<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 0-23635
CONDOR TECHNOLOGY SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1814931
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
170 JENNIFER ROAD, SUITE 325, ANNAPOLIS, MARYLAND 21401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(410) 266-8700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
---- ----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
OUTSTANDING AS OF
CLASS NOVEMBER 10, 1999
----- -----------------
<S> <C>
COMMON STOCK , $.01 PAR VALUE 15,106,981
----------
</TABLE>
- -------------------------------------------------------------------------------
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................................1
Consolidated Statements of Operations......................................................2
Consolidated Condensed Statements of Cash Flows............................................3
Notes to Consolidated Financial Statements..............................................4-12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................13-19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK......................................................................20
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.........................................................................21
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ................................................22
Item 3. DEFAULTS UPON SENIOR SECURITIES...........................................................22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................22
Item 5. OTHER INFORMATION.........................................................................22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................22
SIGNATURES..................................................................................................23
EXHIBIT INDEX...............................................................................................24
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,053 $ 4,935
Restricted cash 2,756 2,575
Accounts receivable, net 39,814 32,565
Prepaids and other current assets 3,284 6,841
--------- ---------
Total current assets 48,907 46,916
PROPERTY AND EQUIPMENT, NET 4,329 8,010
GOODWILL AND OTHER INTANGIBLES, NET 145,163 121,441
OTHER ASSETS 2,243 2,497
--------- ---------
TOTAL ASSETS $ 200,642 $ 178,864
========= =========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,838 $ 8,202
Accrued expenses and other current liabilities 16,524 15,320
Deferred revenue 4,915 5,371
Current portion of contingent purchase liability 4,308 2,388
Current portion of long-term debt 442 47,372
--------- ---------
Total current liabilities 40,027 78,653
LONG-TERM DEBT 24,296 203
NON-CURRENT CONTINGENT PURCHASE LIABILITY 20,348 7,912
OTHER LONG-TERM OBLIGATIONS 1,929 1,335
--------- ---------
Total liabilities 86,600 88,103
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS EQUITY:
Preferred stock, $.01 par, 1,000,000 authorized; none outstanding -- --
Common stock, $.01 par value; authorized 49,000,000 shares;
issued and outstanding, 12,009,608 shares at December 31, 1998
and 15,050,807 shares at September 30, 1999 120 151
Additional paid-in capital 111,278 121,863
Retained earnings (Accumulated deficit) 2,818 (30,965)
Other comprehensive income (loss) 20 (94)
Treasury stock, at cost (13,178 shares) (194) (194)
--------- ---------
Total stockholders equity 114,042 90,761
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 200,642 $ 178,864
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
--------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
IT service revenues $ 27,345 $ 33,018 $ 59,369 $ 108,072
Hardware procurement revenues 17,662 16,435 54,989 54,515
--------- --------- --------- ---------
Total revenues 45,007 49,453 114,358 162,587
--------- --------- --------- ---------
Cost of IT services 13,109 20,118 28,680 63,018
Cost of hardware procurement 15,771 14,663 49,814 49,042
--------- --------- --------- ---------
Total cost of revenues 28,880 34,781 78,494 112,060
--------- --------- --------- ---------
Gross profit 16,127 14,672 35,864 50,527
Selling, general and administrative expenses 9,272 12,969 22,124 38,780
Depreciation and amortization 1,310 1,830 3,125 6,322
In process research and development -- -- 5,000 --
Impairment of intangible assets and loss on sale of assets
to be disposed of -- 1,500 -- 30,736
Other costs -- 1,535 -- 3,953
--------- --------- --------- ---------
Income (loss) from operations 5,545 (3,162) 5,615 (29,264)
Interest and other income (expense) (36) (2,676) 560 (4,092)
--------- --------- --------- ---------
Income (loss) before extraordinary item and income taxes 5,509 (5,838) 6,175 (33,356)
Income tax expense (benefit) 2,507 (1,511) 4,152 243
--------- --------- --------- ---------
Net income (loss) before extraordinary item 3,002 (4,327) 2,023 (33,599)
Extraordinary loss, net of income taxes of $122 -- -- -- (184)
--------- --------- --------- ---------
Net income (loss) $ 3,002 $ (4,327) $ 2,023 $ (33,783)
========= ========= ========= =========
Net income (loss) per share from continuing operations -
Basic $ 0.27 $ (0.31) $ 0.21 $ (2.59)
========= ========= ========= =========
Net income (loss) per share from continuing operations -
Diluted $ 0.26 $ (0.31) $ 0.20 $ (2.59)
========= ========= ========= =========
Net income (loss) per share from extraordinary item -
Basic & Diluted $ -- $ -- $ -- $ (0.01)
========= ========= ========= =========
Net income (loss) per share - Basic $ 0.27 $ (0.31) $ 0.21 $ (2.60)
========= ========= ========= =========
Net income (loss) per share - Diluted $ 0.26 $ (0.31) $ 0.20 $ (2.60)
========= ========= ========= =========
Basic shares outstanding 11,198 13,840 9,779 12,954
========= ========= ========= =========
Diluted shares outstanding 11,596 13,840 9,950 12,954
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,023 $ (33,783)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Research and development charge 5,000 -
Impairment of intangible assets and loss on sale of assets to
be disposed of - 30,736
Writeoff of deferred financing costs - 1,617
Depreciation and amortization 3,125 6,322
Deferred income taxes (992) -
Changes in assets and liabilities (4,112) (7,514)
------------- --------------
Net cash provided by (used in) operating activities 5,044 (2,622)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,026) (4,232)
Sale of short term investments, net 1,046 8
Payment for technology license (1,550) -
Acquisition of subsidiaries, net of cash (65,729) (5,227)
Payment of contingent purchase liability - (7,000)
Other (487) 188
------------- --------------
Net cash used in investing activities (68,746) (16,263)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on debt, net (1,723) 22,462
Proceeds from initial public offering 72,926 -
Purchase of treasury shares (194) -
Deferred financing costs (445) (1,762)
------------- --------------
Net cash provided by financing activities 70,564 20,700
------------- --------------
EFFECT OF EXCHANGE RATE CHANGES (3) (114)
NET INCREASE IN CASH AND CASH EQUIVALENTS
AND RESTRICTED CASH 6,859 1,701
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH,
BEGINNING OF PERIOD 26 5,809
------------- --------------
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH,
END OF PERIOD $ 6,885 $ 7,510
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
CONDOR TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Condor Technology Solutions, Inc., a Delaware corporation ("Condor" or
the "Company"), was founded in August 1996. The Company is an enterprise
portal and e-commerce solutions provider of strategic information
technology ("IT") business solutions to middle market companies, Fortune
1000 firms and government agencies. In order to become an end-to-end
provider of a wide range of IT services and solutions, Condor entered
into agreements (the "Mergers") to acquire all of the outstanding stock
of eight established IT service providers (the "Founding Companies") and
concurrently completed an initial public offering (the "Offering") of its
common stock (the "Common Stock"). On February 5, 1998 and February 10,
1998, respectively, the Offering and the Mergers were completed.
