITY
----------- ----------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996.............................. 3,700 $ 4 $ 180 $ 317 $ 501
Net income.......................................... 660 660
Dividends........................................... (187) (187)
----- ----- ----- ----- ------
Balance, June 30, 1997.............................. 3,700 4 180 790 974
Net income (unaudited).............................. 153 153
Dividends (unaudited)............................... (4) (4)
----- ----- ----- ----- ------
Balance, September 30, 1997......................... 3,700 $ 4 $ 180 $ 939 $ 1,123
----- ----- ----- ----- ------
----- ----- ----- ----- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
CORPORATE ACCESS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------
1997 1996 1997
------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 660 $ 190 $ 153
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation.................................................................... 76 19 51
(Gain) Loss on sale of equipment................................................ (11) 29
Increase (decrease) in cash from changes in operating assets and liabilities:
Accounts receivable........................................................... (687) (536) (466)
Inventory..................................................................... 39 12 26
Other current assets.......................................................... (8) (6) (8)
Accounts payable.............................................................. 303 238 697
Accrued expenses.............................................................. (26) (19) (13)
----- --------- ---------
Net cash provided by (used in) operating activities......................... 346 (73) 440
----- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.......................................................... (74) (7) (13)
Proceeds from sale of equipment................................................... 24 - -
----- --------- ---------
Net cash used in investing activities....................................... (50) (7) (13)
----- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends............................................................. (187) - (4)
----- --------- ---------
Net cash used in financing activities....................................... (187) - (4)
----- --------- ---------
Net increase (decrease) in cash and cash equivalents................................ 109 (80) 423
Cash and cash equivalents, beginning of period...................................... 80 80 189
----- --------- ---------
Cash and cash equivalents, end of period............................................ $ 189 $ - $ 612
----- --------- ---------
----- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................................ $ 1 $ 1 $ -
----- --------- ---------
----- --------- ---------
Cash paid for income taxes........................................................ $ 102 $ 23 $ 4
----- --------- ---------
----- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Corporate Access, Inc. (the "Company") was incorporated on December 9, 1986
as a Massachusetts corporation. The Company offers a variety of desktop computer
hardware, software and peripherals, as well as configuration and installation
services, to commercial clients and governmental entities in the Greater Boston
metropolitan area. All product sold by the Company is purchased from third
parties.
The Company and its stockholders intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company invests its excess cash in money market or overnight securities.
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. At June 30,
1997, the Company had invested $410,000 in overnight securities which included
$301,000 in outstanding checks.
INTERIM FINANCIAL INFORMATION
The balance sheet as of September 30, 1997 and the statement of operations,
of changes in stockholder's equity and of cash flows for the three months ended
September 30, 1996 and 1997, are unaudited, and certain information and footnote
disclosures related thereto, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's cash and cash equivalents are held in one
bank. In addition, the Company grants credit terms in the normal course of
business to its customers. As part of its ongoing procedures, the Company
monitors the creditworthiness of its customers. The Company does not believe
that it is subject to any unusual credit risk beyond the normal credit risk
attendant in its business.
At June 30, 1997, 10 customers accounted for approximately 57% of the
Company's accounts receivable, with one of these customers accounting for 23% of
the Company's accounts receivable.
During the year ended June 30, 1997, 10 customers accounted for
approximately 62% of the Company's net revenues, with one of these customers
accounting for approximately 30% of the Company's net revenue.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenues from product sales are recognized when the related product is
shipped. An allowance for doubtful accounts has been established for potentially
uncollectible accounts.
F-62
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Inventory is comprised entirely of goods held
for resale.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is calculated over the
estimated useful life of the assets as indicated in Note 3, primarily using the
double declining balance method. Leasehold improvements are depreciated over the
shorter of their estimated useful life or the remaining lease term. Repair and
maintenance costs are expensed as incurred.
INCOME TAXES
The Company has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
is, however, subject to certain state income taxes.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
3. FIXED ASSETS
Fixed assets at June 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
USEFUL LIVES IN
YEARS AMOUNT
----------------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Office furniture and equipment...................................... 7 $ 169
Motor vehicles...................................................... 5 87
Leasehold improvements.............................................. Lease term/life 58
-----
314
Less accumulated depreciation and amortization...................... (155)
-----
Net fixed assets.................................................... $ 159
-----
-----
</TABLE>
F-63
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LINES OF CREDIT
In February 1997, the Company entered into a wholesale financing agreement
with Deutsche Financial Services Corporation ("DFS"). Under this agreement, DFS
will pay certain of the Company's vendors for purchases of inventory. The
Company can have a maximum of $700,000 outstanding at any time under this
agreement. Amounts outstanding under this agreement are interest free for the
first 30 days after payment is made by DFS, and bear interest at 16% thereafter.
At June 30, 1997, there were no amounts outstanding in excess of 30 days. Under
the agreement, the line is voidable in the event that the Company merges with
another party. Outstanding amounts under this agreement are collateralized by
the business assets of the Company. At June 30, 1997, the Company had $153,000
outstanding under this agreement. This amount is included in accounts payable on
the balance sheet.
The Company has a revolving bank line of credit with Century Bank (the
"Bank"). Borrowings under the line are limited to 80% of the Company's eligible
accounts receivable (as defined), up to a maximum borrowing of $1,000,000. In
June 1997, the maximum borrowings under this line were reduced to $300,000. The
borrowings bear interest at the Bank's prime rate (8.5% at June 30, 1997). Under
the agreement the borrowings are collateralized by substantially all of the
Company's business assets. The Bank's security interest is subordinate to that
of DFS. If the Company fails to meet certain restrictive covenants, a personal
guarantee of one of the Company's stockholders is required to cover up to
$200,000 of the borrowings. At June 30, 1997, there were no borrowings
outstanding under the line. In connection with this line, the Company is
required to maintain a balance of $80,000 in an account with the Bank at all
times.
The Company has pledged its business assets to two vendors for inventory
purchased from the vendors. The security interests are subordinate to those of
DFS and the Bank. At June 30, 1997, the Company had accounts payable to these
vendors totaling $381,000.
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office and warehouse space in Andover, Massachusetts
under a non-cancelable operating lease agreement (expiring in June 2000) with an
entity in which an officer of the Company has ownership. The lease agreement
requires an annual rent plus a proportionate share of certain operating costs.
During the twelve months ended June 30, 1997, rent expense and operating costs
incurred by the Company under this lease amounted to $75,000.
The Company leases an automobile and certain office equipment under
non-cancelable operating leases expiring through October 1999. During the twelve
months ended June 30, 1997, the lease expense incurred under these agreements
totaled $5,000. Commitments under non-cancelable leases over the next five years
are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
1998........................................................................... $ 98
1999........................................................................... 98
2000........................................................................... 71
-----
$ 267
-----
-----
</TABLE>
F-64
<PAGE>
CORPORATE ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SUCCESS FEE
The Company has entered into an agreement with a consulting firm to locate a
buyer for the Company. In the event that the Company is sold, pursuant to this
agreement, the consulting firm is entitled to a success fee to be paid by the
Company. This fee is based upon a percentage of the selling price, but is not to
be less than $100,000. Had an acquisition been consummated at June 30, 1997, the
liability under this agreement would be approximately $364,000.
6. PROFIT SHARING PLAN
The Company sponsors a defined contribution profit sharing plan covering
substantially all of its employees who meet certain eligibility requirements.
Contributions to the plan are made at the discretion of the Company's Board of
Directors. During the year ended June 30, 1997, the Company contributed $34,000
to the plan.
7. RELATED PARTIES
The Company leases its office facilities from a related party (see Note 5).
8. INCOME TAXES
The provision for income taxes of $34,000 for the year ended June 30, 1997
was comprised of state income tax expense.
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
requires the disclosure of the fair value of financial instruments, both assets
and liabilities recognized and not recognized on the balance sheet, for which it
is practicable to estimate fair value. The carrying values of the Company's
financial instruments approximate fair value.
