<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 JUNE 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 August 10, 1999
----- ---------------
<S> <C>
COMMON STOCK , $.01 PAR VALUE 13,102,716
</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..............................................4-11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................12-18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK......................................................................19
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.........................................................................20
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ................................................21
Item 3. DEFAULTS UPON SENIOR SECURITIES...........................................................21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................21
Item 5. OTHER INFORMATION.........................................................................21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................21
SIGNATURES..................................................................................................22
EXHIBIT INDEX...............................................................................................23
</TABLE>
<PAGE>
PART 1--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
CONDOR TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,053 $ 5,059
Restricted cash 2,756 3,487
Accounts receivable, net 39,814 38,114
Prepaids and other current assets 3,284 5,001
--------- ---------
Total current assets 48,907 51,661
PROPERTY AND EQUIPMENT, NET 4,329 6,988
GOODWILL AND OTHER INTANGIBLES, NET 145,163 120,818
OTHER ASSETS 2,243 3,503
--------- ---------
TOTAL ASSETS $ 200,642 $ 182,970
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,838 $ 10,579
Accrued expenses and other current liabilities 16,524 14,243
Deferred revenue 4,915 6,397
Current portion of contingent purchase liability 4,308 2,388
Current portion of long-term debt 442 45,468
--------- ---------
Total current liabilities 40,027 79,075
LONG-TERM DEBT 24,296 285
NON-CURRENT CONTINGENT PURCHASE LIABILITY 20,348 9,112
OTHER LONG-TERM OBLIGATIONS 1,929 1,562
--------- ---------
Total liabilities 86,600 90,034
--------- ---------
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 13,019,935 shares at June 30, 1999 120 130
Additional paid-in capital 111,278 119,767
Retained earnings (Accumulated deficit) 2,818 (26,638)
Other comprehensive income 20 (129)
Treasury stock, at cost (13,178 shares at June 30, 1999) (194) (194)
--------- ---------
Total stockholders' equity 114,042 92,936
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 200,642 $ 182,970
--------- ---------
--------- ---------
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
IT service revenues $ 19,074 $ 36,305 $ 32,024 $ 75,054
Hardware procurement revenues 24,614 17,139 37,327 38,080
--------- --------- --------- ---------
Total revenues 43,688 53,444 69,351 113,134
Cost of IT services 8,890 21,581 15,571 42,900
Cost of hardware procurement 22,287 15,599 34,043 34,379
--------- --------- --------- ---------
Total cost of revenues 31,177 37,180 49,614 77,279
--------- --------- --------- ---------
Gross profit 12,511 16,264 19,737 35,855
Selling, general and administrative expenses 8,054 14,166 12,852 25,811
Depreciation and amortization 1,137 2,333 1,815 4,492
In process research and development -- -- 5,000 --
Impairment of intangible assets -- 29,236 -- 29,236
Other costs -- 2,418 -- 2,418
--------- --------- --------- ---------
Income (loss) from operations 3,320 (31,889) 70 (26,102)
Interest and other income (expense) 368 (991) 596 (1,416)
--------- --------- --------- ---------
Income (loss) before extraordinary item and income taxes 3,688 (32,880) 666 (27,518)
Income tax expense (benefit) 1,660 (605) 1,645 1,754
--------- --------- --------- ---------
Net income (loss) before extraordinary item 2,028 (32,275) (979) (29,272)
Extraordinary loss, net of income taxes of $122 -- (184) -- (184)
--------- --------- --------- ---------
Net income (loss) $ 2,028 $ (32,459) $ (979) $ (29,456)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share before extraordinary item -
Basic & Diluted $ 0.18 $ (2.49) $ (0.11) $ (2.34)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share from extraordinary
item - Basic & Diluted $ -- $ (0.01) $ -- $ (0.02)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share - Basic & Diluted $ 0.18 $ (2.50) $ (0.11) $ (2.36)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic shares outstanding 10,979 12,959 9,057 12,504
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted shares outstanding 11,073 12,959 9,057 12,504
--------- --------- --------- ---------
--------- --------- --------- ---------
</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>
SIX MONTHS ENDED
JUNE 30,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (979) $(29,456)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Research and development charge 5,000 --
Impairment of Goodwill -- 29,236