Since February 10, 1998, the Company has acquired seven additional IT
service providers. The Founding Companies along with the additional
acquisitions are referred to herein as "operating companies". All
acquisitions have been accounted for using the purchase method of
accounting and are reflected as of their respective acquisition dates.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission
regulations. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring
nature) which are necessary to present fairly the financial position,
results of operations and cash flows for the interim periods. The results
for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
The financial statements should be read in conjunction with the Company's
audited consolidated financial statements included in the Company's most
recently filed Form 10-K.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a description of the Company's accounting policies, refer to the
Notes to the Financial Statements of the Company included in the
Company's most recently filed Form 10-K. The following addition to the
accounting policies of the Company during the periods presented is:
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," requires impairment losses to be recorded on
long-lived assets used in operations when indications of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. The Company will
review long-lived assets for impairment when one or more of the following
events have occurred:
a. Current or immediate (future twelve months) short-term projected cash
flows are significantly less than the most recent historical cash
flows.
b. Loss of or scheduled completion of a major positive cash flow
generating contract in the next six months without the realistic
expectation of sufficient contract replacement within six-to-nine
months.
4
<PAGE>
c. A significant, extraordinary loss of billable professionals without
the realistic expectation of an in-kind replacement within three
months.
d. The unplanned departure of the original founder of an acquired
entity, where the founder is critical to large customer
relationship(s) and/or development and maintenance of existing
technology.
e. A significant adverse change in legal factors or in the business
climate that could affect the value of the goodwill or other
long-lived assets or an adverse action or assessment by a regulator.
f. Significant adverse changes in technology that could affect the
Company's ability to win contracts or result in termination of
existing contracts.
As of September 30, 1999, the Company has recorded impairment losses
related to a portion of the Company's goodwill and other intangibles
balance (see notes 8 and 9).
(3) ACQUISITIONS
ACQUISITIONS
On April 1, 1999, the Company acquired the outstanding ownership
interests of Titan Technologies Group, LLC ("Titan"), a New Jersey based
company which provides enterprise resource planning services and software
for middle market companies in the Northeast. The initial purchase price
was $9.0 million comprised of $6.8 million in cash and 245,264 shares of
Common Stock. The Company has accounted for this transaction as a
purchase business combination. The excess of the purchase price over the
fair values of the net assets acquired has been recorded as goodwill,
which will be amortized on a straight-line basis over 35 years. The
purchase agreement also contains additional payments contingent on the
future earnings performance of Titan. Any additional payments made when
the contingency is resolved will be accounted for as goodwill and will be
amortized over the remaining estimated life of such goodwill.
On February 15, 1999, the Company acquired 48% of the ownership interests
of Dimensional Systems LLC ("Dimensional"), a Cambridge, Massachusetts
consulting firm which is focusing on the development of a decision
support lab. The initial purchase price was $240,000 comprised of
$120,000 in cash and 10,703 shares of Common Stock. The Company accounted
for this investment using the equity method until September 30, 1999 when
it exercised its option to purchase the remaining 52% of Dimensional for
an additional purchase price of $260,000 comprised of $130,000 in cash
and 51,418 shares of Common Stock. The Company accounted for the purchase
on September 30, 1999 as a purchase business combination. The excess of
the purchase price over the fair values of the net assets acquired has
been recorded as goodwill, which will be amortized on a straight-line
basis over 10 years.
CONTINGENT PURCHASE LIABILITY
Pursuant to contingent payment agreements entered into as part of the
acquisitions of the operating companies, the Company paid $7 million in
cash and $7.5 million of Common Stock (1,251,689 shares) related to
accrued contingent consideration as of September 30, 1999. At September
30, 1999, approximately $2.9 and $7.4 million in cash and stock,
respectively, of contingent consideration was accrued, which will be paid
in 2000 and 2001 in accordance with the original purchase agreements.
5
<PAGE>
PRO FORMA RESULTS
The results of operations of the operating companies have been reflected
in the financial statements as of their respective acquisition dates. The
following table reflects unaudited pro forma combined results of
operations of the operating companies on the basis that the acquisitions
of all of the operating companies had taken place at the beginning of the
earliest period presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1998 1999
------------------ ------------------
(in thousands, except per share amounts)
<S> <C> <C>
Revenues $171,866 $164,734
Net income (loss) before extraordinary item 6,978 (34,122)
Net income (loss) 6,978 (34,306)
Net income (loss) per share before extraordinary item -
Basic $ 0.57 $ (2.61)
Net income (loss) per share before extraordinary item -
Diluted $ 0.56 $ (2.61)
Net income (loss) per share - Basic $ 0.57 $ (2.62)
Net income (loss) per share - Diluted $ 0.56 $ (2.62)
</TABLE>
The unaudited pro forma amounts reflect the results of operations for all
of the operating companies as well as the following purchase accounting
adjustments for the periods presented: reductions in salaries, bonuses,
profit sharing and other benefits to the stockholders of the operating
companies to which they have agreed prospectively; interest on assumed
borrowings; 1998 reduction of $5 million for in-process research and
development, elimination of revenues and cost of revenues on transactions
between operating companies occurring prior to the acquisition by the
Company; amortization of goodwill recorded as a result of the
acquisitions; income taxes on S-corporation income; and the estimated
income tax effect on the pro forma adjustments. Total pro forma
adjustments included as of September 30, 1998 and 1999 were approximately
$6.7 million and $150,000, respectively, and resulted in a net increase
to net income.
The unaudited pro forma combined results of operations may not be
comparable to and may not be indicative of the actual results that would
have occurred had the acquisitions been consummated at the beginning of
the periods presented or of future operations of the combined companies
because the companies were not under common control or management and had
different tax and capital structures during the periods presented.
(4) EARNINGS PER SHARE
The Company calculates earnings per share on both a basic and diluted
basis. Dilutive securities are excluded from the computation in periods
which they have an anti-dilutive effect. Net income available to common
stockholders and common equivalent stockholders is equal to net income
for all periods presented.
6
<PAGE>
The following table represents reconciliations between the weighted
average common stock outstanding used in basic earnings per share and the
weighted average common and common equivalent shares outstanding used in
diluted earnings per share for each of the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Weighted average common stock outstanding 11,198 13,840 9,779 12,954
Stock options, as if converted outstanding 5 - 39 -
Contingent purchase price adjustment 393 - 132 -
----------- ----------- ------------ -----------
Weighted average common and common
equivalent shares outstanding 11,596 13,840 9,950 12,954
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
(5) COMPREHENSIVE INCOME
Comprehensive income includes net income, foreign currency translation
adjustments and unrealized gains on marketable securities and is detailed
as follows for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1998 1999 1998 1999
----------- ------------ ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $3,002 $(4,327) $2,023 $(33,783)
Foreign currency translation adjustments 7 35 (3) (114)
Unrealized gain (loss) on marketable
securities (1) - 11 -
----------- ------------ ----------- -----------
Comprehensive income (loss) $3,008 $(4,292) $2,031 $(33,897)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
(6) DEBT
In April 1999, the Company entered into a $100 million syndicated credit
facility underwritten and arranged by a major commercial bank (the
"Bank") which replaced the Company's $50 million revolving credit
facility. The new credit facility included a three-year, $75 million
revolving line of credit (the "Revolver") and a five-year, $25 million
term loan (the "Term Loan"). The Term Loan included repayments of
principal in quarterly installments with final payment due March 31,
2004. Interest accrued on the Term Loan at the Base Rate (which is the
greater of Prime Rate or the Federal Funds Rate plus 0.50%) plus 1.5% or
the London Interbank Offering Rate ("LIBOR") plus 3.0%, at the option of
the Company. Borrowings under the Revolver bear interest beginning at the
Base Rate plus 0.50% to 1.50% or the LIBOR Rate plus 1.75% to 2.75% at
the option of the Company. The Company is also required to pay a
commitment fee based on the unused portion of the Revolver at an annual
percentage rate ranging from 0.50% to 0.75%, as defined in the agreement.