F-65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Interactive Software Systems Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Interactive Software Systems Incorporated and its
subsidiary at December 31, 1995 and 1996, and September 30, 1997 and the results
of their operations and their cash flows for each of the three years ended
December 31, 1996, and the nine months ended September 30, 1997 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boulder, CO
October 31, 1997
F-66
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 2,711 $ 2,832 $ 4,230
Accounts receivable, net of allowance for doubtful accounts of $52, $30 and $70
(unaudited) in 1995, 1996 and 1997, respectively.............................. 2,190 2,435 3,296
Income tax receivable........................................................... 28 226 269
Other current assets............................................................ 113 107 119
Deferred taxes, net............................................................. 70 59 85
--------- --------- ------
Total current assets...................................................... 5,112 5,659 7,999
--------- --------- ------
Investments....................................................................... 1,242
Property, equipment and software:
Office furniture and equipment, net of accumulated depreciation of $778, $1,028
and $749 (unaudited) in 1995 1996, and 1997 respectively...................... 454 425 450
Software, net of accumulated amortization of $1,069, $1,146 and $1,165
(unaudited) in 1995, 1996, and 1997, respectively............................. 70 64 111
Deferred taxes, net............................................................. 90
--------- --------- ------
Total assets.............................................................. $ 6,968 $ 6,148 $ 8,560
--------- --------- ------
--------- --------- ------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............................................... $ 16 $ 8 $ 8
Accounts payable and accrued liabilities........................................ 282 576 975
Accrued compensation and employee benefits...................................... 497 678 833
Deferred revenue and customer deposits.......................................... 1,656 1,805 2,412
--------- --------- ------
Total current liabilities................................................. 2,451 3,067 4,228
--------- --------- ------
Deferred taxes, net............................................................... 37
Long-term debt.................................................................... 14 27 20
Mandatorily redeemable convertible preferred stock:
Series A mandatorily redeemable convertible preferred stock, $.10 par value;
1,147,959 and 0 shares authorized, issued and outstanding in 1995 and 1996,
respectively with a liquidation value of $3,500............................... 115
Series B mandatorily redeemable convertible preferred stock, $.10 par value;
159,439 and 0 shares authorized, issued and outstanding in 1995 and 1996,
respectively with a liquidation value of $350................................. 16
Additional paid-in capital...................................................... 5,172
--------- --------- ------
5,303
--------- --------- ------
Commitments and contingencies (Notes 3 and 5)
Shareholders' equity (deficit):
Common stock, $.01 par value; 7,500,000 shares authorized; 2,000,000, 2,640,787
(unaudited) and 2,640,787 (unaudited) shares issued and outstanding in 1995,
1996 and 1997, respectively................................................... 20 26 26
Additional paid-in capital...................................................... 2,602 2,602
Retained (deficit) earnings..................................................... (820) 426 1,647
--------- --------- ------
Total liabilities and stockholders' equity................................ $ 6,968 $ 6,148 $ 8,560
--------- --------- ------
--------- --------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-67
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees................................................ $ 2,417 $ 2,780 $ 4,310 $ 3,434 $ 4,251
Services and other revenue.................................. 3,312 3,830 4,718 3,221 4,109
--------- --------- --------- ----------- ---------
Total revenues............................................ $ 5,729 6,610 9,028 6,655 8,360
--------- --------- --------- ----------- ---------
Costs and expenses:
Cost of software and other revenue.......................... 1,297 2,010 1,482 1,120 1,224
General and administrative.................................. 1,120 1,911 1,535 978 1,163
Selling and marketing....................................... 2,030 2,270 2,762 1,972 2,593
Research and development.................................... 1,018 804 766 522 933
Depreciation and amortization............................... 165 272 260 194 223
--------- --------- --------- ----------- ---------
Total costs and expenses.................................. 5,630 7,267 6,805 4,786 6,136
--------- --------- --------- ----------- ---------
Income (loss) from operations................................. 99 (657) 2,223 1,869 2,224
Other income (expense):
Interest income............................................. 163 169 101 71 107
Interest expense............................................ (4) (4) (199) (188)
Other income................................................ 1 8 7 15
--------- --------- --------- ----------- ---------
Total other income (expense).............................. 159 166 (90) (110) 122
--------- --------- --------- ----------- ---------
Income (loss) before income taxes............................. 258 (491) 2,133 1,759 2,346
(Provision for) benefit from income taxes..................... (82) 188 (737) (609) (795)
--------- --------- --------- ----------- ---------
Net income (loss)............................................. $ 176 $ (303) $ 1,396 $ 1,150 $ 1,551
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-68
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------------- PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............................ 2,000,000 $ 20 $ - $ 877 $ 897
Dividends paid........................................ (800) (800)
Accrued dividends..................................... (385) (385)
Net income............................................ 176 176
---------- --- ----------- ----------- ------
Balance, December 31, 1994............................ 2,000,000 20 (132) (112)
Accrued dividends..................................... (385) (385)
Net loss.............................................. (303) (303)
---------- --- ----------- ----------- ------
Balance, December 31, 1995............................ 2,000,000 20 (820) (800)
Issuance of common stock on conversion of note
payable............................................. 640,787 6 2,602 2,608
Dividends paid........................................ (150) (150)
Net income............................................ 1,396 1,396
---------- --- ----------- ----------- ------
Balance, December 31, 1996............................ 2,640,787 26 2,602 426 3,054
Dividends paid........................................ (330) (330)
Net income............................................ 1,551 1,551
---------- --- ----------- ----------- ------
Balance, September 30, 1997........................... 2,640,787 $ 26 $ 2,602 $ 1,647 $ 4,275
---------- --- ----------- ----------- ------
---------- --- ----------- ----------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 176 $ (303) $ 1,396 $ 1,150 $ 1,551
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 394 826 304 264 262
Amortization of investment premiums.................... 71 53
Conversion of accrued interest......................... 74
Deferred taxes......................................... 61 (213) 173 161 12
Increase (decrease) in cash from changes in operating
assets and liabilities:
Accounts receivable................................ 144 (773) (245) 126 (861)
Income tax receivable.............................. (145) 346 (198) (17) (43)
Other current assets............................... (90) (6) 5 66 (12)
Accounts payable and accrued liabilities........... 59 73 294 141 398
Accrued compensation and employee benefits......... (448) 111 183 (22) 153
Deferred revenue and customer deposits............. 102 340 149 (76) 607
--------- --------- --------- ----------- ---------
Net cash provided by operating activities.......... 324 454 2,135 1,793 2,067
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed asset additions.................................... (334) (284) (214) (89) (247)
Capitalized software development costs................... (325) (14) (71) (59) (84)
Purchases of investment securities....................... (2,499)
Sales of investment securities........................... 500 611 611
Maturities of investment securities...................... 664 621 621
--------- --------- --------- ----------- ---------
Net cash (used in) provided by investing
activities....................................... (2,658) 366 947 1,084 (331)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt..................... (15) (16) (311) (306) (8)
Dividends paid........................................... (800) (150) (100) (330)
Redemption of preferred stock............................ (2,500) (2,500)
--------- --------- --------- ----------- ---------
Net cash used by financing activities.............. (815) (16) (2,961) (2,906) (338)
--------- --------- --------- ----------- ---------
Net (decrease) increase in cash and cash equivalents....... (3,149) 804 121 (29) 1,398
Cash and cash equivalents at beginning of period........... 5,056 1,907 2,711 2,711 2,832
--------- --------- --------- ----------- ---------
Cash and cash equivalents at end of period................. $ 1,907 $ 2,711 $ 2,832 $ 2,682 $ 4,230
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest................................... $ 4 $ 5 $ 154 $ 131 $ -
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Cash paid for income taxes............................... $ 184 $ 4 $ 744 $ 403 $ 307
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Capital lease obligations................................ $ 11 $ 20 $ 6 $ 6 $ -
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Conversion of preferred stock to note payable............ $ - $ - $ 2,832 $ 2,832 $ -
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Conversion of note payable to common stock............... $ - $ - $ 2,534 $ - $ -
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Interactive Software Systems Incorporated (the "Company") was incorporated
in 1979 and restructured in 1987 for the development, sale and support of
software products for use in database management. The Company designs, markets
and serves end-user business production reporting and data query, access and
warehousing software, specializing in managing information across multiple
relational and production databases, platforms and applications in a
client/server environment.
The Company and its stockholders intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The consolidated statements of operations, and of cash flows for the nine
months ended September 30, 1996 are unaudited, and certain information and
footnote disclosures related thereto, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, the interim consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and reflect all adjustments, consisting only of normal
recurring adjustments necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
PRINCIPLES OF CONSOLIDATION
In February 1995, the Company incorporated a wholly-owned subsidiary, Visual
Reportwriter Software, B.V. ("VRS"), headquartered in The Netherlands. The
Company's consolidated financial statements include the accounts of VRS. All
significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of
Statement of Position (SoP) 91-1, Software Revenue Recognition. The Company
licenses software under non-cancelable license agreements and provides related
services, including support, training and consulting.
Revenue from license fees is generated from both end users and resellers and
is recognized when a non-cancelable license agreement has been signed, the
product has been delivered, collection is probable and all significant
obligations relating to the license have been satisfied. Generally, license fees
from resellers are included as license fee revenue net of related costs.
Typically, the Company's software licenses do not include significant
post-delivery obligations to be fulfilled by the Company and payments are due
within a twelve-month period from date of delivery. Revenue from agreements for
supporting and providing periodic enhancements is recorded as deferred revenue
and is recognized ratably over the support service period, and includes a
portion of the related license fee equal to the fair value of any bundled
support services. Training and consulting services are not essential to the
functionality of the
F-71
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's software products and are separately priced. Accordingly, revenue from
these services is recorded separately from the license fee, as those services
are performed.
A new Statement of Position, 97-2, will be effective for transactions
entered into in fiscal 1998. Adoption of this new SOP is expected to be
immaterial.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables.
During 1996, royalties from two major resellers comprised approximately 23%
and 18% of total revenue, respectively. At December 31, 1996, these resellers
accounted for approximately 33% and 0% of total accounts receivable,
respectively. During 1995 and 1994, royalties from a major reseller comprised
16% and 13% of total revenue, respectively. At December 31, 1995 and 1994, the
reseller accounted for 9% of total accounts receivable.
INVESTMENTS
Investments at December 31, 1995 were comprised of municipal bonds and
recorded at amortized cost. At December 31, 1995 fair market value of these
investments was $1,242,000.
SOFTWARE COSTS
The Company capitalizes internally developed software costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of development costs of new software products, as well as costs
incurred to enhance existing software products, begins once the technological
feasibility of the product is established. Capitalization ceases when such
software is ready for general release, at which time amortization of the
capitalized costs begins.
Amortization of capitalized internally developed software costs is computed
as the greater of: (a) the amount determined by the ratio of the product's
current revenue to its total expected future revenue or (b) the straight-line
method over the product's estimated useful life of two to three years. Software
amortization expense was $554,000, $77,000, and $37,000 in for the year ended
December 31, 1995, 1996, and the nine months ended September 30, 1997,
respectively. Included in the 1995 amortization expense was $226,000 of
writeoffs due to impairment of capitalized costs.
Maintenance of software products as well as research and development costs
related to new software products are charged to expense as incurred.
F-72
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 during the period. Actual results could differ from the estimates
making it reasonably possible that a change in these estimates could occur in
the near term.
3. LONG-TERM DEBT--CAPITALIZED LEASE OBLIGATIONS
Future minimum annual lease payments under capitalized leases are as follows
at September 30, 1997:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
1997........................................................................... $ 2
1998........................................................................... 11
1999........................................................................... 11
2000........................................................................... 8
-----
32
Less interest.................................................................. (4)
-----
28
Less current portion........................................................... (8)
-----
$ 20
-----
-----
</TABLE>
Net assets under capitalized leases were $25,000, $35,000, and $27,000 at
December 31, 1995 and 1996, and September 30, 1997, respectively.