Extraordinary writeoff of deferred financing costs -- 184
Depreciation and amortization 1,815 4,492
Deferred income taxes (1,032) --
Changes in assets and liabilities (3,270) (5,812)
-------- --------
Net cash provided by (used in) operating activities 1,534 (1,356)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,090) (3,114)
Purchase of short term investments, net (13,846) --
Payment for technology license (1,550) --
Acquisition of subsidiaries, net of cash (43,683) (5,317)
Payment of contingent purchase liability -- (7,000)
Other (487) (69)
-------- --------
Net cash used in investing activities (60,656) (15,500)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on debt, net (1,571) 20,682
Proceeds from initial public offering 72,849 --
Purchase of treasury shares (194) --
Deferred financing costs (398) (940)
-------- --------
Net cash provided by financing activities 70,686 19,742
-------- --------
EFFECT OF EXCHANGE RATE CHANGES (10) (149)
NET INCREASE IN CASH AND CASH EQUIVALENTS
AND RESTRICTED CASH 11,554 2,737
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH,
BEGINNING OF PERIOD 26 5,809
-------- --------
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH,
END OF PERIOD $ 11,580 $ 8,546
-------- --------
-------- --------
</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 solutions provider of strategic information technology ("IT")
business solutions to middle market organizations, Fortune 1000 companies
and public sector organizations. 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 six 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 six months ended June 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 period 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 that 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 June 30, 1999, the Company has recorded impairment losses related
to a portion of the Company's goodwill and other intangibles balance (see
notes 9 and 10).
(3) ACQUISITIONS
ACQUISITION
On April 1, 1999, the Company acquired the outstanding ownership
interests of Titan Technologies Group, LLC, a New Jersey based company
which provides enterprise resource planning services and software for
middle market companies in the Northeast. The initial purchase price
included $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 the company. 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.
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 $5.8 million of Common Stock (651,689 shares) related to accrued
contingent consideration on April 15, 1999. At June 30, 1999,
approximately $11.5 million of contingent consideration was accrued,
which will be paid in 2000 and 2001 in accordance with the original
purchase agreements.
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>
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
1998 1999
----------------- ------------------
(in thousands, except per share amounts)
<S> <C> <C>
Revenues $ 112,555 $ 114,972
Net income (loss) before extraordinary item 4,962 (29,557)
Net income (loss) 4,962 (29,741)
Net income (loss) per share before extraordinary item -
Basic & Diluted $ 0.40 $ (2.34)
Net income (loss) per share - Basic & Diluted $ 0.40 $ (2.35)
</TABLE>
5
<PAGE>
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 June 30, 1998 and 1999 were approximately $4.5
million and $30,000, 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) INVESTMENT IN AFFILIATE
On February 15, 1999, the Company acquired 48% of the ownership interests
of Dimensional Systems LLC, a Cambridge, Massachusetts consulting firm
focusing on the development of a decision support lab, for an initial
purchase price of $120,000 in cash and 10,703 shares of Common Stock. The
agreement also contains an option, exercisable by the Company through
August 1999, to purchase the remaining 52% of Dimensional Systems LLC for
an additional purchase price of $130,000 in cash and Common Stock valued
at $130,000 as set forth in the purchase agreement. The Company is
accounting for this transaction using the equity method.
(5) 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.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1999 1998 1999
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Weighted average common stock
outstanding 10,979 12,959 9,057 12,504
Stock options, as if converted 94 -- -- --
------ ------ ------ ------
Weighted average common and common
Equivalent shares outstanding 11,073 12,959 9,057 12,504
------ ------ ------ ------
</TABLE>
6
<PAGE>
(6) 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 JUNE SIX MONTHS ENDED
30, JUNE 30,
---------------------- ----------------------
1998 1999 1998 1999
------ -------- ----- --------
(in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $2,028 $(32,459) $(979) $(29,456)
Foreign currency translation adjustment 25 (45) (10) (149)
Unrealized gains on marketable
securities 11 -- 12 --
------ -------- ----- --------
Comprehensive income (loss) $2,064 $(32,504) $(977) $(29,605)
------ -------- ----- --------
------ -------- ----- --------
</TABLE>
(7) STOCK COMPENSATION
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.