The credit facility was intended to be used to finance acquisitions,
refinance existing indebtedness and fund working capital requirements.
The Company must comply with various loan covenants including: (i)
maintenance of certain financial performance ratios; (ii) limits on
capital expenditures; (iii) restrictions on additional indebtedness; (iv)
restrictions on liens, guarantees, advances and dividends; and (v)
restrictions on the type, size and number of acquisitions.
At June 30, 1999 and September 30, 1999, the Company was not in
compliance with the financial covenants of its Credit Agreement. On
August 27,1999, the Company and the Banks entered into a Third
Amendment to Forbearance Letter Agreement and Amendment Agreement
(the "Third Amendment") pursuant to which, among other things, the
Banks agreed to a forbearance of their rights and remedies under the
Credit Agreement and prior forbearance agreements through November 15,
1999. As of November 15, 1999, the Company and the Banks reached
agreement as to the terms and conditions of a Fourth Amendment to
Forbearance Letter Agreement and Amendment Agreement (the "Fourth
Amendment") by which the Banks extended their agreement to forbear,
together with the maturity of the credit facility,
7
<PAGE>
through February 15, 2000. The Fourth Amendment, among other things,
effected a permanent reduction of the Company's credit limit to about
$51 million and required the Company to pay certain extension fees.
Except as noted above, the terms of the Fourth Amendment are
substantially consistent with the terms of the Third Amendment.
As of September 30, 1999, the Company wrote off approximately $1.4
million of deferred financing costs related to the renegotiation of the
Company's credit facility which is included in interest and other expense
on the statement of operations.
(7) RETENTION COSTS
On January 1, 1999, the Company granted restricted stock awards to
certain key employees to purchase 58,500 shares of the Company's Common
Stock at a purchase price of $0.01 per share. These restricted stock
awards vest in four installments every six months beginning June 30,
1999. The Company records compensation expense ratably over the vesting
period based on the current fair value of the Common Stock.
On August 12, 1999, the Company granted restricted stock awards to
certain key employees to purchase approximately 1.3 million shares of the
Company's Common Stock at a purchase price of $0.01 per share. These
restricted stock awards vest in three installments every six months
beginning January 1, 2000. The Company records compensation expense
ratably over the vesting period based on the current fair value of the
Common Stock.
During the third quarter, the Company recorded retention costs of
approximately $0.7 million related to employee retention plans.
(8) ASSETS TO BE DISPOSED OF
During the second quarter of 1999, as part of its strategy to migrate its
revenue base from hardware sales to higher margin IT service revenues,
the Company initiated a plan to sell two of its operating companies,
Corporate Access, Inc. ("Corporate Access") and U.S. Communications, Inc.
("USComm"). Both companies have significant computer hardware revenue
concentrations and are included in the Company's System Support division.
Pursuant to SFAS 121, the Company's consolidated balance sheet at
September 30, 1999 has been adjusted to reduce the assets and liabilities
of Corporate Access and USComm and the goodwill associated with the two
operating companies to their expected net realizable value. As a result,
the impairment of intangible assets charge in the second and third
quarters of 1999, respectively, included losses of $6.1 million and $1.5
million. The remaining net assets of these companies of $2.8 million are
included on the balance sheet in prepaids and other current assets at
September 30, 1999.
Subsequent to September 30, 1999, the Company completed the sale of
both Corporate Access and USComm. As of October 18, 1999, the Company
sold the assets of both Corporate Access and USComm for a sales price
of $2.3 million of cash and equity securities of the purchaser.
Subsequent to closing the Company is also entitled to receive
additional funds related to the realization of net assets sold.
Combined net revenues for Corporate Access and USComm for the three and
nine months ended September 30, 1999 were $8.7 million and $24.5 million,
respectively. Combined net revenues for these companies for the three and
nine months ended September 30, 1998 were $9.0 million and $22.4 million,
respectively. Combined income from operations for these companies for the
three and nine months ended September 30, 1999 were approximately $0.2
million and $0.5 million, respectively. Combined income from operations
for these companies for the three and nine months ended September 30,
1998 were approximately $0.2 million and $0.7 million, respectively.
During the second quarter, the client that provided substantially all of
the revenue of the Company's Boston-based strategic consulting business,
Management Support Technology Corp. ("MST"), was acquired, and the
acquiring company expressed its desire not to renew any projects with MST
after all current projects are completed. Completion of existing projects
is expected in 1999. As a result the decision was made to shut down MST's
operations in its Boston office and the Company has,
8
<PAGE>
pursuant to SFAS 121, measured the carrying value of MST's long-lived
assets consisting primarily of goodwill and recorded an impairment charge
of $15.1 million to reduce the goodwill related to MST to $0 as of June
30, 1999.
Net revenues for MST for the three and nine months ended September 30,
1999 were $0.4 million and $3.7 million, respectively. Net revenues for
MST for the three and nine months ended September 30, 1998 were $2.9
million and $6.6 million, respectively. MST's losses from operations for
the three and nine months ended September 30, 1999 were $1.8 million and
$2.5 million, respectively. MST's income from operations for the three
and nine months ended September 30, 1998 were $0.7 million and $1.9
million, respectively.
(9) IMPAIRMENT OF ASSETS HELD AND USED
The Company's Interactive Software Systems ("ISSI") business unit has
experienced significant revenue and profit degradation of its Safari
product line. These changes are the result of operating and financial
difficulties being experienced by its largest sales channel partner, an
international ERP software company which has recently informed ISSI of
its intention to no longer promote its Safari products. As a result, the
Company has, pursuant to SFAS 121, measured the goodwill and other
long-lived assets of that business unit. The net capitalized software
value of $1.7 million is expected to be realized through subsequent sales
of and support services for the software. However, the projected
remaining cash flows from other products and services do not support the
carrying value of the other intangible assets. Consequently, the Company
recorded an impairment charge of $8.0 million to reduce the goodwill
related to ISSI to $0 as of June 30, 1999.