4. CAPITAL STOCK AND STOCK OPTIONS
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1991, the Board of Directors authorized 1,307,398 shares of preferred
stock of which 1,147,959 and 159,439 are designated as Series A and Series B
mandatorily redeemable convertible preferred stock,
F-73
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
respectively. The following table reflects the activity in Series A and Series B
Preferred Stock for the years ended December 31, 1994, 1995 and 1996 (in
thousands):
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK ADDITIONAL
---------------------- PAID-IN
SHARES AMOUNT CAPITAL
--------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993................................... 1,307 $ 131 $ 4,403
Accrued dividends............................................ 385
--------- ----- -----------
Balance, December 31, 1994................................... 1,307 131 4,788
Accrued dividends............................................ 384
--------- ----- -----------
Balance, December 31, 1995................................... 1,307 131 5,172
Redemption of preferred shares............................... (1,307) (131) (5,172)
--------- ----- -----------
Balance, December 31, 1996................................... $ - $ -
--------- ----- -----------
--------- ----- -----------
</TABLE>
Effective January 10, 1996, the Company entered into an agreement to redeem
all of the shares of the Preferred Stock owned by a private investor. In
connection therewith, 536,835 shares of Series A Stock and 75,343 shares of
Series B Stock were redeemed in cash at a redemption price of $4.07 per share.
The remaining 611,124 shares of Series A Stock and the remaining 84,904 shares
of Series B Stock, plus all accrued dividends, were converted into convertible
notes payable in the aggregate principal amount of $2,832,470. The notes were
convertible into the Company's common stock at a rate of $4.07 per share and
bore interest at 9.5% per year. Interest was payable quarterly. In October 1996,
the investor converted the outstanding notes and accrued interest in the
aggregate amount of $2,608,003 into 640,787 shares of common stock.
In October 1997, the Company repurchased 491,400 shares of Common Stock from
this investor for approximately $2.0M. After the repurchase, the investor held
149,387 shares of the Company's common stock.
In December 1997, the Company declared a dividend of $1.0M. This dividend
will be paid in early 1998.
STOCK COMPENSATION PLAN
The Company has a stock option plan. The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plan. As all options have been granted with an exercise price
equal to the fair market value of common stock on the date of grant, no
compensation cost has been recognized. Had compensation cost for the Company's
stock-based compensation plan been determined based on the fair value at the
grant dates for awards under the plan consistent
F-74
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
with the method of FASB Statement No. 123, "Accounting for Stock Based
Compensation," the Company's pro forma results of operations would have been as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, NINE MONTHS
-------------------- ENDED SEPT. 30
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Net income (loss):
As reported......................................... $ (303) $ 1,394 $ 1,551
Pro forma........................................... $ (335) $ 1,369 $ 1,528
</TABLE>
Under the Company's stock option plan, the Company may grant incentive and
non-qualified stock options to its employees and directors for up to 400,000
shares of common stock. Under the plan, options are granted at an exercise price
not less than the fair market value of the stock on the date of grant. The
options generally vest ratably over five years and expire 10 years after the
date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996: dividend yield of 1.4% for both
years; zero volatility for both years; risk-free interest rates of 7.78% and
5.57% in 1995 and 1996, respectively; and an expected option term of 6 years for
each year.
A summary of the status of the Company's fixed option plan as of December
31, 1995 and 1996 and September 30, 1997, and changes during the years then
ending is presented below. As of September 30, 1997, no options were vested.
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............... $ - 127,000 $ 3.05 190,000 $ 3.05
Granted........................................ 161,000 3.05 65,000 3.05
Exercised......................................
Forfeited...................................... (34,000) 3.05 (2,000) 3.05 (6,000) $ 3.05
--------- ----- --------- ----- --------- -----
Outstanding at end of year..................... 127,000 $ 3.05 190,000 $ 3.05 184,000 $ 3.05
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted average fair value of options granted
during the year.............................. $ 0.94 $ 0.68
Weighted average remaining contractual life.... 8.31 years 7.58 years
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company maintains non-cancelable operating lease arrangements for office
space and office equipment. Rent expense related to these and other
month-to-month leases approximated $264,000,
F-75
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$273,000, and $255,000 for the years ended December 31, 1995 and 1996, and
September 30, 1997, respectively. Future minimum annual operating lease payments
are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
(IN
THOUSANDS)
1997........................................................................... $ 111
1998........................................................................... 348
1999........................................................................... 327
2000........................................................................... 325
2001........................................................................... 157
------
$ 1,268
------
------
</TABLE>
6. INCOME TAXES
Income (loss) before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------- MINE MONTHS ENDED
1994 1995 1996 SEPT. 30, 1997
--------- --------- --------- -------------------
<S> <C> <C> <C> <C>
Domestic..................................... $ 258 $ (312) $ 2,058 $ 1,806
Foreign...................................... (180) 73 540
--------- --------- --------- ------
$ 258 $ (492) $ 2,131 $ 2,346
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
The provision for (benefit from) income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED
1994 1995 1996 SEPT. 30, 1997
--------- --------- --------- -------------------
Current tax expense
Federal....................................... $ 17 $ 19 $ 479 $ 499
State......................................... 4 6 86 79
Foreign....................................... 205
--------- --------- --------- ------
Total current expense......................... 21 25 565 783
--------- --------- --------- ------
Deferred tax expense (benefit)
Federal....................................... 45 (192) 169 13
State......................................... 16 (21) 5 2
Foreign....................................... (2) (3)
--------- --------- --------- ------
Total deferred expense (benefit).............. 61 (213) 172 12
--------- --------- --------- ------
Total provision for (benefit from) income
taxes....................................... $ 82 $ (188) $ 737 $ 795
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>
F-76
<PAGE>
INTERACTIVE SOFTWARE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differ from the amounts computed by
applying the federal statutory rate to income before income taxes. The amounts
are reconciled as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Statutory rate................................................ $ 88 $ (167) $ 725 $ 798
Non-deductible expenses....................................... 22 7 31 47
Income tax credits............................................ (41) (27) (27) (73)
State income taxes, net of federal benefit.................... 18 (18) 57 54
Tax exempt interest........................................... (39) (15)
Change in valuation allowance................................. 61 (26) (40)
Other......................................................... (5) (5) (8) 9
--------- --------- --------- ---------
Provision (benefit) for income taxes.......................... $ 82 $ (188) $ 737 $ 795
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Capitalized software, net.................................... $ (234) $ (27) $ (25) $ (49)
Other........................................................ (6) (33)
--------- --------- --------- ---------
Gross deferred tax liabilities............................. (240) (60) (25) (49)
--------- --------- --------- ---------
Change in tax accounting method.............................. 104 78 54 36
Accrued expenses and allowance for doubtful accounts......... 10 45 30 60
Research credit carryforwards................................ 72 97
Foreign net operating loss carryforward...................... 66 40
--------- --------- --------- ---------
Gross deferred tax assets.................................. 186 286 124 96
--------- --------- --------- ---------
Valuation allowance.......................................... (66) (40)
--------- --------- --------- ---------
$ (54) $ 160 $ 59 $ 47
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The Company changed its accounting method for tax purposes from cash to
accrual during 1994. The net change is amortized for tax purposes over six
years.
7. EMPLOYEE BENEFIT PLAN
In January 1989, the Company implemented a 401(k) savings plan. Participants
may contribute up to 18% of their compensation, not to exceed the maximum
allowed by law. The Company made matching contributions of $0 and $69,000 in
1995 and 1996, respectively.
F-77
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
U.S. Communications, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholder's equity and of cash flows present
fairly, in all material respects, the financial position of U.S. Communications,
Inc. at December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the nine
months ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, PA
October 31, 1997
F-78
<PAGE>
U.S. COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 93 $ 22
Accounts receivable............................................................... 891 1,243
Inventory......................................................................... 204 60
Prepaid expenses and other current assets......................................... 3 2
------ ------
Total current assets.......................................................... 1,191 1,327
Fixed assets, net................................................................... 75 157
Other non-current assets............................................................ 2 4
------ ------
Total assets.................................................................. $ 1,268 $ 1,488
------ ------
------ ------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 6 $ 6
Current portion of capital lease obligation....................................... 27
Accounts payable.................................................................. 989 1,175
Other accrued expenses............................................................ 26 26
Deferred revenue.................................................................. 17
Income taxes payable.............................................................. 34 8
Notes payable..................................................................... 87 51
------ ------
Total current liabilities..................................................... 1,142 1,310
Long-term debt...................................................................... 12 46
------ ------
Total liabilities............................................................. 1,154 1,356
------ ------
Stockholder's equity:
Common stock, no par value, 100 shares authorized, issued and outstanding at
stated value.................................................................... 1 1
Retained earnings................................................................. 113 131
------ ------
Total stockholder's equity.................................................... 114 132
------ ------
Total liabilities and stockholder's equity.................................... $ 1,268 $ 1,488
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
U.S. COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPT. 30,
------------- ----------------------
1996 1996 1997
------------- ----------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues..................................................................... $ 7,215 $ 4,740 $ 6,024
Cost of revenues............................................................. 6,574 4,293 5,611
------ ----------- ---------
Gross profit................................................................. 641 447 413
Selling, general and administrative expenses................................. 475 336 367
------ ----------- ---------
Income from operations....................................................... 166 111 46
Interest expense............................................................. 21 17 13
------ ----------- ---------
Income before income taxes................................................... 145 94 33
Provision for income taxes................................................... 51 39 15
------ ----------- ---------
Net income................................................................... $ 94 $ 55 $ 18
------ ----------- ---------
------ ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE>
U.S. COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........................................... 100 $ 1 $ 19 $ 20
Net income........................................................... 94 94
--- ----- ----- -----
Balance, December 31, 1996........................................... 100 1 113 114
Net income........................................................... 18 18
--- ----- ----- -----
Balance, September 30, 1997.......................................... 100 $ 1 $ 131 $ 132
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
U.S. COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ------------------------
1996 1996 1997
------------- ------------- ---------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 94 $ 55 $ 18
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 13 7 45
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable, net.............................................. (456) (322) (352)
Inventory............................................................. (167) (755) 144
Prepaid expenses and other assets..................................... (4) (1) (1)
Accounts payable...................................................... 596 1,023 186
Other accrued liabilities............................................. 17 20 (26)
Deferred revenue...................................................... 17
----- ----- ---------
Net cash provided by operating activities........................... 93 27 31
----- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................ (22) (19) (127)
----- ----- ---------
Net cash used in investing activities............................... (22) (19) (127)
----- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in capital lease obligation...................................... 84
Payments on capital lease obligation...................................... (19)
Increase in notes payable................................................. 50
Decrease in notes payable................................................. 26 (36)
Payments on long term debt and notes payable.............................. (6) (8) (4)
----- ----- ---------
Net cash provided by (used in) financing activities................. 20 42 25
----- ----- ---------
Net increase (decrease) in cash............................................. 91 50 (71)
Cash, beginning of period................................................... 2 2 93
----- ----- ---------
Cash, end of period......................................................... $ 93 $ 52 $ 22
----- ----- ---------
----- ----- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................................... $ 24 $ 2 $ 12
----- ----- ---------
----- ----- ---------
Cash paid for income taxes................................................ $ 18 $ 52 $ 22
----- ----- ---------
----- ----- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
U.S. Communications, Inc. (the "Company") provides commercial and
governmental clients desktop system hardware and software supplies, technical
support and comprehensive training solutions. Clients are primarily government
agencies and private companies located in the eastern region of the U.S. The
computer training programs are held in the Company's training facility which is
located at the Company's headquarters in Annapolis, Maryland.