(8) DEBT
In April 1999, the Company entered into a $100 million syndicated credit
facility underwritten and arranged by a major commercial bank which
replaced the Company's $50 million revolving credit facility. The new
credit facility includes 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 includes repayments of principal in quarterly
installments with final payment due March 31, 2004. Interest accrues 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 the Company was not in compliance with one of its
financial covenants. The Company and the Banks agreed to the terms and
conditions of a forbearance through November 15, 1999 during which period
the parties will discuss restructuring the facility to a structure that
will support the Company's working capital needs. Under the terms of this
forbearance, there was a permanent reduction of principle available to
$60 million, and during the forbearance period borrowings will be at a
rate of interest equal to the Base Rate plus 1.75%, which was 9.75% at
August 13, 1999.
(9) ASSETS TO BE DISPOSED OF
During the second quarter of 1999, as part of its strategy to shift 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
7
<PAGE>
companies have significant computer hardware revenue concentrations and
are included in the Company's System Support division. The Company is in
active discussions with potential acquirers and believes these businesses
will be sold during 1999. Pursuant to SFAS 121, the Company's
consolidated balance sheet at June 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 quarter of 1999 includes a loss of $6.1 million. The
remaining net assets of these companies of $2.4 million are included on
the balance sheet in Prepaids and other current assets.
Combined net revenues for Corporate Access and USComm for the three and
six months ended June 30, 1999 were $8.1 million and $15.8 million,
respectively. Combined net revenues for these companies for the three and
six months ended June 30, 1998 were $8.3 million and $13.4 million,
respectively. Combined income from operations for these companies for the
three and six months ended June 30, 1999 were approximately $0.1 million
and $0.3 million, respectively. Combined income from operations for these
companies for the three and six months ended June 30, 1998 were
approximately $0.2 million and $0.4 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
is expected during 1999. As a result the decision was made to shut
down MST's continuing operations in its Boston office and the Company
has, 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 six months ended June 30, 1999
were $1.2 million and $2.6 million, respectively. Net revenues for MST
for the three and six months ended June 30, 1998 were $2.4 million and
$3.7 million, respectively. MST's losses from operations for the three
and six months ended June 30, 1999 were $0.4 million and $0.8 million,
respectively. MST's income from operations for the three and six months
ended June 30, 1998 were $0.5 million and $0.8 million, respectively.
(10) 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 $1.8 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.
(11) RESTRUCTURING AND OTHER CHARGES
During the second quarter of 1999, the Company recorded restructuring and
other one-time charges of $2.4 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 $0.82 million,
facility closures of $0.34 million, voluntary severance benefits of $0.17
million, estimated contract losses of $0.84 million, and other charges of
$0.25 million. As of June 30, 1999, payments of approximately $0.18
million have been made for severance benefits. The Company anticipates
that substantially all of the remaining restructuring and other one-time
charges will be paid in 1999.
8
<PAGE>
The severance and other employee related costs provide for a reduction of
approximately 80 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.
(12) 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.
(13) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1999
-------- -------
(in thousands)
<S> <C> <C>
Cash paid during the year for:
Federal income tax payments $ -- $ 2,724
State income tax payments 911 1,101
Interest payments 67 1,236
Supplemental disclosure of non-cash transactions:
Liability incurred for technology license $ 1,550 $ --
Business acquisitions:
Cash paid for business acquisitions $ 50,100 $ 6,550
Less cash acquired (4,833) (1,133)
-------- -------
Cash paid for business acquisitions, net 45,267 5,417
Issuance of common stock for business acquisition 27,150 1,950
-------- -------
Total purchase price 72,417 7,367
Purchase price in escrow -- 500
Less in-process research and development (5,000) --
Less fair value of net assets acquired, net of cash (1,171) 1,535
-------- -------
Excess of fair value over net assets acquired $ 66,246 $ 9,402
-------- -------
-------- -------
</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.
(14) 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 and its
Interactive Software Systems ("ISSI") 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
9
<PAGE>
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, 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 solutions focusing on implementation and consulting
related to the SAP, Peoplesoft, BAAN, and Made2Manage enterprise software
packages. The Division focuses on the following service lines:
installation, business process design, configuration and implementation,
and staff augmentation.