(10) RESTRUCTURING AND OTHER CHARGES
During the second and third quarters of 1999, the Company recorded
restructuring and other special charges of approximately $4.0 million,
which are included in other costs on the statement of operations.
Included in this total are involuntary severance benefits and employment
contract settlements of $1.4 million, facility closures of $0.4 million,
voluntary severance benefits of $0.3 million, retention costs of $0.7
million, contract losses of $0.8 million, and other charges of $0.4
million. As of September 30, 1999, payments of approximately $0.5 million
have been made for severance benefits. The Company anticipates that
substantially all of the remaining restructuring and other special
charges will be paid in 1999 and 2000.
The severance and other employee related costs provide for a reduction of
approximately 115 employees for streamlining operations related to cost
reduction initiatives. The facility closure costs represent estimated
losses in closing facilities to match a reduction in force as well as to
reduce redundancies in the combined company. Contract losses are
comprised of employee time and expenses in order to complete a large
contract at MST.
(11) EXTRAORDINARY ITEM
In April 1999, the Company entered into a new $100 million credit
facility which replaced the existing $50 million facility. As a result,
the Company recognized an extraordinary loss to write off the unamortized
balance of deferred financing costs from the original facility. The
extraordinary loss recorded was approximately $184,000, net of income
taxes of $122,000, for the second quarter of 1999.
9
<PAGE>
(12) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1999
----- ------
(in thousands)
<S> <C> <C>
Cash paid during the year for:
Federal income tax payments $ -- $ 2,725
State income tax payments 911 1,113
Interest payments 134 2,479
Supplemental disclosure of non-cash transactions:
Liability incurred for technology license $ 1,550 $ --
Business acquisitions:
Cash paid for business acquisitions $ 72,100 $ 6,780
Less cash acquired (4,771) (1,203)
-------- --------
Cash paid for business acquisitions, net 67,329 5,577
Liability incurred for purchase price adjustment 579 --
Issuance of common stock for business acquisition 27,150 2,330
-------- --------
Total purchase price 95,058 7,907
Less in-process research and development (5,000) --
Less fair value of net assets acquired, net of cash (3,331) 1,700
-------- --------
Excess of fair value over net assets acquired $ 86,727 $ 9,607
-------- --------
-------- --------
</TABLE>
The excess of fair value over net assets acquired includes goodwill,
internally developed software and other intangibles acquired in
conjunction with the acquisitions of the operating companies.
(13) SEGMENT REPORTING
The Company has four reporting segments: Consulting Solutions; System
Support; Government Solutions; and Enterprise Performance Service
("EPS"). The Company's Safari software related business ("Safari") and
its Interactive Software Systems operating unit are not included in these
segments and are included in "Other". These four segments correspond to
the Company's divisional structure which was changed in the second
quarter of 1999. The financial information reported below for 1998 has
been conformed to the new divisional structure.
The Consulting Solutions division provides decision support, custom
application development, software package implementation, and contract
staffing and recruiting. These services involve the development of near
and long-term technology plans that help clients 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,
and business process automation.
The System Support division provides customer management solutions and
support services, call center and help-desk operations, as well as a
complete array of desktop systems maintenance and support services to its
clients, including hardware and software maintenance, systems testing and
engineering, and hardware procurement.
The Government Solutions division offers its public sector clients a
variety of management consulting services, interactive media services,
system maintenance and hardware procurement.
The EPS division offers its clients a single source for enterprise
resource planning and e-commerce solutions focusing on implementation and
consulting related to the SAP, Peoplesoft, Trilogy, BAAN, and Made2Manage
software packages. The Division focuses on the following service lines:
installation, business process design, configuration and implementation,
and staff augmentation.
10
<PAGE>
The accounting policies of the reporting segments are the same as those
described in Note 2. The Company evaluates the performance of its
operating segments based on operating income after intercompany
transactions have been eliminated. The "Other" column includes the Safari
operating unit and corporate related items not allocated to the
divisions. Safari's sales and services include the sale and
implementation of the Safari software product lines, training and
continuing education. Corporate selling, general and administrative costs
have been allocated to the divisions and Safari based on a three factor
formula based on total revenue, operating income and total assets.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables (in thousands).
For the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
CONSULTING SYSTEM GOVERNMENT
SOLUTIONS SUPPORT SOLUTIONS EPS OTHER CONSOLIDATED
---------------------- ------------- --------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues $ 26,465 $ 19,902 $ 20,191 $ 31,267 $ 10,247 $ 108,072
Hardware procurement
revenues - 46,005 8,510 - - 54,515
---------------------- ------------- --------------------- --------------
Total revenues $ 26,465 $ 65,907 $ 28,701 $ 31,267 $ 10,247 $ 162,587
---------------------- ------------- --------------------- --------------
Income (loss) from
operations $ (2,008) $ 4,490 $ 4,867 $ (1,801) $ (34,812)(a) $ (29,264)
---------------------- ------------- --------------------- --------------
Total Assets $ 37,497 $ 31,393 $ 39,156 $ 55,936 $ 14,882 $ 178,864
---------------------- ------------- --------------------- --------------
</TABLE>
For the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
CONSULTING SYSTEM GOVERNMENT
SOLUTIONS SUPPORT SOLUTIONS EPS OTHER CONSOLIDATED
------------------------ ------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues $ 21,471 $ 13,885 $ 12,376 $ - $ 11,637 $ 59,369
Hardware procurement
revenues - 43,550 11,439 - - 54,989
------------------------ ------------- --------- ----------- --------------
Total revenues $ 21,471 $ 57,435 $ 23,815 $ - $ 11,637 $ 114,358
------------------------ ------------- --------- ----------- --------------
Income (loss) from
operations $ 1,055 $ 4,695 $ 2,467 $ - $ (2,602)(b)$ 5,615
------------------------ ------------- --------- ----------- --------------
Total Assets $ 55,273 $ 38,425 $ 32,992 $ - $ 12,649 $ 139,339
------------------------ ------------- --------- ----------- --------------
</TABLE>
- -----------------
(a) Includes Impairment of intangible assets and loss on sale of assets
to be disposed of and other costs of $34.7 million.
(b) Includes a charge of $5 million for in-process research and
development.
(14) COMMITMENTS AND CONTINGENCIES
In the course of Condor's consolidation efforts, SCM LLC d/b/a The
Commonwealth Group ("Commonwealth"), the promoter of the Offering, and
Condor negotiated with Emtec, Inc. ("Emtec"), an IT service company based
in Pennsylvania, with a view to Emtec becoming one of the Founding
Companies. As part of the 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 it would not seek to enter into
a business transaction with any companies to be introduced to it by
Emtec's investment banker for a period of two years without such
investment banker's prior written consent. On October 28, 1997, Emtec
filed a Complaint in the United States District Court for the Eastern
District of Pennsylvania against Condor, Commonwealth, J. Marshall
Coleman, a Managing Director of Commonwealth and the former Chairman of
the Board of Condor, and Kennard F. Hill, the Company's Chairman of the
Board and Chief Executive Officer, captioned EMTEC, INC. V. CONDOR
TECHNOLOGY SOLUTIONS, INC., SCM LLC, ET AL., Civil No. 97-6652. The
complaint alleges breach of contract, tortuous interference with Emtec's
business relationship with Corporate Access, Inc. ("Corporate Access")
and Computer Hardware Maintenance Corporation ("CHMC"), two of the
11
<PAGE>
Founding Companies, and misappropriation of a trade secret arising out of
the participation of CHMC and Corporate Access in the consolidation and
the Offering without Emtec's written consent. In connection with the
three causes of action, Emtec demands that the defendants disgorge the
financial benefits that they have and will obtain as a result of their
alleged 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. The court denied
Emtec's motion to amend the complaint to add a claim of unjust
enrichment. A motion by Condor for partial summary judgment was granted
in part to eliminate Emtec's claim for misappropriation of a trade secret
and later Emtec stipulated to a dismissal of its claim of tortuous
interference with business relations, and to the removal of both Mr.