The Company was organized on June 27, 1994 as a Maryland corporation with
the President of the Company being the sole shareholder and director. Including
the President, the Company has approximately 24 employees fully dedicated to the
sales, service, training and administration activities of the Company. As the
Company relies on government agencies for the majority of its sales, the
retention of employees with strong client contacts is essential to the future
profitability of the Company. In addition, the President of the Company is an
integral part of the Company's operations.
The Company and its stockholder intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The statements of operations and statement of cash flows for the nine months
ended September 30, 1996, are unaudited, and certain information and footnote
disclosures related thereto, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash. In addition, the company grants credit terms in the normal course of
business to its customers. As part of its ongoing procedures, the Company
monitors the creditworthiness of its customers. The Company does not believe
that it is subject to any unusual credit risk beyond the normal credit risk
attendant in its business. The Company had net revenues representing
approximately 53% and 30% of total revenue from one customer for the years ended
December 31, 1996 and for the nine months ended September 30, 1997,
respectively. The customer also represented approximately 35% of the Company's
total accounts receivable balance at December 31, 1996 and September 30, 1997.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Training revenues are recognized upon the completion of the training course.
Hardware and software revenues requiring installation services are recognized
upon the installation or configuration of the product and the acceptance of the
product by the customer. The Company has no further obligation to the Customer
after installation of software. Installation revenue for hardware and software
not purchased
F-83
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from the Company is recognized upon completion of the installation or
configuration service. If no installation or configuration is included in the
sale, hardware and software revenues are recognized when goods are shipped to
the customer. The Company has recorded a $3,000 allowance for doubtful accounts
as management anticipates that all of the accounts receivable balance at
September 30, 1997 is collectible.
DEFERRED REVENUE
Deferred revenue represents deposits received related to training costs for
which revenue has not yet been earned.
INVENTORY
Inventory is stated as the lower of cost or market. Cost is determined using
the average cost method. Inventory is comprised entirely of hardware and
software held for resale.
FIXED ASSETS
Equipment and furniture are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets which range
up to 7 years. Leasehold improvements are recorded at cost and amortized using
the straight-line method over the lesser of the lease term or the estimated
useful life. Equipment under the capital lease is recorded at the present value
of the maximum lease payments. The amortization is computed using the straight
line method over the term of the lease. Maintenance and repairs are expensed as
incurred.
INCOME TAXES
Income taxes are provided in accordance with the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
deferred tax assets and liabilities are recognized at the applicable income tax
rates based upon future tax consequences of temporary differences between the
tax basis and financial reporting basis of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
F-84
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FIXED ASSETS
Fixed assets at December 31, 1996 and September 30, 1997, respectively,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
AVERAGE DECEMBER 31 SEPTEMBER 30
USEFUL LIFE 1996 1997
----------- --------------- ---------------
<S> <C> <C> <C>
Leasehold improvements............................... 3 years $ 21 $ 21
Furniture and fixtures............................... 7 years 15 22
Computers and office equipment....................... 3 years 27 63
Automobiles, trucks and other........................ 5 years 27 27
Property under capital lease......................... 3 years -0- 84
--- -----
90 217
--- -----
Less accumulated depreciation and amortization....... (15) (60)
--- -----
$ 75 $ 157
--- -----
--- -----
</TABLE>
4. NOTES PAYABLE
As of December 31, 1996 and September 30, 1997, notes payable consisted of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1996 1997
--------------- -----------------
<S> <C> <C>
Note payable with Resellers Credit Corporation, with monthly
interest payments at prime plus 3%; principal is due on
demand......................................................... $ 50 $ 50
Loan from shareholder at 0% interest and due on demand; no
written agreement exists....................................... 37 1
--- ---
Total........................................................ $ 87 $ 51
--- ---
--- ---
</TABLE>
The Resellers Credit Corporation ("RCC") loan of $50,000 is secured by a
security interest in accounts receivable and specified inventory and includes
certain restrictions and conditions. The Company pays interest to RCC on the
outstanding balance at a rate equal to Chase Manhattan Bank's prime rate (8.25%
at December 31, 1996 and 8.5% at September 30, 1997) plus 3% per annum. The
Company also pays an advance fee equal to .25% on each advance. The outstanding
principal is due on demand.
F-85
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt at December 31, 1996 and September 30, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1996 1997
--------------- -----------------
<S> <C> <C>
Note payable with monthly payments of $283 including interest at
3.9% due in October 1999, secured by a vehicle................. $ 9 $ 7
Note payable with monthly payments of $278 including interest at
3.9% due in October 1999, secured by a vehicle................. 9 7
Less current portion of debt..................................... (6) (6)
--
---
Total........................................................ $ 12 $ 8
--
--
---
---
</TABLE>
The aggregate maturities of long-term notes payable are as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------------
<S> <C>
(IN THOUSANDS)
1997........................................................................... $ 2
1998........................................................................... 6
1999........................................................................... 6
---
Total...................................................................... $ 14
---
---
</TABLE>
6. LINES OF CREDIT
The Company had a $100,000 line of credit facility with RCC as well as a
Short-Term Accounts Receivable ("STAR") agreement obtained on May 3, 1996.
Effective May, 1997, the line of credit was increased to $150,000 and was
further increased to $200,000 effective June, 1997. The line of credit facility
was temporarily increased to $300,000 from October 2, 1997 through January 31,
1998. Both agreements are secured by a security interest in accounts receivable
and specified inventory and includes certain restrictions and conditions. The
Company uses the facilities to purchase merchandise from approved manufacturers.
The following table summarizes the conditions of the two credit facilities:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF SEPTEMBER 30, 1997 HANDLING
-------------------------------- -------------------------------- CHARGE
OUTSTANDING UNUSED OUTSTANDING UNUSED INTEREST RATE ON NEW
AMOUNT AMOUNT AMOUNT AMOUNT PER ANNUM ADVANCES
----------- ------------------- ----------- ------------------- ----------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
RCC........ $ 45,000 $55,000 $ 79,000 $121,000 Prime + 3% .25%
STAR....... $ 0 customer specific $ 158,000 customer specific Prime + 3% after 40 days .5%
</TABLE>
Prime rate is equivalent to Chase Manhattan Bank's prime rate (8.25% at
December 31, 1996 and 8.5% at September 30, 1997). Outstanding borrowings at
December 31, 1996 and September 30, 1997 are included in accounts payable at the
respective dates.
F-86
<PAGE>
U.S. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LEASE COMMITMENTS
The Company conducts its operations and training classes from facilities
that are leased for a combined monthly rent of $3,000. The lease for operations
space began on July 1, 1996 and the lease for training class space began on
December 1, 1996. Both leases are under non-cancelable operating leases which
expire on June 30, 1999, with a 4% escalation each year.
The Company also leases automobiles, and office equipment under long-term
operating leases with terms of two to five years. In addition, the Company
leases computer equipment under a capital lease.
Total rental expense included in operations is $28,000 and $61.370 for the
year ended December 31, 1996 and the nine months ended September 30, 1997.
Total future minimum lease payments as of September 30, 1997 for all leasing
arrangements were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
AMOUNT AMOUNT
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
1997..................................................................... $ 15 8
1998..................................................................... 55 32
1999..................................................................... 32 32
----- ---
Total................................................................ $ 102 72
-----
-----
Interest................................................................. 7
---
PV of net lease payments................................................. 65
Less current portion..................................................... 27
---
Long term obligation under capital lease................................. $ 38
---
---
</TABLE>
8. INCOME TAXES
The components of the provision for income taxes for the year ended December
31, 1996 and nine months ended September 30, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
--------------------- ---------------------
<S> <C> <C>
Current income tax expense:
Federal.............................................. $ 41 $ 11
State................................................ 10 4
--- ---
Total income tax....................................... $ 51 $ 15
--- ---
--- ---
</TABLE>
For the year ended December 31, 1996 and nine months ended September 30,
1997, the effective tax rate of 35% and 37%, respectively approximated the
combined federal and state income tax rates. Deferred taxes are immaterial.