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 ISSI
operating unit and corporate related items not allocated to the
divisions. ISSI'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 ISSI 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 six months ended June 30, 1999:
<TABLE>
<CAPTION>
CONSULTING SYSTEM GOVERNMENT
SOLUTIONS SUPPORT SOLUTIONS EPS OTHER CONSOLIDATED
-------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues $ 18,702 $14,099 $13,357 $21,813 $ 7,083 $ 75,054
Hardware procurement
revenues -- 29,780 8,300 -- -- 38,080
-------- ------- ------- ------- -------- ---------
Total revenues 18,702 43,879 21,657 21,813 7,083 113,134
Income from operations (1,092) 3,600 3,338 85 (32,033)(a) (26,102)
Total Assets $ 37,239 $57,606 $40,256 $31,384 $ 17,522 $ 184,007
</TABLE>
For the six months ended June 30, 1998:
<TABLE>
<CAPTION>
CONSULTING SYSTEM GOVERNMENT
SOLUTIONS SUPPORT SOLUTIONS EPS OTHER CONSOLIDATED
-------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
IT service revenues $10,682 $ 7,012 $ 6,570 $ -- $ 7,760 $ 32,024
Hardware procurement
revenues -- 27,638 9,689 -- -- 37,327
-------- ------- ------- ------- -------- ---------
Total revenues 10,682 34,650 16,259 -- 7,760 69,351
Income from operations 677 1,701 959 -- (3,267)(b) 70
Total Assets $28,364 $42,329 $35,578 $ -- $ 26,877 $133,148
</TABLE>
- ------------------
(a) Includes Impairment of intangible assets and other charges of $31.7
million.
(b) Includes a charge of $5 million for in-process research and development.
10
<PAGE>
(15) 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
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 later this year. 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. 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.
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 alleges that the action
was prompted by the press release that the Company issued on June 9, 1999
with regard to its likely results for the second quarter. The plaintiff
purports 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 contends 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 it intends to defend the matter vigorously. The Company
does not expect that the litigation will have a material affect on how it
conducts its business.
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.
11
<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
12
<PAGE>
basis. As a result, for the six months ended June 30, 1998, Condor's
consolidated operating results include the Founding Companies' operations
for only five months.
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
JUNE 30,
---------------------------------------------------
1998 1999
--------------------- ----------------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
IT service revenues $19,074 43.7% $ 36,305 67.9%
Hardware procurement revenues 24,614 56.3% 17,139 32.1%
------- ----- -------- -----
Total revenues 43,688 100.0% 53,444 100.0%
------- ----- -------- -----
Cost of IT services 8,890 46.6% 21,581 59.4%
Cost of hardware procurement 22,287 90.5% 15,599 91.0%
------- --------
Total cost of revenues 31,177 71.4% 37,180 69.6%
------- --------
Gross profit 12,511 28.6% 16,264 30.4%
Selling, general and administrative expenses 8,054 18.4% 14,166 26.5%
Depreciation and amortization 1,137 2.6% 2,333 4.4%
Impairment of intangible assets -- --% 29,236 54.7%
Other costs -- --% 2,418 4.5%
------- ----- -------- -----
Income (loss) from operations $ 3,320 7.6% $(31,889) (59.7)%
------- ----- -------- -----
------- ----- -------- -----
</TABLE>
REVENUES. Revenue increased $9.8 million or 22.3%, from $43.7 million for
the three months ended June 30, 1998 to $53.4 million for the three
months ended June 30, 1999. The increase is the result of organic revenue
growth and the acquisition of six additional operating companies
subsequent to the initial public offering. IT service revenue grew
approximately $17.2 million, or 90.3%, while hardware procurement revenue
decreased $7.5 million, or 30.4%.
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. These increases were somewhat offset by
the decline in revenue related to MST. The System Solutions division
revenue growth was primarily attributable to growth in the Company's
customer management solutions, 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. ISSI has
experienced a decrease in sales of the Company's Safari software licenses
during 1999.
The decrease in hardware procurement revenue was primarily attributable a
shift in the Company's focus from hardware procurement to higher margin
IT service revenues.
COST OF REVENUES. Cost of revenues increased $6.0 million or 19.3% from
$31.2 million for the three months ended June 30, 1998 to $37.2 million
for the three months ended June 30, 1999. This increase is primarily
attributable to the revenue growth discussed above. Cost of revenues as a
percentage of revenues decreased from 71.4% of revenues for the three
months ended June 30, 1998 to 69.6% for the three months ended June 30,
1999. This decrease was primarily attributable to the shift in revenue
mix toward higher margin IT service revenues.
13
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $6.1 million, or 75.9%, from $8.1
million to $14.2 million for the three months ended June 30, 1998 and
1999, respectively. The increase is attributable the acquisitions of
the additional six 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
EPS services area in anticipation of future revenue growth. Selling,
general and administrative costs increased from 18.4% of revenues to
26.5% of revenues for the three months ended June 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
$1.2 million, or 105.2%, from $1.1 million for the three months ended
June 30, 1998 to $2.3 million for the three months ended June 30, 1999.