Coleman and Mr. Hill as defendants in the suit. Trial of this matter
could be scheduled in the next six months. 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 financial position or results of operations. 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.
On or about July 1, 1999, an action was commenced against the Company and
its Chief Executive Officer in the United States District Court for the
District of Maryland, captioned GORDON V. CONDOR TECHNOLOGY SOLUTIONS,
INC., ET AL., Civil AMD-99-1952. The plaintiff purported to bring the
action on behalf of a class consisting of all persons (other than the
defendants and their affiliates) who purchased common stock in the
Company between February 3, 1999 and June 8, 1999 (the "Alleged Class
Period"). The plaintiff contended that, during the Alleged Class Period,
the defendants made false and misleading statements about the future
impact of the "Y2K" issue on the Company's business and on the
concentration of the Company's business with certain customers. The
Company believes that the statements challenged by the plaintiff were
accurate, and that the plaintiff's allegations of wrongdoing were
baseless. On November 4, 1999, the Court issued an Order dismissing the
class action lawsuit against the Company and its officer.
The Company is a party to other legal proceedings and disputes related to
the Company's day to day business operations, none of which, in the
opinion of management, are material to the financial position or results
of operations of the Company.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by reference to and
should be read in conjunction with the Annual Report on Form 10-K of the
Company for its fiscal year ended December 31, 1998 (the "Form 10-K"). A
number of statements in this Quarterly Report on Form 10-Q 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. For a discussion of important factors
which could cause actual results to differ materially from the
forward-looking statements see "Special Note Regarding Forward Looking
Statements."
INTRODUCTION
The Company earns revenues from the provision of IT services and hardware
procurement. The Company recognizes IT service revenues using formulas
based on time and materials, whereby revenues are recognized as costs are
incurred at agreed-upon billing rates. For projects billed on a
fixed-price basis, revenue is recognized using the percentage of
completion method. Percentage of completion is determined using total
costs as a cost input measure. Revenues from license fees on proprietary
software 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
Company's license fees. Revenues from hardware procurement are recognized
upon shipment or acceptance of the equipment. When installation services
are an integral component of the hardware procurement, revenue is
recognized at the customer's acceptance of the equipment.
Cost of revenues includes the provision of services and material directly
related to the revenues, costs of acquisition of hardware resold to
clients, subcontracted labor or other outside services and other direct
costs associated with revenues, as well as an allocation of certain
indirect costs.
Selling, general and administrative costs include salaries, benefits,
commissions payable to the Company's sales and marketing personnel,
recruiting, finance and other general and administrative costs.
In July 1996, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that
these combinations be accounted for using the purchase method of
acquisition accounting. Condor was identified as the "accounting
acquiror" for financial statement presentation purposes.
RESULTS OF OPERATIONS
The Company's consolidated financial statements have been prepared based
on accounting for all companies acquired using the purchase method of
acquisition accounting. All operating companies that previously used
fiscal year financial reporting basis have converted to a calendar year
financial reporting basis and because all individual operating companies
are now included in the consolidated tax return of Condor, all have
converted their tax status to be taxed under subchapter C of the Internal
Revenue Code of 1986, as amended. The financial statements include
operations of the operating companies from their respective dates of
acquisition.
Financial statement audits of the Founding Companies were completed
through January 31, 1998. As there were no significant transactions from
February 1, 1998 to the February 10, 1998 closing of the Mergers, January
31, 1998 is considered to represent the pre-merger closing balance sheet.
On February 1, 1998 (the date of post-Merger balance sheet), Condor began
reporting on a consolidated basis. As a result, for the nine months ended
September 30, 1998, Condor's consolidated operating results include the
Founding Companies' operations for only eight months.
13
<PAGE>
UNAUDITED CONSOLIDATED RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
The following table sets forth certain selected financial data for the
Company and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------------------
1998 1999
--------------------------- --------------------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
IT service revenues $ 27,345 60.8% $ 33,018 66.8%
Hardware procurement revenues 17,662 39.2% 16,435 33.2%
----------- ------------ ----------- -----------
Total revenues 45,007 100.0% 49,453 100.0%
----------- ------------ ----------- -----------
Cost of IT services 13,109 47.9% 20,118 60.9%
Cost of hardware procurement 15,771 89.3% 14,663 89.2%
----------- -----------
Total cost of revenues 28,880 64.2% 34,781 70.3%
----------- -----------
Gross profit 16,127 35.8% 14,672 29.7%
Selling, general and administrative expenses 9,272 20.6% 12,969 26.2%
Depreciation and amortization 1,310 2.9% 1,830 3.7%
Impairment of intangible assets - -% 1,500 3.1%
Other costs - -% 1,535 3.1%
----------- ------------ ----------- -----------
Income (loss) from operations $ 5,545 12.3% $ (3,162) (6.4)%
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
REVENUES. Revenue increased $4.4 million or 9.9%, from $45.0 million for
the three months ended September 30, 1998 to $49.4 million for the three
months ended September 30, 1999. The increase is the result of the
acquisition of seven additional operating companies subsequent to the
initial public offering. IT service revenue grew approximately $5.7
million, or 20.7%, while hardware procurement revenue decreased $1.2
million, or 6.9%.
IT service revenue increased in the Company's Government Solutions and
EPS divisions. The Government Solutions division revenue growth was
primarily attributable to a shift in the mix of revenue from hardware
procurement to higher margin IT service revenues. The EPS division
includes operations of PowerCrew, Inc. and Global Core Strategies, Inc.
which were acquired in the fourth quarter of 1998 and Titan Technologies
Group, LLC which was acquired in April 1999. These increases were offset
by IT service revenue decreases in the Company's other divisions. The
Consulting Solutions division revenue decline was primarily attributable
to the winding down of MST's operations due to the loss of a large
insurance client during the second quarter of 1999. The System Solutions
division revenue decrease was primarily the result of the reprocurement
of a large call center contract for a five year period at a reduced
revenue rate. Additionally, the Safari Solutions unit has experienced a
decrease in sales of the Company's Safari software licenses during 1999.
The decrease in hardware procurement revenue was primarily attributable
to a shift in the Company's focus from hardware procurement to higher
margin IT service revenues.