F-87
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
InVenture Group, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholder's equity and of cash flows present fairly,
in all material respects, the financial position of InVenture Group, Inc. at
December 31, 1996 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Philadelphia, PA
July 15, 1997
F-88
<PAGE>
INVENTURE GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER
31, SEPTEMBER 30,
ASSETS 1996 1997
----------- -------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash.............................................................. $ 80 $ 13
Accounts receivable, net of allowance for doubtful accounts of $35
and $30......................................................... 629 738
Accounts receivable, officers and employees....................... 54 2
Accounts receivable, affiliates................................... 62
Deferred income taxes............................................. 26 11
Prepaid expenses and other current assets......................... 52 95
----------- ------
Total current assets.......................................... 903 859
Fixed assets, net................................................... 153 153
Intangible assets, net.............................................. 9 22
Other non-current assets............................................ 175
----------- ------
Total assets.................................................. $ 1,240 $ 1,034
----------- ------
----------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 830 $ 626
Accounts payable, officers........................................ 37
Other accrued expenses............................................ 410 66
Income taxes payable.............................................. 27 133
Other current liabilities......................................... 1
----------- ------
Total current liabilities..................................... 1,268 862
----------- ------
Deferred income taxes............................................... 15 4
----------- ------
Stockholder's equity:
Common stock, no par value; 10,500 shares authorized, issued and
outstanding..................................................... 11 11
Retained (deficit) earnings....................................... (54) 157
----------- ------
Total stockholder's equity.................................... (43) 168
----------- ------
Total liabilities and stockholder's equity.................... $ 1,240 $ 1,034
----------- ------
----------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
INVENTURE GROUP, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------- --------------------
1996 1996 1997
------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues........................................................................ $ 5,416 $ 4,253 $ 3,210
Cost of revenues................................................................ 3,948 3,165 1,603
------ --------- ---------
Gross profit.................................................................... 1,468 1,088 1,607
Selling, general and administrative expenses.................................... 1,464 1,028 1,378
------ --------- ---------
Income from operations.......................................................... 4 60 229
Other income.................................................................... 19 14 123
------ --------- ---------
Income before income taxes...................................................... 23 74 352
Provision for income taxes...................................................... 7 30 141
------ --------- ---------
Net income...................................................................... $ 16 $ 44 $ 211
------ --------- ---------
------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-90
<PAGE>
INVENTURE GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
--------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........................................... 10,500 $ 11 $ (70) $ (59)
Net income........................................................... 16 16
--------- ----- ----- -----
Balance, December 31, 1996........................................... 10,500 11 (54) (43)
Net income........................................................... 211 211
--------- ----- ----- -----
Balance, September 30, 1997 (unaudited).............................. 10,500 $ 11 $ 157 $ 168
--------- ----- ----- -----
--------- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-91
<PAGE>
INVENTURE GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- ------------------------
1996 1996 1997
--------------- ------------- ---------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 16 $ 44 $ 211
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 77 57 61
Deferred income taxes................................................. 2 4
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable, net............................................ 188 16 (67)
Prepaid expenses and other current assets........................... (39) (103) 135
Accounts payable.................................................... 468 489 (225)
Other accrued expenses.............................................. 7 (23) (309)
Income taxes payable................................................ 20 32 107
Deferred revenue.................................................... (467) (468)
--- --- ---------
Net cash provided by (used in) operating activities............... 272 44 (83)
--- --- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................... (79) (69) (17)
Purchase of trademark................................................... (10) (10)
Acquisition of IGI Services, Inc........................................ (82)
Software development costs.............................................. (8)
--- --- ---------
Net cash used in investing activities............................. (97) (79) (99)
--- --- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to affiliates, net............................................. (200) (62) 62
Officers loans, net..................................................... (12) (9) 53
--- --- ---------
Net cash (used in) provided by financing activities............... (212) (71) 115
--- --- ---------
Net decrease in cash...................................................... (37) (106) (67)
Cash, beginning of period................................................. 117 117 80
--- --- ---------
Cash, end of period....................................................... $ 80 $ 11 $ 13
--- --- ---------
--- --- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes.............................................. $ 9 $ - $ 8
--- --- ---------
--- --- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-92
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
InVenture Group, Inc. ("InVenture" or the "Company") creates and executes
strategic marketing programs for resellers and manufacturers of information
technology products and services as well as commercial customers in other
industries. InVenture provides a comprehensive portfolio of marketing services,
including marketing strategy, corporate identity, creation and maintenance
programs, creative development, merchandising programs, publications, website
development, direct mail advertising, event planning and empowerment programs.
The Company and its stockholders intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The balance sheet as of September 30, 1997 and the statements of operations,
of changes in stockholder's equity and of cash flows for the nine months ended
September 30, 1996 and 1997, are unaudited, and certain information and footnote
disclosures related thereto, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit
risks consist primarily of accounts receivable. In addition, the Company grants
credit terms in the normal course of business to its customers. As part of its
ongoing procedures, the Company monitors the creditworthiness of its customers.
The Company does not believe that it is subject to any unusual credit risk
beyond the normal credit risk attendant in its business.
The Company had net revenues of approximately $3.9 million and $625,000 from
two customers during 1996 which represent 84% of total revenues. Accounts
receivable from these two customers totaled $334,000 at December 31, 1996.
In the third quarter of 1997, the contract with the customer that accounted
for $625,000 expired and was not renewed.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenues are recognized upon completion and/or delivery of specific
projects. An allowance for doubtful accounts has been established for
potentially uncollectible accounts.
F-93
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Equipment and furniture are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets which range
up to 7 years. Leasehold improvements are recorded at cost and are amortized
over the shorter of the estimated lives of the related assets or the term of the
lease.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach in accounting for income taxes. The
asset and liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between carrying amounts and the tax bases of all assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
3. FIXED ASSETS
Fixed assets as of December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
AVERAGE
USEFUL
LIFE AMOUNT
---------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Leasehold improvements............................................ 5 years $ 22
Equipment......................................................... 3-7 years 306
Furniture and fixtures............................................ 3-7 years 26
Software.......................................................... 3 years 11
-----
365
Less accumulated depreciation and amortization.................... (212)
-----
Fixed assets, net................................................. $ 153
-----
-----
</TABLE>
There were no significant operating leases other than leases for office
space (see Note 4).
Depreciation and amortization expense for the year ended December 31, 1996
was $76,000.
4. COMMITMENTS
The Company leases office space in Pittsburgh, Pennsylvania, under an
agreement that provides for escalating rent. Rent expense is normalized over the
term of the lease, which expires in April 2000. The difference between cash
payments and rent expense is carried as accrued rent.
F-94
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
1997........................................................................... $ 188
1998........................................................................... 183
1999........................................................................... 184
2000........................................................................... 73
2001........................................................................... 1
-----
Total.......................................................................... $ 629
-----
-----
</TABLE>
Rent expense for the year ended December 31, 1996 was $194,000.
5. EMPLOYEE BENEFIT PLAN
The Company has an employee savings plan (the "Plan") which permits
participants who make contributions by salary reduction pursuant to section
401(k) Savings Plan of the Internal Revenue Code. The Company matches employee
contributions 100% for the first 3% of compensation deferred plus 50% of the
next 3% of compensation deferred. Amounts deferred over 6% are not matched.
Participants in the Plan vest in the employer contributions pro rata over 3
years. During 1996, the Company contributed $21,000 to the Plan.
6. RELATED PARTIES
During 1996, the Company purchased $32,000 of prepress services from IGI
Services, Inc. ("IGI"), a related organization that is owned by the stockholder
of the Company. The Company also advanced $56,000 to IGI during 1996, net of
repayments of $39,000. IGI shares office space with InVenture and InVenture
provides administrative services to IGI. The total charges to IGI for office
space and administrative services for the year ended December 31, 1996 were
$42,000. In addition, InVenture annually (through July 1, 1996) submitted to IGI
a print brokerage fee amounting to 7.0% of all InVenture print purchases, or
$47,000 for the year ended December 31, 1996. The net receivable at December 31,
1996 is $62,000 and is recorded in the balance sheet as accounts receivable,
affiliates. The Company believes the fees paid to IGI were equivalent to those
that would be paid under an arms'-length transaction. See Note 9 regarding a
related subsequent event.
During 1996, the Company advanced funds and provided marketing services to
The Sound Marketing Group ("SMG"), an organization with common ownership,
totaling $168,000. This amount has been recorded as a note receivable in the
December 31, 1996 balance sheet and is included in other non-current assets. The
note is payable beginning January 1, 1998 with payments on the outstanding
principal amortized over 60 months and bears interest at 6.65%.
At December 31, 1996, the Company had advanced funds totaling $42,000 to the
stockholders of the Company. This amount is included in the accounts receivable,
officers and employees balance at December 31, 1996 and is payable on demand.
F-95
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision for income taxes at December 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
Current taxes:
Federal...................................................................... $ 5
State........................................................................
-----
Current tax expense.......................................................... 5
Deferred taxes:
Federal tax benefit.......................................................... (5)
State tax expense............................................................ 7
-----
Deferred tax expense......................................................... 2
-----
Provision for income taxes................................................... $ 7
-----
-----
</TABLE>
Deferred tax liabilities (assets) at December 31, 1996 were comprised of the
following:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
Depreciation................................................................... $ 15
-----
Deferred tax liabilities....................................................... 15
-----
Allowance for doubtful accounts................................................ (12)
Vacation accrual............................................................... (6)
Accrued rent................................................................... (8)
-----
Deferred tax asset............................................................. (26)
-----
Net deferred tax asset....................................................... $ (11)
-----
-----
</TABLE>
The provision for income taxes differs from the amount computed by applying
the U.S. federal income tax rates due to use of graduated tax rates at lower
income brackets, non-deductible expenses and state income taxes.
8. SUBSEQUENT EVENTS
ACQUISITION OF IGI
Effective May 31, 1997, the Company acquired all of the operating assets of
IGI Services, Inc. ('IGI'), a company engaged in the business of operating an
electronic service bureau that supplies high resolution negatives and positives
from computer files for the publishing and advertising industries. The purchase
price of the acquisition included a cash payment of $22,000, forgiveness of
account receivable from IGI in the amount of $60,000 and the assumption of
liabilities totaling $22,000.
F-96
<PAGE>
INVENTURE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased based on the fair values at the date of acquisition. The
purchase price was allocated as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
<S> <C>
(IN THOUSANDS)
Accounts receivable............................................................ $ 43
Equipment...................................................................... 46
Intangibles.................................................................... 12
Prepaids and other assets...................................................... 3
Accounts payable............................................................... (22)
-----
$ 82
-----
-----
</TABLE>
The operating results of IGI have been included in the unaudited statement
of operations from the date of acquisition. The following unaudited pro forma
information has been prepared assuming that this acquisition had taken place at
the beginning of the respective period. This pro forma financial information is
presented for informational purposes only and may not be indicative of what the
actual results of operations might have been if the acquisition had been
effective at the beginning of 1996.