The increase is attributable an increase in goodwill and other intangible
amortization associated with the acquisitions of the additional six
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 second 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 a charge of $6.1 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 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 one-time charges
of $2.4 million. Included in this total are involuntary severance
benefits and employment contract settlements of $0.82 million, facility
closures of $0.34 million, voluntary severance benefits of $0.17 million,
contract losses of $0.84 million, and other charges of $0.25 million.
14
<PAGE>
The following table sets forth certain selected financial data for the
Company and as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------------------------------
1998 1999
----------------------- --------------------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
IT service revenues $32,024 46.2% $ 75,054 66.3 %
Hardware procurement revenues 37,327 53.8% 38,080 33.7 %
------- -------- --------- --------
Total revenues 69,351 100.0% 113,134 100.0 %
------- -------- --------- --------
Cost of IT services 15,571 48.6% 42,900 57.2 %
Cost of hardware procurement 34,043 91.2% 34,379 90.3 %
------- ---------
Total cost of revenues 49,614 71.5% 77,279 68.3 %
------- ---------
Gross profit 19,737 28.5% 35,855 31.7 %
Selling, general and administrative expenses 12,852 18.5% 25,811 22.8 %
Depreciation and amortization 1,815 2.7% 4,492 4.0 %
In process research and development 5,000 7.2% - %
Impairment of intangible assets -- -- 29,236 25.8 %
-- -- 2,418 2.1 %
------- -------- --------- --------
Income (loss) from operations $ 70 0.1% $ (26,102) (23.0)%
------- -------- --------- --------
------- -------- --------- --------
</TABLE>
REVENUES. Revenue increased $43.8 million or 63.1%, from $69.3 million
for the six months ended June 30, 1998 to $113.1 million for the six
months ended June 30, 1999. This increase is partly a result of the
inclusion of only five of the six months of operations of the Founding
Companies in 1998 compared to the six months ended June 30, 1999. All of
the operating companies' revenues were included for the six months ended
June 30, 1999 except Titan Technologies Group LLC whose revenues were
included from its acquisition date in April 1999. The increase is also
the result of organic revenue growth and the acquisition of six
additional operating companies subsequent to the initial public offering.
IT service revenue grew approximately $43.0 million, or 134.4%, while
hardware procurement revenue increased $0.8 million, or 2.0%.
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, 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. ISSI has experienced a
decrease in sales of the Company's Safari software licenses during 1999.
The increase in hardware procurement revenue was primarily attributable
to the inclusion of only five of the six months of operations of the
Founding Companies in 1998. In general, the Company has shifted its focus
from hardware procurement to higher margin IT service revenues.
COST OF REVENUES. Cost of revenues increased $27.7 million or 55.8% from
$49.6 million for the six months ended June 30, 1998 to $77.3 million for
the six months ended June 30, 1999. This increase is primarily
attributable to the revenue growth discussed above. Cost of revenues as a
percentage of revenues decreased from 71.5% of revenues for the six
months ended June 30, 1998 to 68.3% for the six months ended June 30,
1999. This decrease was primarily attributable to the shift in revenue
mix toward higher margin IT service revenues.
15
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.0 million, or 100.8%, from $12.8
million to $25.8 million for the six months ended June 30, 1998 and 1999,
respectively. The increase is attributable to the inclusion of only five
of the six months of operations of the Founding Companies in 1998; the
acquisitions of the additional six 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 18.5% of revenues to 22.8% of revenues for the three
months ended June 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
$2.7 million, or 147.5%, from $1.8 for the six months ended June 30, 1998
to $4.5 million for the six months ended June 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 five of the six
months in 1998; an increase in goodwill and other intangible amortization
associated with the acquisitions of the additional six 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 second 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 a charge of $6.1 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 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 one-time charges
of $2.4 million. Included in this total are involuntary severance
benefits and employment contract settlements of $0.82 million, facility
closures of $0.34 million, voluntary severance benefits of $0.17 million,
contract losses of $0.84 million, and other charges of $0.25 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 June 30, 1999 the Company had $5.1 million in cash
and cash equivalents and $45.8 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.