COST OF REVENUES. Cost of revenues increased $5.9 million or 20.4% from
$28.9 million for the three months ended September 30, 1998 to $34.8
million for the three months ended September 30, 1999. This increase is
primarily attributable to the revenue growth discussed above. Cost of
revenues as a percentage of revenues increased from 64.2% of revenues for
the three months ended September 30, 1998 to 70.3% for the three months
ended September 30, 1999. This increase was primarily a result of lower
utilization and pressure on average billing rates due to delays in Year
2000 spending in the IT service market.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.7 million, or 39.9%, from $9.3
million to $13.0 million for the three months ended September 30, 1998
and 1999, respectively. The increase is attributable to the acquisitions
of the additional seven operating companies subsequent to the Mergers and
the hiring of additional sales and marketing staff and administrative
personnel. Selling, general and administrative costs increased from 20.6
% of revenues to 26.2% of revenues for the three months ended September
30, 1998 and 1999, respectively. This increase primarily resulted from
the incremental selling, general and administrative costs associated with
the execution of the Company's growth strategies.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$0.5 million, 39.7%, from $1.3 million for the three months ended
September 30, 1998 to $1.8 million for the three months ended September
30, 1999. The increase is attributable an increase in goodwill and other
intangible amortization associated with the acquisitions of the
additional seven operating companies subsequent to the Mergers;
additional amortization on goodwill related to the contingent purchase
consideration earned at December 31, 1998; and the increase of property
and equipment.
IMPAIRMENT OF INTANGIBLE ASSETS. Impairment of intangible assets includes
a write down of intangible assets during the third quarter of 1999 based
on measurement in accordance with SFAS 121. As a part of its strategy to
reduce the amount of computer hardware resale, the Company decided to
sell two of its operating companies, Corporate Access, Inc. and U.S.
Communications, Inc. The Company recorded an additional charge of $1.5
million to reduce the assets of these companies, including intangible
assets, to their estimated net realizable value. During the second
quarter, the Company recorded a charge of $6.1 million.
OTHER COSTS. Other costs include restructuring and other one-time charges
of $3.0 million. Included in this total are retention costs of $0.7
million and voluntary severance and other costs of $0.8 million.
UNAUDITED CONSOLIDATED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998
The following table sets forth certain selected financial data for the
Company and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------------------
1998 1999
--------------------------- --------------------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
IT service revenues $ 59,369 51.9% $108,072 66.5%
Hardware procurement revenues 54,989 48.1% 54,515 33.5%
----------- ------------ ------------- -----------
Total revenues 114,358 100.0% 162,587 100.0%
----------- ------------ ------------- -----------
Cost of IT services 28,680 48.3% 63,018 58.3%
Cost of hardware procurement 49,814 90.6% 49,042 90.0%
----------- -------------
Total cost of revenues 78,494 68.6% 112,060 68.9%
----------- -------------
Gross profit 35,864 31.4% 50,527 31.1%
Selling, general and administrative expenses 22,124 19.4% 38,780 23.9%
Depreciation and amortization 3,125 2.7% 6,322 3.9%
In process research and development 5,000 4.4% - -%
Impairment of intangible assets - -% 30,736 18.9%
Other costs - -% 3,953 2.4%
----------- ------------ ------------- -----------
Income (loss) from operations $ 5,615 4.9% $(29,264) (18.0)%
----------- ------------ ------------- -----------
----------- ------------ ------------- -----------
</TABLE>
15
<PAGE>
REVENUES. Revenue increased $48.2 million or 42.2%, from $114.4 million
for the nine months ended September 30, 1998 to $162.6 million for the
nine months ended September 30, 1999. This increase is partly a result of
the inclusion of only eight of the nine months of operations of the
Founding Companies in 1998 compared to the nine months ended September
30, 1999. All of the operating companies' revenues were included for the
nine months ended September 30, 1999 except Titan Technologies Group LLC
whose revenues were included from its acquisition date in April 1999 and
Dimensional Systems LLC which was purchased in September 1999. The
increase is also the result of organic revenue growth and the acquisition
of seven additional operating companies subsequent to the initial public
offering. IT service revenue grew approximately $48.7 million, or 82.0%,
while hardware procurement revenue decreased $0.5 million, or 0.9%.
IT service revenue increased in each of the Company's divisions. The
Consulting Solutions division revenue growth was primarily attributable
to increases in consulting and planning services within the division and
the acquisition of Decision Support Technologies in May 1998 and LINC
Systems Corporation in July 1998. The System Solutions division revenue
growth was primarily attributable to growth in the Company's customer
management solutions, call center, help desk and support services. The
Government Solutions division revenue growth was primarily attributable
to the acquisition of Louden Associates, Inc. in June 1998. The ERP
division includes operations of PowerCrew, Inc. and Global Core
Strategies, Inc. which were acquired in the fourth quarter of 1998 and
Titan Technologies Group, LLC which was acquired in April 1999. Safari
Solutions has experienced a decrease in sales of the Company's Safari
software licenses during 1999.
The decrease in hardware procurement revenue was primarily attributable
to a shift in the Company's focus from hardware procurement to higher
margin IT service revenues.
COST OF REVENUES. Cost of revenues increased $33.6 million or 42.8% from
$78.5 million for the nine months ended September 30, 1998 to $112.1
million for the nine months ended September 30, 1999. This increase is
primarily attributable to the revenue growth discussed above. Cost of
revenues as a percentage of revenues increased from 68.6% of revenues for
the nine months ended September 30, 1998 to 68.9% for the nine months
ended September 30, 1999. This increase was primarily a result of lower
utilization and pressure on average billing rates due to delays in Year
2000 spending in the IT service market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $16.7 million, or 75.3%, from $22.1
million to $38.8 million for the nine months ended September 30, 1998 and
1999, respectively. The increase is attributable to the inclusion of only
eight of the nine months of operations of the Founding Companies in 1998;
the acquisitions of the additional seven operating companies subsequent
to the Mergers; the hiring of additional sales and marketing staff and
administrative personnel; and recruiting and hiring additional personnel
in the consulting, systems and EPS services areas in anticipation of
future revenue growth. Selling, general and administrative costs
increased from 19.4% of revenues to 23.9% of revenues for the nine months
ended September 30, 1998 and 1999, respectively. This increase primarily
resulted from the incremental selling, general and administrative costs
associated with the execution of the Company's growth strategies.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$3.2 million, or 102.3%, from $3.1 for the nine months ended September
30, 1998 to $6.3 million for the nine months ended September 30, 1999.
The increase is attributable to the amortization of goodwill of the
Founding Companies beginning at the time of the Mergers which included
only eight of the nine months in 1998; an increase in goodwill and other
intangible amortization associated with the acquisitions of the
additional seven operating companies subsequent to the Mergers;
additional amortization on goodwill related to the contingent purchase
consideration earned at December 31, 1998; and the increase of property
and equipment.