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
(IN
THOUSANDS)
Net sales...................................................................... $ 5,674
Net income..................................................................... $ 14
</TABLE>
SETTLEMENT OF LIABILITY
During October 1997, the Company entered into an agreement with a vendor to
whom InVenture owed $321,000. The vendor agreed to accept assignment of the
Company's receivable from SMG in full settlement of this liability upon the
effectiveness of the Condor transaction. As the receivable was $222,000 at the
time of this agreement, a gain of $99,000 will be recorded upon effectiveness of
the Offering.
F-97
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
MIS Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholder's equity and of cash flows present
fairly, in all material respects, the financial position of MIS Technologies,
Inc. at December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the nine
months ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, PA
October 31, 1997
F-98
<PAGE>
MIS TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 20 $ 151
Investments....................................................................... 75 75
Accounts receivable, less allowance for doubtful accounts of $13.................. 296 579
Other current assets.............................................................. 5 10
----- -----
Total current assets.......................................................... 396 815
Fixed assets, net................................................................... 22 21
----- -----
Total assets.................................................................. $ 418 $ 836
----- -----
----- -----
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Lines of credit................................................................... $ 193 $ 371
Accrued expenses.................................................................. 107 226
Shareholder note payable.......................................................... 20
----- -----
Total current liabilities..................................................... 320 597
----- -----
Stockholder's equity:
Common stock, no par value, 1,000 shares authorized, 500 shares issued and
outstanding..................................................................... 2 2
Retained earnings................................................................. 96 237
----- -----
Total stockholder's equity.................................................... 98 239
----- -----
Total liabilities and stockholder's equity.................................... $ 418 $ 836
----- -----
----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ----------------------
1996 1996 1997
------------- ----------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Revenues.................................................................. $ 2,582 $ 1,895 $ 3,387
Cost of revenues.......................................................... 1,426 1,213 1,841
------ ----------- ---------
Gross profit.............................................................. 1,156 682 1,546
Selling, general and administrative expenses.............................. 1,150 592 1,347
------ ----------- ---------
Income from operations.................................................... 6 90 199
Net interest expense...................................................... 12 9 26
------ ----------- ---------
Net (loss) income......................................................... $ (6) $ 81 $ 173
------ ----------- ---------
------ ----------- ---------
Unaudited pro forma information (see Note 2):
Pro forma net income before provision for income taxes.................. $ (6) $ 81 $ 173
Provision for income taxes.............................................. 32 69
------ ----------- ---------
Pro forma income.......................................................... $ (6) $ 49 $ 104
------ ----------- ---------
------ ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995............................................ 500 $ 2 $ 151 $ 153
Distributions to stockholder.......................................... (49) (49)
Net loss.............................................................. (6) (6)
--- ----- ----- -----
Balance, December 31, 1996............................................ 500 2 96 98
Distributions to stockholder.......................................... (32) (32)
Net income............................................................ 173 173
--- ----- ----- -----
Balance, September 30, 1997........................................... 500 $ 2 $ 237 $ 239
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
MIS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- ------------------------
1996 1996 1997
--------------- ------------- ---------
<S> <C> <C> <C>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED)
<S> <C> <C> <C>
Net (loss) income........................................................... $ (6) $ 81 $ 173
Adjustments to reconcile net (loss) income to net cash provided by (used
in) operating activities:
Depreciation............................................................. 12 8 10
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable.................................................... (88) (3) (283)
Other assets........................................................... (6) (5) (5)
Accrued liabilities.................................................... 57 26 119
Shareholder receivable................................................. (20)
--- ----- ---------
Net cash used by operating activities................................ (31) 107 (6)
--- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................ (15) (12) (9)
--- ----- ---------
Net cash used in investing activities................................ (15) (12) (9)
--- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in borrowings under lines of credit............................... 65 39 178
Distributions to shareholder............................................... (49) (67) (32)
--- ----- ---------
Net cash provided by financing activities............................ 16 (28) 146
--- ----- ---------
Net (decrease) increase in cash.............................................. (30) 67 131
Cash, beginning of period.................................................... 50 125 20
--- ----- ---------
Cash, end of period.......................................................... $ 20 $ 192 $ 151
--- ----- ---------
--- ----- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................................... $ 17 $ 11 $ 26
--- ----- ---------
--- ----- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MIS Technologies, Inc. (the "Company") is an S corporation headquartered in
Tulsa, Oklahoma. The Company, founded in 1984, provides clients temporary
contract information, staffing and permanent placement of qualified
professionals with information technology experience. In addition to these
serivices, the Company works with clients to assess their management information
systems and staffing needs.
The Company and its stockholder intend to enter into a definitive agreement
with Condor Technology Solutions, Inc. ("Condor"), pursuant to which all of the
common stock of the Company will be exchanged for cash and shares of Condor
common stock concurrent with the consummation of the initial public offering of
the common stock of Condor.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The interim statements of operations and of cash flows for the nine months
ended September 30, 1996 are unaudited, and certain information and footnote
disclosures related thereto, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
At December 31, 1996, the Company had four significant customers which
accounted for 24%, 15%, 11% and 10%, respectively, of total 1996 revenue.
Additionally, one significant customer accounted for 24% of the Company's
accounts receivable as of December 31, 1996. At September 30, 1997, the Company
had 2 significant accounts which each accounted for 10% of the total 1997
revenue through September 30, 1997.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenues from contract services as the work is
performed and recognizes revenues from permanent placement services upon
commencement of employment. An allowance for doubtful accounts has been
established for potentially uncollectible accounts.
INVESTMENTS
Investments consist of certificates of deposit with original maturities of
more than 90 days. The carrying value of these assets approximates the fair
market value.
OTHER CURRENT ASSETS
Other current assets consist primarily of employee receivables.
F-103
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost. Expenditures incurred that enhance the
utility or extend the life of a fixed asset are capitalized, while repair and
maintenance costs are expensed as incurred. Costs of assets acquired through
acquisition have been recorded at their respective fair value at the date of
acquisition. Depreciation is computed using the double declining balance method
over the following estimated useful lives of the related assets:
<TABLE>
<CAPTION>
YEARS
-----------------
<S> <C>
Furniture and equipment........................................................ 4-7
Computers and accessories...................................................... 3-5
</TABLE>
INCOME TAXES
The Company has elected S corporation status as defined by the Internal
Revenue Code and relevant state tax code whereby the Company is not subject to
taxation. Under S corporation status the stockholder reports his share of the
Company's taxable earnings or losses in his personal returns. Accordingly, the
financial statements include no provision for income taxes. If the Company were
subject to taxation, deferred tax assets and liabilities would be established
based on temporary differences between the book and tax basis of assets and
liabilities. Due to differences in book and tax accounting treatment for certain
items, including accounts receivable, property and equipment and accrued
liabilities, the stockholder's basis in the Company's net assets for book
purposes exceeds the related tax basis by $165,000.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
3. FIXED ASSETS
Fixed assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------- -------------------
<S> <C> <C>
Furniture and equipment................................ $ 41 $ 50
Computers and accessories.............................. 20 20
--- ---
61 70
Less accumulated depreciation.......................... (39) (49)
--- ---
$ 22 $ 21
--- ---
--- ---
</TABLE>
F-104
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED EXPENSES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
AMOUNT
---------------------
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------- ---------------------
<S> <C> <C>
(IN THOUSANDS)
Salaries and wages..................................... $ 32 $ 133
Vacation and sick pay.................................. 28 34
Commissions............................................ 35 29
Other accrued liabilities.............................. 12 30
----- -----
$ 107 $ 226
----- -----
----- -----
</TABLE>
5. SHAREHOLDER NOTE AND LINES OF CREDIT
Shareholder note and lines of credit at December 31, 1996 and September 30,
1997 consisted of the following:
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
BancFirst $600,000 line of credit dated September 11, 1997
expiring September 6, 1998; interest paid monthly at prime
plus 1.5% (9.75% at September 30, 1997), principal due at
maturity...................................................... $ -- $ 350
BancFirst $600,000 line of credit dated September 11, 1996
expiring September 6, 1997; interest paid monthly at prime
plus 1.75% (10% at December 31, 1996), principal due at
maturity...................................................... 175 --
Wells Fargo $40,000 line of credit dated July 31, 1997 expiring
July 31, 1998; interest paid monthly at prime plus 4.0%
(12.25% at September 30, 1997), principal paid in monthly
installments of varying amounts............................... -- 21
Wells Fargo $40,000 line of credit dated July 31, 1996 expiring
July 31, 1997; interest paid monthly at prime plus 4.0% (13%
at December 31, 1996), principal paid in monthly installments
of varying amounts............................................ 18 --
----- -----
$ 193 $ 371
----- -----
----- -----
</TABLE>
The BancFirst line of credit is secured by a continuing security interest in
the Company's cash, accounts receivable and equipment. The Wells Fargo line of
credit is unsecured. Additionally, the Company's sole shareholder has personally
guaranteed the lines of credit. The Company made cash interest payments of
$17,000 and $26,000 during the year ended December 31, 1996, and period ended
September 30, 1997 respectively.
In addition, at December 31, 1996, the Company was obligated to repay a
$20,000 shareholder note payable to its sole shareholder. The Company repaid the
shareholder during 1997.
F-105
<PAGE>
MIS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under long-term leases
which are accounted for as operating leases.
Future minimum lease payments for long-term operating leases as of December
31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
YEAR (IN THOUSANDS)
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 16
1998........................................................................... 47
1999........................................................................... 23
2000........................................................................... 16
2001........................................................................... 3
2002........................................................................... 1
-----
Total.................................................................... $ 106
-----
-----
</TABLE>
Rent expense for the period ended December 31, 1996 and the year ended
September 30, 1997 was $36,000 and $40,000, respectively.