16
<PAGE>
A June 30, 1999 the Company was not in compliance with one of its
financial covenants. The Company and the Banks agreed to the terms and
conditions of a forbearance through November 15, 1999 during which
period the parties will discuss restructuring the facility to a
structure that will support the Company's working capital needs. Under
the terms of this forbearance, there was a permanent reduction of
principle available to $60 million, and during the forbearance period
borrowings will be at a rate of interest equal to the Base Rate plus
1.75%, which was 9.75% at August 13, 1999.
Net cash used in operating activities was $1.4 million for the six months
ended June 30, 1999. Net cash used in investing activities was $15.5
million for the six months ended June 30, 1999 which included $3.1
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 $19.7 million for the six
months ended June 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 October 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 estimates that it is 95% complete in the
remediation phase of all material hardware systems and expects to
complete corporate remediation by September 1999. After completing
remediation, the Company's plans include testing and implementing its
information technology systems.
TESTING AND IMPLEMENTATION. The Company estimates it has completed 93% of
the testing and implementation of its remediated systems. Completion of
the testing phase is expected by September 1999 with all remediated
systems fully implemented by November 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
17
<PAGE>
software. The financial module of the ERP system went "live" on August 1,
1999 and completion of the implementation of the remaining modules is
scheduled for December 1999.
THIRD PARTIES. With respect to third parties, the Company has completed
its assessment, remediation and testing phases. Implementation is 95%
complete and is expected to be completed by September 1999.
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 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 September, 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 June 30, 1999, the cost incurred
to date was approximately $1.6 million. Remaining costs 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.
18
<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 June 30, 1999,
the Company had total debt of $45.8 million of which $45.0 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 six months ended June 30, 1999 from
services performed in the Netherlands, the United Kingdom and Germany,
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.
19
<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 for 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 later this year. 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. 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.
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 alleges that the action
was prompted by the press release that the Company issued on June 9, 1999
with regard to its likely results for the second quarter. The plaintiff
purports 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 contends 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 it intends to defend the matter vigorously. The Company
does not expect that the litigation will have a material affect on how it
conducts its business.
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.
20
<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
At the Annual Meeting of Stockholders on May 4, 1999, the following
proposals were adopted by the margins indicated:
1. To elect three Class II Directors, each for a term of three years and
until their respective successors have been elected and qualified.
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Dennis E. Logue 8,557,192 4,922
Edward J. Mathias 8,557,192 4,922
William E. Hummel 8,557,192 4,922
</TABLE>
2. To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for 1999.
<TABLE>
<S> <C>
For 8,560,311
Against 1,303
Abstain 500
</TABLE>
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 a 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.
21
<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 AUGUST 16, 1999 By: /s/ Kennard F. Hill
------------------------- ----------------------------------
Kennard F. Hill
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
Date AUGUST 16, 1999 By: /s/ William J. Caragol
------------------------- ----------------------------------
William J. Caragol
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
22
<PAGE>
EXHIBIT INDEX
<TABLE>
Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule for the three and six months ended
June 30, 1999.
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
JUNE 30,1999 CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 8,546 8,546
<SECURITIES> 0 0
<RECEIVABLES> 38,986 38,986
<ALLOWANCES> (872) (872)
<INVENTORY> 432 432
<CURRENT-ASSETS> 51,661 51,661
<PP&E> 9,043 9,043
<DEPRECIATION> (2,055) (2,055)
<TOTAL-ASSETS> 182,970 182,970
<CURRENT-LIABILITIES> 79,075 79,075
<BONDS> 0 0
0 0
0 0
<COMMON> 130 130
<OTHER-SE> 92,806 92,806
<TOTAL-LIABILITY-AND-EQUITY> 182,970 182,970
<SALES> 17,139 38,080
<TOTAL-REVENUES> 53,444 113,134
<CGS> 15,599 34,379
<TOTAL-COSTS> 37,180 77,279
<OTHER-EXPENSES> 31,463 25,603
<LOSS-PROVISION> 385 400
<INTEREST-EXPENSE> 1,032 1,515
<INCOME-PRETAX> (32,880) (27,518)
<INCOME-TAX> (605) 1,754
<INCOME-CONTINUING> (32,275) (29,272)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (184) (184)
<CHANGES> 0 0
<NET-INCOME> (32,459) (29,456)
<EPS-BASIC> (2.50) (2.36)
<EPS-DILUTED> (2.50) (2.36)
</TABLE>