16
<PAGE>
IMPAIRMENT OF INTANGIBLE ASSETS. Impairment of intangible assets includes
a write down of intangible assets during the second and third quarters of
1999 based on measurement in accordance with SFAS 121. As a part of its
strategy to reduce the amount of computer hardware resale, the Company
decided to sell two of its operating companies, Corporate Access, Inc.
and U.S. Communications, Inc. In the second and third quarters, the
Company recorded charges of $7.6 million to reduce the assets of these
companies, including intangible assets, to their estimated net realizable
value. The client that provided substantially all of the revenue of the
Company's Boston based strategic consulting business, Management Support
Technology Corp. ("MST"), was acquired, and the acquiring company
expressed its desire not to renew any projects after all current projects
are completed. As a result the decision was made to shut down MST's
continuing operations in its Boston office, and the Company has recorded
an impairment charge of $15.1 million for MST. The Company's Safari
Solutions business through its Interactive Software Systems ("ISSI")
business unit has experienced significant revenue and profit degradation
in the sale of its Safari product line as a result of operating and
financial difficulties being experienced by its largest sales channel
partner, an international ERP software company which has recently
informed ISSI of its intention to no longer promote its Safari products.
As the result, the Company recorded an impairment charge of $8.0 million
for ISSI.
OTHER COSTS. Other costs include restructuring and other special charges
of $4.0 million. Included in this total are involuntary severance
benefits and employment contract settlements of $1.4 million, facility
closures of $0.4 million, voluntary severance benefits of $0.3 million,
retention costs of $0.7 million, contract losses of $0.8 million, and
other charges of $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Condor is a holding company that conducts its operations through its
subsidiaries. Accordingly, Condor's principal sources of liquidity are
the cash flows of its operating divisions and cash available from its
credit facilities. At September 30, 1999 the Company had $4.9 million in
cash and cash equivalents and $47.6 million of indebtedness outstanding,
which consists primarily of borrowings on the credit facility (the
"Credit Facility"), which was entered in April 1999.
In accordance with its Credit Facility, the Company must comply with
various loan covenants including: (i) maintenance of certain financial
performance ratios; (ii) limits on capital expenditures; (iii)
restrictions on additional indebtedness; (iv) restrictions on liens,
guarantees, advances and dividends; and (v) restrictions on the type,
size and number of acquisitions.
At June 30, 1999 and September 30, 1999, the Company was not in
compliance with the financial covenants of its Credit agreement. On
August 27, 1999, the Company and the Banks entered into a Third
Amendment to Forbearance Letter Agreement and Amendment Agreement
(the "Third Amendment") pursuant to which, among other things, the
Banks agreed to a forbearance of their rights and remedies under
the Credit Agreement and prior forbearance agreements through
November 15, 1999. As of November 15, 1999, the Company and
the Banks reached agreement as to the terms and conditions of a
Fourth Amendment to Forbearance Letter Agreement and Amendment
Agreement (the "Fourth Amendment") by which the Banks extended their
agreement to forbear, together with the maturity of the credit
facility, through February 15, 2000. The Fourth Amendment, among
other things, effected a permanent reduction in the Company's credit
limit to about $51 million and required the Company to pay certain
extension fees. Except as noted, the terms of Fourth Amendment are
substantially consistent with the terms of the Third Amendment.
If unable to negotiate a new agreement with existing lenders or obtain
replacement financing, the Company may experience material adverse
financial effects and its ability to continue as a going concern may be
impaired.
By letter dated October 28, 1999, the Company requested a hearing before
the Nasdaq Listing Qualification Panel regarding a pending delisting
notification of the Company's Common Stock from the Nasdaq National
Market. The hearing will be held on December 9, 1999. If delisted, the
Common Stock would be quoted on the Nasdaq SmallCap Market or the NASD's
Electronic Bulletin Board.
17
<PAGE>
Net cash used in operating activities was $2.6 million for the nine
months ended September 30, 1999. Net cash used in investing activities
was $16.3 million for the nine months ended September 30, 1999 which
included $4.2 million for purchases of property, equipment and the costs
of licensing and developing the Company's internal use ERP system.
Net cash provided by financing activities was $20.7 million for the nine
months ended September 30, 1999 which is comprised of net borrowings of
debt and is offset by outflows for deferred financing costs related to
the Company's new Credit Facility.
YEAR 2000 READINESS
IMPACT OF YEAR 2000 ISSUE. The Year 2000 issue is the result of certain
computer programs being written using two digits rather than four to
define the applicable year. Any computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace portions of hardware and software so that
those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications and replacement of
some of the existing hardware and software, the Year 2000 issue can be
mitigated. However, if such modifications and replacements are not made,
or are not completed timely, the Year 2000 issue could have a small to
moderate impact on the Company's operations. The Company currently does
not have a formal contingency plan in place, however a plan is expected
to be completed by December 1999.
The Company's plan to resolve the Year 2000 issues involves four phases:
assessment, remediation, testing and implementation.
ASSESSMENT. The Company has fully completed its assessment of all
material systems and Company products that could be affected by the Year
2000 issue. The completed assessment indicated that a portion of the
Company's information technology systems could be affected. That
assessment also indicated that accounting systems being used at the time
were at risk of not being Year 2000 compliant. If not resolved on a
timely basis, that could have affected the Company's ability to provide
adequate and timely billing information.
REMEDIATION. The Company has fully completed the remediation phase of all
material hardware systems.
TESTING AND IMPLEMENTATION. The Company estimates it has completed 98% of
the testing and implementation of its remediated systems. Completion of
the testing phase was completed and all remediated systems should be
fully implemented by December 1999. In certain cases, the remedy is a
replacement of the system or software. The Company has begun the
implementation of a Year 2000 compliant enterprise resource planning
("ERP") accounting and management information system to remediate the
risk of non-Year 2000 compliant accounting software. The financial module
of the ERP system went "live" on August 1, 1999.
THIRD PARTIES. With respect to third parties, the Company has completed
its assessment, remediation and testing phases.
The Company is in the process of surveying its significant suppliers that
do not involve system interface. The Company has no means of ensuring
that these suppliers will be Year 2000 ready, and the inability of those
parties to complete the Year 2000 resolution process could materially
impact the Company. The effect of non-compliance by third parties, where
no system interface exists, is not
18
<PAGE>
determinable. The Company is not aware of any problems with third parties
that would materially impact results of operations, liquidity, or capital
resources.
The Company's internal assessment of its proprietary licensed products
released after December, 1998 is that they are, in and of themselves,
Year 2000 compliant. Customers that purchased the products prior to this
date may upgrade the products to be Year 2000 compliant if they paid for
a continuing support services agreement for the products. There can be no
assurances, however, that the Company's current proprietary licensed
products do not contain undetected Year 2000 defects. The Company can not
ensure Year 2000 compliance will be maintained when its proprietary
licensed products are integrated with third party non-compliant hardware
products, software products, operating systems or databases.