7. SUBSEQUENT EVENT
The Company has entered into an agreement with Kinnaird Technical Resources,
Inc. ("KTR") to merge the two companies whereby KTR will become a wholly-owned
subsidiary of MIS. Management has elected to effect the merger concurrent with
the successful agreement with Condor. KTR operates as an independent branch of
MIS. During the period ended September 30, 1997 and the year ended December 31,
1996, commissions totaling $127,000 and $79,000, respectively, were paid by MIS
to KTR for contract and temporary placement services performed by KTR. In
addition, certain administrative expenses related to KTR's operations totaling
$21,000 and $23,000 were paid directly by MIS during the period ended September
30, 1997 and year ended December 31, 1996, respectively.
F-106
<PAGE>
[Maps showing locations of offices, warehouses and a training
center of the Company in the United States and Europe]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
Offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the shares of Common Stock to which it relates or an offer
to, or a solicitation of, any person in any jurisdiction in which such offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 15
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 23
Business.................................................................. 38
Management................................................................ 47
Certain Transactions...................................................... 53
Principal Stockholders.................................................... 56
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 64
Experts................................................................... 65
Additional Information.................................................... 65
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
Until , 1998 (25 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments of
subscriptions.
5,900,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
, 1998
-------------------
VOLPE BROWN WHELAN & COMPANY FURMAN SELZ
WHEAT FIRST BUTCHER SINGER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with this Offering. All of
such amounts (except the SEC Registration Fee and the NASD Filing Fee) are
estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 30,841
Nasdaq National Market Listing Fees............................. 42,750
NASD Filing Fee................................................. 10,678
Blue Sky Fees and Expenses...................................... 3,000
Printing and Engraving Costs.................................... 500,000
Legal Fees and Expenses......................................... 1,400,000
Accounting Fees and Expenses.................................... 2,400,000
Transfer Agent and Registrar Fees and Expenses.................. 3,500
Miscellaneous................................................... 509,231
---------
Total..................................................... $4,900,000
</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.
The Underwriting Agreement filed as Exhibit 1 provides that the Underwriters
named therein will indemnify and hold harmless the Company and each director,
officer or controlling person of the Company from and against certain
liabilities, including liabilities under the Securities Act. The Underwriting
Agreement also provides that such Underwriters will contribute to certain
liabilities of such persons under the Securities Act.
II-1
<PAGE>
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. The share figures do not take into account the
one-for-5.26227 reverse stock split to be effective on the day immediately
preceding the date of the Prospectus.
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 $.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.
Simultaneously with the completion of this Offering, the Company will issue
2,153,355 shares of its Common Stock in connection with the Mergers of the eight
Founding Companies. The Company also will assume options to purchase 177,000
shares of common stock of certain of the Founding Companies which, following the
Mergers, will constitute options to purchase an aggregate of 64,970 shares of
Common Stock of the Company.
Each of the transactions described in this Item 15 was effected or will be
effected without registration of the relevant security under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act
and/or Regulation D thereunder for transactions not involving a public offering
and/ or Rule 701 under the Securities Act.
(b) Financial Statement Schedules
None
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1* -- Form of Underwriting Agreement
2.1* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MST
Acquisition Corp., Management Support Technology Corporation and the Stockholders named therein
2.2* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, CHMC
Acquisition Corp., Computer Hardware Maintenance Company, Inc. and the Stockholders named therein
2.3* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Federal
Acquisition Corp., Federal Computer Corporation and the Stockholders named therein
2.4* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Corporate Access Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein
2.5* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Interactive Acquisition Corp., Interactive Software Systems Incorporated and the Stockholders named
therein
2.6* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, US Comm
Acquisition Corp., U.S. Communications, Inc. and the Stockholders named therein
2.7* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
InVenture Acquisition Corp., InVenture Group, Inc. and the Stockholders named therein
2.8* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MIS
Acquisition Corp., MIS Technologies, Inc. and the Stockholders named therein
3.1* -- Amended and Restated Certificate of Incorporation of the Company
3.2* -- By-Laws of the Company as amended
4* -- Form of Certificate Evidencing Ownership of Common Stock of the Company
5* -- Opinion of Morgan, Lewis & Bockius LLP
10.1* -- 1997 Long-Term Incentive Plan of the Company
10.2* -- Employment Agreement between the Company and Kennard F. Hill
10.3* -- Form of Employment Agreement between the Company and C. Lawrence Meador
10.4* -- Employment Agreement between the Company and Daniel J. Roche
10.6* -- Lease between Tysons II Development Co. Limited Partnership and the Company and the Guarantee
thereof and Form of Amendment of Lease between Tysons II Development Co. Limited Partnership and
the Company
10.7* -- Employment Agreement between the Company and William J. Caragol, Jr.
10.8 -- Indemnification Agreement by and between SCM LLC d/b/a The Commonwealth Group and the Company
21* -- List of Subsidiaries of the Company
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Deloitte & Touche LLP
23.4* -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)
23.5* -- Consent of C. Lawrence Meador to be named as a director
23.6* -- Consent of Edward J. Mathias to be named as a director
23.7* -- Consent of William M. Newport to be named as a director
23.8* -- Consent of Peter T. Garahan to be named as a director
23.9 -- Consent of William E. Hummel to be named as a director
24* -- Powers of Attorney
27* -- Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the Underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be the initial bona fide
offering thereof.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of McLean, the Commonwealth of Virginia, on the 7th day of January, 1998.
<TABLE>
<S> <C> <C>
CONDOR TECHNOLOGY SOLUTIONS, INC.
By: /s/ KENNARD F. HILL
-----------------------------------------
Kennard F. Hill
President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------------------------- -----------------
<C> <S> <C>
/s/ J. MARSHALL COLEMAN
------------------------------------ Chairman of the Board January 7, 1998
J. Marshall Coleman
/s/ KENNARD F. HILL
------------------------------------ President, Chief Executive Officer and January 7, 1998
Kennard F. Hill Director (Principal Executive Officer)
/s/ WILLIAM J. CARAGOL, JR.
------------------------------------ Vice President-Finance (Principal Financial January 7, 1998
William J. Caragol, Jr. and Accounting Officer)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1* -- Form of Underwriting Agreement
2.1* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MST
Acquisition Corp., Management Support Technology Corporation and the Stockholders named therein
2.2* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, CHMC
Acquisition Corp., Computer Hardware Maintenance Company, Inc. and the Stockholders named therein
2.3* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, Federal
Acquisition Corp., Federal Computer Corporation and the Stockholders named therein
2.4* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Corporate Access Acquisition Corp., Corporate Access, Inc. and the Stockholders named therein
2.5* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
Interactive Acquisition Corp., Interactive Software Systems Incorporated and the Stockholders named
therein
2.6* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, US Comm
Acquisition Corp., U.S. Communications, Inc. and the Stockholders named therein
2.7* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company,
InVenture Acquisition Corp., InVenture Group, Inc. and the Stockholders named therein
2.8* -- Agreement and Plan of Organization, dated as of October 1, 1997, by and among the Company, MIS
Acquisition Corp., MIS Technologies, Inc. and the Stockholders named therein
3.1* -- Amended and Restated Certificate of Incorporation of the Company
3.2* -- By-Laws of the Company as amended
4* -- Form of Certificate Evidencing Ownership of Common Stock of the Company
5* -- Opinion of Morgan, Lewis & Bockius LLP
10.1* -- 1997 Long-Term Incentive Plan of the Company
10.2* -- Employment Agreement between the Company and Kennard F. Hill
10.3* -- Form of Employment Agreement between the Company and C. Lawrence Meador
10.4* -- Employment Agreement between the Company and Daniel J. Roche
10.5* -- Employment Agreement between the Company and Santanu J. Sarkar
10.6* -- Lease between Tysons II Development Co. Limited Partnership and the Company and Guarantee thereof
and Form of Amendment of Lease between Tysons II Development Co. Limited Partnership and the
Company
10.7* -- Employment Agreement between the Company and William J. Caragol, Jr.
10.8 -- Indemnification Agreement by and between SCM LL.C d/b/a The Commonwealth Group and the Company
21* -- List of Subsidiaries of the Company
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Deloitte & Touche LLP
23.4* -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)
23.5* -- Consent of C. Lawrence Meador to be named as a director
23.6* -- Consent of Edward J. Mathias to be named as a director
23.7* -- Consent of William M. Newport to be named as a director
23.8* -- Consent of Peter T. Garahan to be named as a director
23.9 -- Consent of William E. Hummel to be named as a director
24* -- Powers of Attorney
27* -- Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
EXHIBIT 10.8
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is entered into as of this
9th day of January, 1998 by and between SCM LLC d/b/a/ The Commonwealth
Group, a Delaware limited liability company ("Commonwealth"), and Condor
Technology Solutions, Inc., a Delaware corporation ("Condor").
RECITALS
I. Condor was established to create a leading provider of information
technology ("IT") services to middle market organizations. In order to
provide a single-source IT solution, Condor has entered into merger
agreements by which it will acquire eight established IT service providers,
simultaneously with and as a condition to the closing of Condor's initial
public offering of its common stock (Condor's "IPO").
II. Commonwealth was a significant stockholder of Condor and served as its
promoter.
III. As part of the process by which the eight acquisition targets were
identified, Commonwealth and Condor, through their agents, sought out,
evaluated and entered into negotiations with a number of prospective
acquisition targets ("Prospects"), and also engaged in communications and
negotiations with such Prospects' respective investment banks, accountants,
attorneys and other professional advisors.
IV. One prospect, Emtec, Inc., has filed a lawsuit against Condor,
Commonwealth, J. Marshall Coleman and Kennard F. Hill in the United States
District Court for the Eastern District of Pennsylvania, Civil Action No.
97-CV-6552 (the "Emtec Suit"), alleging damages arising from the proposed
inclusion in the acquisition transactions of two entities which, Emtec
alleges, Emtec and its advisors introduced to Condor and Commonwealth.