COST. The Company will utilize both internal and external resources to
update or replace, test, and implement the affected information
technology systems for Year 2000 modifications. The total cost of the
Year 2000 project is estimated at $1.8 million and is being funded
through operating cash flows. Expenditures to date have related to all
phases of the Year 2000 project. As of September 30, 1999, the cost
incurred to date was approximately $1.8 million. Remaining costs are
minimal and relate to the resources to complete implementation of new
systems.
The Company's plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources and other factors. Estimates on the status of
completion and the expected completion dates are based on costs incurred
to date compared to total expected costs. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those plans. Special factors that might cause such
material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Form 10-Q based on current expectations that are not
strictly historical statements, such as the Company's or management's
intentions, hopes, beliefs, expectations, strategies, or predictions, are
forward-looking statements. Such statements, or any other variation
thereof regarding the Company's future activities or other future events
or conditions within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended, are
intended to be covered by the safe harbors for forward-looking statements
created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation,
the sufficiency of the Company's working capital and the ability of the
Company to realize benefits from consolidating certain general and
administrative functions, to pursue strategic acquisitions and alliances,
to retain management and to implement its focused business strategy, to
leverage consulting services, secure full-service contracts, to expand
client relationships, successfully recruit, train and retain personnel,
expand services and geographic reach and successfully defend itself in
ongoing and future litigation.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company is exposed to market risk from adverse changes
in interest rates and foreign currency exchange rates.
INTEREST RATE RISKS. The Company is exposed to risk from changes in
interest rates as a result of its borrowing activities. At September 30,
1999, the Company had total debt of $47.6 million of which $46.9 million
represents borrowings on its Credit Facility at a variable interest rate.
Management does not believe that the Company's exposure to interest rate
fluctuations is material.
FOREIGN CURRENCY EXCHANGE RISK. The Company's international operations
are subject to foreign exchange rate fluctuations. The Company derived
less than 2% of its revenue for the nine months ended September 30, 1999
from services performed in the Netherlands, the United Kingdom, Germany
and Mexico, all of which have traditionally had relatively stable
currencies. Management does not believe that the Company's exposure to
foreign currency rate fluctuations is material.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the course of Condor's consolidation efforts, SCM LLC d/b/a The
Commonwealth Group ("Commonwealth"), the promoter of the Offering, and
Condor negotiated with Emtec, Inc. ("Emtec"), an IT service company based
in Pennsylvania, with a view to Emtec becoming one of the Founding
Companies. As part of the 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 it would not seek to enter into
a business transaction with any companies to be introduced to it by
Emtec's investment banker for a period of two years without such
investment banker's prior written consent. On October 28, 1997, Emtec
filed a Complaint in the United States District Court for the Eastern
District of Pennsylvania against Condor, Commonwealth, J. Marshall
Coleman, a Managing Director of Commonwealth and the former Chairman of
the Board of Condor, and Kennard F. Hill, the Company's Chairman of the
Board and Chief Executive Officer, captioned EMTEC, INC. V. CONDOR
TECHNOLOGY SOLUTIONS, INC., SCM LLC, ET AL., Civil No. 97-6652. The
complaint alleges breach of contract, tortuous interference with Emtec's
business relationship with Corporate Access, Inc. ("Corporate Access")
and Computer Hardware Maintenance Corporation ("CHMC"), two of the
Founding Companies, and misappropriation of a trade secret arising out of
the participation of CHMC and Corporate Access in the consolidation and
the Offering without Emtec's written consent. In connection with the
three causes of action, Emtec demands that the defendants disgorge the
financial benefits that they have and will obtain as a result of their
alleged 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. The court denied
Emtec's motion to amend the complaint to add a claim of unjust
enrichment. A motion by Condor for partial summary judgment was granted
in part to eliminate Emtec's claim for misappropriation of a trade secret
and later Emtec stipulated to a dismissal of its claim of tortuous
interference with business relations, and to the removal of both Mr.
Coleman and Mr. Hill as defendants in the suit. Trial of this matter
could be scheduled in the next six months. 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 financial position or results of operations. 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.
On or about July 1, 1999, an action was commenced against the Company and
its Chief Executive Officer in the United States District Court for the
District of Maryland, captioned GORDON V. CONDOR TECHNOLOGY SOLUTIONS,
INC., ET AL., Civil AMD-99-1952. The plaintiff purported to bring the
action on behalf of a class consisting of all persons (other than the
defendants and their affiliates) who purchased common stock in the
Company between February 3, 1999 and June 8, 1999 (the "Alleged Class
Period"). The plaintiff contended that, during the Alleged Class Period,
the defendants made false and misleading statements about the future
impact of the "Y2K" issue on the Company's business and on the
concentration of the Company's business with certain customers. The
Company believes that the statements challenged by the plaintiff were
accurate, and that the plaintiff's allegations of wrongdoing were
baseless. On November 4, 1999, the Court issued an Order dismissing the
class action lawsuit against the Company and its officer.
The Company is a party to other legal proceedings and disputes related to
the Company's day to day business operations, none of which, in the
opinion of management, are material to the financial position or results
of operations of the Company.
21
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote by security holders during the
three months ended September 30, 1999.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (see index on page 18)
(b) Reports on Form 8-K: The Company filed the following:
(1) Form 8-K/A Current Report on February 22, 1999 related to the
acquisition of substantially all of the assets of Global Core
Strategies, Inc.
(2) Form 8-K Current report on August 27, 1999 related to the
Third Amendment to Forbearance Letter Agreement and Amendment
Agreement
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONDOR TECHNOLOGY SOLUTIONS, INC.
Date November 15, 1999 By: /s/ Kennard F. Hill
-------------------------- ---------------------------------
Kennard F. Hill
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date November 15, 1999 By: /s/ William J. Caragol
------------------------- ---------------------------------
William J. Caragol
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule for the three and nine
months ended September 30, 1999.
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 7,510 7,510
<SECURITIES> 0 0
<RECEIVABLES> 35,027 35,027
<ALLOWANCES> (2,462) (2,462)
<INVENTORY> 373 373
<CURRENT-ASSETS> 46,916 46,916
<PP&E> 10,590 10,590
<DEPRECIATION> (2,580) (2,580)
<TOTAL-ASSETS> 178,864 178,864
<CURRENT-LIABILITIES> 78,653 78,653
<BONDS> 0 0
0 0
0 0
<COMMON> 151 151
<OTHER-SE> 90,610 90,610
<TOTAL-LIABILITY-AND-EQUITY> 178,864 178,864
<SALES> 16,435 54,515
<TOTAL-REVENUES> 49,453 162,587
<CGS> 14,663 49,042
<TOTAL-COSTS> 34,781 112,060
<OTHER-EXPENSES> 18,880 80,338
<LOSS-PROVISION> 313 713
<INTEREST-EXPENSE> 1,317 2,832
<INCOME-PRETAX> (5,838) (33,356)
<INCOME-TAX> (1,511) 243
<INCOME-CONTINUING> (4,327) (33,599)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (184)
<CHANGES> 0 0
<NET-INCOME> (4,327) (33,783)
<EPS-BASIC> (0.31) (2.60)
<EPS-DILUTED> (0.31) (2.60)
</TABLE>