V. In connection with its IPO, Condor has asked Commonwealth to indemnify,
defend and hold it harmless from the Emtec Suit, and certain specified
similar claims, all on the terms and conditions more fully set forth below.
Commonwealth has agreed to provide such an indemnity, also on the terms and
conditions more fully set forth below.
AGREEMENT
NOW, THEREFORE, Commonwealth and Condor hereby agree as follows:
1. Definitions.
A. The "Condor Parties" shall consist of Condor, its directors,
officers, stockholders and employees other than Commonwealth and its
members or stockholders.
<PAGE>
B. "Covered Claims" shall mean all claims seeking or potentially giving
rise to any Loss, where such claims arise from any threatened, pending
or completed claim, action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that
Condor believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil,
administrative, investigative or other by reason of or arising out of
any act or occurrence by Commonwealth, any of its members or Stockholders
during the period during which Condor was organized, up to but excluding
the closing of Condor's IPO. Covered Claims shall not include any
claims under federal or state securities laws arising from Condor's
IPO.
C. "Defense Costs" shall mean all costs incurred by Condor in
investigating and defending a Covered Claim, including attorneys' fees
and all other costs, expenses and obligations incurred in connection with
investigating, defending a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in, any
action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation relating to or arising from a Covered
Claim, including all interest, assessments and other charges paid or
payable in connection with or in respect of such Defense Costs.
D. "Losses" shall refer to any losses, claims, damages, final judgments
and liabilities, joint or several, fines, penalties and amounts paid in
approved settlements (as provided herein), but shall not include
Defense Cost.
2. Indemnification. Commonwealth hereby agrees to indemnify, defend and
hold the Condor Parties harmless to the fullest extent permitted by law
from and against all Losses arising from Covered Claims.
3. Defense Costs. Condor shall retain responsibility for and shall pay the
first $250,000 of Defense Costs for all Covered Claims arising from a
single set of facts. Thereafter, all Defense Costs for all Covered
Claims arising from such single set of facts shall be borne by
Commonwealth. Such payment of Expenses shall be made by Commonwealth as
soon as practicable but in any event no later than five days after
written demand by Condor therefor is presented to Commonwealth.
4. Indemnification Procedures.
A. Notice/Cooperation by Condor. Condor shall give Commonwealth notice
in writing as soon as practicable of any Claim made against Condor for
which indemnification will or could be sought under this Agreement.
Notice to Commonwealth shall be directed
<PAGE>
to Commonwealth as provided in paragraph 9.
B. Notice to Insurers. If, at the time of the receipt by
Commonwealth of a notice of a Claim pursuant to Section 3(b) hereof,
Commonwealth has liability insurance in effect which may cover such
Claim, Commonwealth shall give prompt notice of the commencement of
such Clam to the insurers in accordance with the procedures set forth
in each of the policies. Commonwealth shall thereafter take all
necessary or desirable action to cause such insurers to pay, on behalf
of Condor, all amounts payable as a result of such action, suit,
proceeding, inquiry or investigation in accordance with the terms of
such policies.
C. Settlement Procedures. If, at a time during which Condor is
responsible for its Defense Costs and is directing the defense of the
Claim, Condor determines that a settlement of the claim would be in
its best interest, it shall notify Commonwealth of the terms and
conditions of such proposed settlement and the status of any pending
negotiations with the party asserting the Claim against Condor.
Commonwealth may participate in any settlement negotiations if it
desires. Commonwealth shall be obligated to pay all amounts due
under any such settlement, provided that Commonwealth has consented to
such terms. If Commonwealth unreasonably withholds, delays or
conditions its consent to any such proposed settlement, it will
thereafter pay the Defense Costs related to such Claim.
D. Selection of Counsel. In the event Commonwealth shall be
obligated hereunder to pay the Defense Costs of a Claim, Commonwealth
shall be entitled to assume the defense of such Claim, with counsel
approved by Condor, which approval shall not be unreasonably withheld,
upon the delivery to Condor of written notice of its election to do
so. After delivery of such notice, approval of such counsel by Condor
and the retention of such counsel by Commonwealth, Commonwealth will
not be liable to Condor under this Agreement for any fees of counsel
subsequently incurred by Condor with respect to the same Claim;
provided that if (A) the employment of counsel by Condor has been
previously authorized by Commonwealth (B) both parties shall have
reasonably concluded that there is a conflict of interest between
Commonwealth and Condor in the conduct of any such defense, or (C)
Commonwealth shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Condor's counsel shall be at the
expense of Commonwealth. In any event, Condor shall have the right to
employ Condor's counsel in any such Claim at Condor's expense.
Commonwealth shall have the right to conduct such defense as it sees
fit in its sole discretion, including the right to settle any claim
against Condor with the consent of Condor, provided that any such
settlement fully releases Condor.
6. Exceptions. Any other provision herein to the contrary
notwithstanding, Commonwealth shall not be obligated pursuant to the
terms of this Agreement:
A. Claims Initiated by Condor. To indemnify or advance expenses to
Condor with respect to Claims initiated or brought voluntarily by
Condor and not by way of defense,
<PAGE>
except with respect to actions or proceedings to establish or enforce an
obligation to indemnify under this Agreement or any other agreement or
insurance policy.
6. Period of Limitations. Commonwealth shall have no obligation to
indemnify Condor under this Agreement as to any Covered Claims except
those which are first asserted (i) by the filing of a lawsuit or
the institution of any other formal proceeding in any other forum; or
(ii) by the sending to Condor of a letter or other notice specifically
threatening the filing of such a lawsuit or the institution of any
other formal proceeding in any other forum, in each case against Condor
by a third party on or prior to the one-year anniversary of the closing
of Condor's IPO.
7. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
8. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted assigns.
Commonwealth shall require and cause any successor (whether direct or
indirect by purchase, merger, consolidation or otherwise) to all,
substantially all, or a substantial part, of the business and/or assets
of Commonwealth, by written agreement in form and substance
satisfactory to Condor, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that Commonwealth
would be required to perform if no such succession had taken place.
9. Notice. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall
in any event be deemed to be given: (i) five (5) days after deposit
with the U.S. Postal Service or other applicable postal service, if
delivered by first class mail, postage prepaid; (ii) upon delivery, if
delivered by hand; (iii) one (1) business day after the business day of
deposit with Federal Express or similar overnight courier, freight
prepaid; or (iv) one day after the business day of delivery by
facsimile transmission, if deliverable by facsimile transmission, with
copy by first class mail, postage prepaid, and shall be addressed, if
to Condor, at Condor's principal executive offices and, if to
Commonwealth, at the home address of each member of Commonwealth or at
such other address as such party may designate by ten (10) days'
advance written notice to the other party hereto.
10. Severability. The provisions of this Agreement shall be severable
in the event that any of the provisions hereof (including any provision
within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable,
and the remaining provisions shall remain enforceable to the fullest
extent permitted by law. Furthermore, to the fullest extent possible,
the provisions of this Agreement (including, without limitation, each
portion of this Agreement containing any
<PAGE>
provision held to be invalid, void or otherwise unenforceable, that is
not itself invalid, void or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
11. Subrogation. In the event of payment under this Agreement, Commonwealth
shall be subrogated to the extent of such payment to all of the rights of
recovery of Condor, which shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable
Commonwealth effectively to bring suit to enforce such rights.
12. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing
signed by all parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute
a continuing waiver.
13. Effectiveness of Agreement. This Agreement will become effective upon
the closing of Condor's IPO.
14. Integration and Entire Agreement. This Agreement sets forth the entire
understanding between the parties with respect to its subject matter and
supersedes and merges all previous written and oral negotiations,
commitments, understandings and agreements relating to the subject matter
hereof between the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
SCM LLC d/b/a/ The Commonwealth Group, a
Delaware limited liability company
By: /s/ Charles F. Smith
Title:
CONDOR TECHNOLOGY SOLUTIONS, INC.,
a Delaware corporation
By: /s/ Kennard F. Hill
Title: Chief Executive Officer
<PAGE>
GUARANTEE
The undersigned Members of SCM LLC hereby jointly and severally
guarantee the obligations of SCM LLC pursuant to the foregoing
Indemnification Agreement.
/s/ J. Marshall Coleman
- --------------------------
J. Marshall Coleman
/s/ James J. Martell, Jr.
- --------------------------
James J. Martell, Jr.
/s/ Charles F. Smith
- --------------------------
Charles F. Smith
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 2 to Registration Statement on Form S-1 of our reports as of the
dates, and related to the financial statements of the companies, listed below
which appear in such Prospectus:
Company Date
------- ----
Condor Technology Solutions, Inc. November 24, 1997
Computer Hardware Maintenance Company, Inc. October 31, 1997
Corporate Access, Inc. July 18, 1997
Interactive Software Systems Incorporated October 31, 1997
U.S. Communications, Inc. October 31, 1997
InVenture Group, Inc. July 15, 1997
MIS Technologies, Inc. October 31, 1997
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, PA
January 7, 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 December 31, 1997, on
our audits of the consolidated financial statements of Federal Computer
Corporation and Subsidiaries as of October 31, 1996 and 1997 and for each of
the three years in the period ended October 31, 1997. We also consent to the
reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Washington, D.C.
January 9, 1998
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-37179 of Condor Technology Solutions, Inc. on Form S-1 (the
"Registration Statement")of our report dated October 29, 1997 (relating to
the financial statements of Management Support Technology Corp., which report
expresses an unqualified opinion and includes an explanatory paragraph
relating to the chief exectuive officer/sole stockholder's compensation being
at his sole discretion), appearing in the Prospectus, which is part of such
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 6, 1998
<PAGE>
Exhibit 23.9
CONSENT TO BE NAMED AS A DIRECTOR
OF
CONDOR TECHNOLOGY SOLUTIONS, INC.
The undersigned hereby consents to be named as a director of Condor
Technology Solutions, Inc. (the "Company") in the Registration Statement on
Form S-1 (Registration No. 333-37179) and all amendments thereto, filed by
the Company with the Securities and Exchange Commission.
/s/ William E. Hummel
_______________________
William E. Hummel
